• The diminishing value method

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time. The formula for the decline in value for a given income year is:

    Base value

    x

    days held*
    365

    x

               150%           
    asset's effective life

    *can be 366 in a leap year

    where the base value for the income year in which an asset's start time occurs, is the asset's cost. For a later income year, the base value is the asset's opening adjustable value for that year plus any amounts included in the asset's second element of cost for that year.

    Note

    At the time of printing this publication, there was legislation before Parliament which will provide that the decline in value for eligible depreciating assets will be worked out under the diminishing value method using the following formula:

    Base value

    x

    days held*
    365

    x

               200%           
    asset's effective life

    *can be 366 in a leap year

    Generally, you can use this formula to work out the decline in value of eligible depreciating assets if you started to hold it on or after 10 May 2006. The decline in value of all other depreciating assets will be worked out using the existing formula (that is, the second numerator remains at 150%).

    However, the new formula may not apply in some cases - for example, if you held an asset before 10 May 2006 but then dispose of and reacquire it on or after 10 May 2006 just so the decline in value of the asset can be worked out using the new formula.

    For more information about the legislation's progress, go to www.ato.gov.au/newlegislation and search the A-Z index under the topic Uniform capital allowances.

    Example: Base value - ignoring any goods and services tax (GST) impact

    Leo purchased a computer for $6,000. The computer's base value in its start year would be its cost of $6,000. If the computer's decline in value for that year is $1,500 and no amounts are included in the second element of the computer's cost, its base value for the next income year would be its opening adjustable value of $4,500. This amount is the cost of the computer of $6,000 less its decline in value of $1,500.

    Days held is the number of days you held the asset in the income year on which you used it or had it installed ready for use for any purpose. If the income year is the one in which the asset's start time occurs, you work out days held from its start time. If a balancing adjustment event occurs for the asset during the income year (for example, if you sell it), you work out days held up until the day the balancing adjustment event occurred - see What happens if you no longer hold or use a depreciating asset? for information about balancing adjustment events.

    Example: Diminishing value method - ignoring any GST impact

    Laura purchased a photocopier on 1 July 2005 for $1,500. The asset started to be used on the day of its purchase and has an effective life of five years. Laura chose to use the diminishing value method to work out the decline in value of the photocopier. The decline in value for the 2005-06 income year would be $450. This is worked out as follows:

    1,500

    x

    365
    365

    x

    150%
    5

    If Laura used the photocopier wholly for taxable purposes in that income year, she would be entitled to a deduction equal to the decline in value. The adjustable value of the asset at 30 June 2006 would be $1,050. This is the cost of the asset ($1,500) less its decline in value up to that time ($450).

    Last modified: 18 Jul 2006QC 27742