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How do you work out your deduction?

Last updated 3 December 2005

You work out your deduction for the decline in value of a depreciating asset using either the prime cost or diminishing value method. Both methods are based on the effective life of the asset.

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 decline in value using this method is:

Base value (see note) × (days held ÷ 365) × (150% ÷ asset's effective life)

Note: For the income year in which an asset is first used or installed ready for use for any purpose, the base value is the asset's cost. For a later income year, the base value is the asset's opening adjustable value plus any amounts included in the asset's second element of cost for that year. The second element of cost is the amount you are taken to have paid to bring the asset to its present condition (such as the cost of capital improvements to the asset).

The adjustable value of a depreciating asset is its cost less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose. The term 'adjustable value' replaces the terms 'written down value' and 'undeducted cost'.

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life. The formula for calculating decline in value using the prime cost method is:

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

The formula under the prime cost method may have to be adjusted if the cost, effective life or adjustable value of the asset is modified. For more information, see the publication Guide to depreciating assets.

Under either method, the decline in value of an asset cannot amount to more than its base value in any income year.

If you use a depreciating asset for more than one purpose -for example, you use the same lawn mower at both your rental property and your private residence -you are allowed only a partial deduction for the mower's decline in value, based on what percentage of the mower's total use occurred at your rental property.