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

    Asset's cost

    X

    Days held*
    365

    X

    100%
    asset's effective life

    *can be 366 in a leap year

    Example: Prime cost method - ignoring any GST impact

    Using the facts of the previous example, if Laura chose to work out the decline in value of the photocopier using the prime cost method, the decline in value for the 2006-07 income year would be $300. This is worked out as follows:

    1,500

    X

    365
    365

    X

    100%
    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 2007 would be $1,200. This is the cost of the asset ($1,500) less its decline in value up to that time ($300).

    If there has been rollover relief and the transferor used the prime cost method to work out the asset's decline in value, the transferee should replace the asset's effective life in the prime cost formula with the asset's remaining effective life - that is, any period of the asset's effective life that is yet to elapse when the transferor stopped holding the asset - see Rollover relief.

    An adjusted prime cost formula must be used if any of the following occurs:

    • you recalculate the effective life of an asset - see Effective life
    • an amount is included in the second element of an asset's cost after the income year in which the asset's start time occurs - see The cost of a depreciating asset
    • an asset's opening adjustable value is reduced by a debt forgiveness amount - see Commercial debt forgiveness
    • you reduced the opening adjustable value of a depreciating asset which is the replacement asset for an asset subject to an involuntary disposal - see Involuntary disposal of a depreciating asset, or
    • an asset's opening adjustable value is modified due to GST increasing or decreasing adjustments, input tax credits for the acquisition or importation of the asset, or input tax credits for amounts included in the second element of cost of an asset - see GST input tax credits, or n an asset's opening adjustable value is modified due to forex realisation gains or forex realisation losses - see Foreign currency gains and losses.

    You must use the adjusted prime cost formula for the income year in which any of these changes are made (the 'change year') and later years. The formula for the decline in value is:

    Opening adjustable value for the change year plus any second element of cost amounts for that year

    X

    Days held*
    365

    X

    100%
    asset's remaining effective life

    *can be 366 in a leap year

    where the asset's remaining effective life is any period of its effective life that is yet to elapse at the start of the change year.

    The prime cost formula must also be adjusted for certain intangible depreciating assets you acquire from a former holder - see Effective life of intangible depreciating assets.

    Last modified: 27 Aug 2007QC 27892