Prime cost (straight line) and diminishing value methods

In most cases, you can choose to use either of 2 alternative methods for calculating depreciation:

• The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.
• The diminishing value method assumes that the value of a depreciating asset decreases more in the early years of its effective life.

To calculate depreciation for most assets for a particular income year you can use the Depreciation and capital allowances tool. The tool compares results of the 2 methods and also provides disposal outcomes.

This graph compares the amount you would claim under each method for the depreciation of an asset that is used only for business. The asset in this example cost $80,000, was acquired on the first day of the income year and has an effective life of 5 years.

Prime cost (straight line) method

Under the prime cost method (also known as the straight-line method), you claim a fixed amount each year based on the following formula:

Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)

Note: ‘Days held’ is the number of days you held the asset in the income year in which you used it or had it installed ready for use for any purpose. Days held can be 366 for a leap year.

Note that if you acquired the above asset part way through the year, the final calculation using the prime cost method should occur in the th year for the remaining portion that was not claimed in the first year.

The asset's cost includes:

• the amount you pay for it
• any additional amounts you spend on transporting it and installing it in position
• amounts you spend on improving it.

In some circumstances, such as when you change the effective life or cost of an asset, an adjusted prime cost formula must be used.

For help calculating the deduction available from a depreciating asset, use the Depreciation and capital allowances tool.

Diminishing value method

Under the diminishing value method, decline in value is calculated using the asset's base value. The base value of an asset is the amount you paid for the asset plus any additional amount you spent on transporting, installing and improving it, less the decline in value up to the end of the prior income year.

The diminishing value method:

• assumes the decline in value each year is a constant proportion of the amount not yet written-off
• produces a progressively smaller decline in value over time.

The following formula is used for the diminishing value method:

Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)

Days held can be 366 for a leap year (see Note).

If you started to hold the asset before 10 May 2006, the formula for the diminishing value method is:

Base value × (days held ÷ 365) × (150% ÷ asset’s effective life)

Effective life of the asset

The decline in value of a depreciating asset is generally based on the asset's effective life. The effective life is broadly the period it can be used by anyone for income-producing purposes. This assumes it will be:

• subject to wear and tear reasonably expected from the circumstances of use
• maintained in reasonably good order and condition.

You decide whether to:

• adopt the Commissioner's effective life determination
• self-assess the depreciating asset's effective life. We only make determinations of the effective life of new assets. If you purchase a second-hand asset where its condition justifies a shorter life than that determined by us, you can self-assess.

In some situations, you don't have a choice. For example:

• You acquire the asset from an associate such as your spouse or business partner. You must use the:
  • same effective life they used (if they used the diminishing value method)
  • effective life that is yet to elapse (if they used the prime cost method).
• The asset is an intangible depreciating asset, such as intellectual property. You don't have a choice as the effective life is set out in the effective life determination rules.

If you:

• use the Commissioner's effective life determinations, they won't be challenged in any audit process
• self-assess the effective life, we may ask you to explain how you worked it out.

Changing the effective life you are using

You can choose to recalculate the effective life you are using for an income year if your circumstances of use change and the effective life you have been using is no longer accurate. You can do this if you either adopted the Commissioner's effective life determination or self-assessed.

You are obliged to recalculate the effective life if you improve an asset that results in its cost increasing by 10% or more in an income year.

Reduction for non-taxable use

Irrespective of the method used, a deduction for the decline in value of a depreciating asset is reduced by the extent to which it's used for a non-taxable purpose. For example, if an asset is used 40% of the time for a private purpose, the deduction for its decline in value is reduced by 40%. Hence all figures above would be multiplied by a factor of 0.6.

Transfer to low-value pool

Once the value of the asset falls below $1,000, you can choose to transfer its remaining value to a low-value pool. By doing so, you can claim depreciation for the asset together with any other low-value assets, rather than making separate calculations for each.

Backing business investment – accelerated depreciation

For assets first held on or after 12 March 2020 and first used or installed ready for use until 30 June 2021 the Backing business investment – accelerated depreciation measure provides a time-limited investment incentive to support business investment and economic growth by accelerating depreciation deductions. The key features of the incentive are as follows:

• The benefits are either
  • Deduction of 50% of the cost or opening adjustable value of an eligible asset on installation. Existing depreciation rules apply to the balance of the asset’s cost.
  • Deduction of 57.5% of the cost of the asset in the first year you add the asset to the small business pool, if you are using the simplified depreciation rules for small business.
• Eligible businesses are those with aggregated turnover below $500 million.
• Eligible assets are new depreciating assets (for example, plant, equipment and specified intangible assets, such as patents). The assets must be first held, and first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021. Some exclusions apply, including the same asset not having received an immediate deduction under instant asset write-off or temporary full expensing.