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Methods of working out decline in value

Last updated 17 July 2006

You generally have the choice of two methods to work out the decline in value of a depreciating asset: the prime cost method or the diminishing value method. You can generally choose to use either method for each depreciating asset you hold.

Once you have chosen a method for a particular asset, you cannot change to the other method for that asset.

The depreciation and capital allowances calculator on our website will help you with the choice and the calculations.

In some cases, you do not need to make the choice because you can claim an immediate deduction for the asset - for example, certain depreciating assets which cost $300 or less - see Immediate deduction (for certain non-business depreciating assets costing $300 or less).

In other cases, you do not have a choice of which method you use to work out the decline in value. These cases are:

  • if you acquire intangible depreciating assets such as in-house software, certain items of intellectual property, spectrum licences, datacasting transmitter licences and telecommunications site access rights - you must use the prime cost method
  • if you acquire a depreciating asset from an associate who has deducted or can deduct amounts for the decline in value of the asset - see Depreciating asset acquired from an associate
  • if you acquire a depreciating asset but the user of the asset does not change or is an associate of the former user (for example, under sale and leaseback arrangements) - see Sale and leaseback arrangements
  • if there has been rollover relief - see Rollover relief.

Both the diminishing value and prime cost methods are based on a depreciating asset's effective life. The rules for working out an asset's effective life are explained in Effective life.

By working out the decline in value you determine the adjustable value of a depreciating asset. A depreciating asset's adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time - see The cost of a depreciating asset for information on first and second elements of cost. Adjustable value is similar to the concept of undeducted cost used in the former depreciation rules. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

You calculate the decline in value and adjustable value of a depreciating asset from the asset's start time independently of your use of the depreciating asset for a taxable purpose. However, your deduction for the decline in value is reduced to the extent your use of the asset is for other than a taxable purpose - see Decline in value of a depreciating asset used for other than a taxable purpose. Your deduction may also be reduced if the depreciating asset is a leisure facility or boat even though the asset is used, or installed ready for use, for a taxable purpose - see Decline in value of leisure facilities and boats.