Choosing depreciation methods – diminishing value vs prime cost

BMT team — Thu, 11 Oct 2018 23:17:13 +0000

There are two depreciation methods to calculate depreciation on plant and equipment in an investment property –the diminishing value method and the prime cost method. When an investor makes their claim, they can choose only one of these depreciation methods, so it is important for them to understand how this choice will affect their investment returns. Both the diminishing value and the prime cost methods claim the total depreciation value available over the life of a property. However, the two methods use different formulas to calculate depreciation deductions, achieving different short and long-term cash flow positions for the property investor. In this article, we will cover: The diminishing value method The prime cost method Diminishing value Under the diminishing value method, the deduction is calculated as a percentage of the balance you have left to deduct This method returns higher depreciation deductions in the first few years of ownership of the property It uses low-value and low-cost pooling to increase the claim on items under $1,000 It allows investors to claim 100 per cent of the value of items worth less than $300 It decreases in value each year, so depreciation claims drop, until assets run out (or are round down to zero) Prime cost Under the prime cost method, the deduction for each year is calculated as a percentage of the cost This method returns a straight-line depreciation amount until the full value of assets are claimed It returns greater deductions in the latter years of the depreciation schedule It allows investors to rely on a more consistent depreciation claim each year It is suitable for investors looking to maximise their depreciation claim in later years Both depreciation methods claim the same total value over forty years. However, they use different rules to achieve either aggressive upfront claims or a more consistent claim each year. If an investor makes their claim using the diminishing value method, they are claiming a greater proportion of the asset’s cost in the earlier years of the effective life of the asset as set by the ATO, therefore receiving greater deductions in the earlier years of owning the property. Alternatively, by selecting the prime cost method the investor is claiming a lower but more constant proportion of the available deductions over a longer period. No matter what strategy an investor has, it is recommended they seek advice from an Accountant when deciding about which depreciation method to choose. specialist Quantity Surveyor will always be able to provide a capital allowance and tax depreciation schedule that outlines the depreciation deductions available to claim using both methods for comparison. *Under legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15th of November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on the 9th May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand-new property will still be able to claim depreciation as they were previously. To learn more, visit the BMT Tax Depreciation website or read BMT’s comprehensive White Paper. Alternatively, for obligation free advice contact the expert team at BMT Tax Depreciation on 1300 728 726.

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Depreciation methods that mean more for you

BMT team — Tue, 01 Mar 2016 05:08:19 +0000

Learn how the experts maximise deductions Many investors ask the question, ‘Why can’t I just do it myself or ask my Accountant to claim depreciation deductions on my investment property?’ The answer is simple. Quantity Surveyors who specialise in depreciation have the recognised qualifications, skills and specialist knowledge of the depreciation methods available to help property investors maximise their deductions. The Australian Taxation Office recognise Quantity Surveyors under tax ruling TR/97 with the appropriate knowledge to estimate construction costs for depreciation purposes. However, not all Quantity Surveyors are created equally. A tax depreciation quantity surveying firm, will use their skills to accurately calculate depreciation deductions for investment property owners. This helps to ensure owners can claim maximum returns for the lifetime of ownership. How do Quantity Surveyors do this? To demonstrate how the depreciation methods a specialist Quantity Surveyor uses can make a difference to an overall claim, let’s look at immediate write-off and low-value pooling. These are two depreciation methods which assist in accelerating deductions for some plant and equipment assets found in a typical residential property. Immediate write-off An immediate write-off can be applied to any plant and equipment asset which costs $300 or less within the first year of ownership, regardless of how many days the property is owned in that year. This means the owner can claim the total value of the individual asset within the first financial year, instead of claiming depreciation over the effective life of the asset. Low-value pooling This depreciation method allows some plant and equipment assets to be depreciated at an increased rate, allowing owners to take advantage of deductions sooner. There are two categories of assets which can be added to a low-value pool: Low-cost assets – depreciable assets which have an opening value of less than $1,000 in the year of purchase Low-value assets – depreciable assets that have a written down value less than $1,000. That is, the value of the asset was greater than $1,000 in the year of purchase. However, the remaining value after a previous year’s depreciation is less than $1,000 By adding these assets, investors can claim deductions for these items at a rate of 18.75 per cent in the first year of purchase and at a rate of 37.5 per cent from the second year onwards. It is important to note that once an investor adds items to a low-value pool, they must apply this depreciation method to all assets. Similarly, if an investor chooses not to pool assets, they must continue to claim deductions using either the diminishing value or prime cost depreciation methods. These rules become even more complicated when a property has more than one owner. A specialist Quantity Surveyor can prepare a split depreciation schedule in a shared ownership scenario which allows each owner to claim the deductions for their portion of interest in each asset. This can mean more assets will qualify to be written off immediately or added to a low-value pool, further maximising the deductions which can be claimed. These are just two of the depreciation methods a specialist Quantity Surveyor uses to ensure owners can claim maximum returns. Which one you chose depends on your personal investment strategy so it’s always best to contact your Accountant or Financial Adviser to discuss your situation.

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Choosing depreciation methods – diminishing value vs prime cost

Depreciation methods that mean more for you