When preparing a detailed Tax Depreciation Schedule, Asset Reports is focused solely on your property and its individual attributes to get you the maximum tax return.

Which Depreciation Method is Right for You?

The ATO allows you to choose between two depreciation methods to apply to your property. The ATO permits either the Prime Cost Method or the Diminishing Value Method of depreciation. An Asset Reports Tax Depreciation Schedule is produced with both PC and DV methods.

The graphs below indicate the annual differences in the two methods for real properties for which Asset Reports has completed Tax Schedules.

Annual depreciation claims – a commercial property Annual depreciation claims – a residential property

 

You and your financial professional can determine the most appropriate method to apply based on your financial objectives.

Be aware that once the particular method is applied, the ATO stipulates that it must remain as the applied method for the life of the property while you own it.


Depreciation Methods

Prime cost (straight line) and diminishing value methods.

In most cases, you can choose to use either of two 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.

This graph below 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 five years.
For further information on ATO requirements in relation to depreciation methods, please refer to:

https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules—capital-allowances/prime-cost-(straight-line)-and-diminishing-value-methods/


Prime Cost (straight line) Depreciation 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)

Example

If the asset costs $80,000 (after excluding GST if entitled to claim it) and has an effective life of five years, you can claim 20% of its cost, or $16,000, in each of the five years.

The cost includes the amount you paid for the asset as well as any additional amounts paid for transport, installation or making it ready to use.

The calculation is:
$80,000 x (365/365) ×20% = $16,000

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 sixth year for the remaining portion that was not claimed in the first year.

For further information on ATO requirements in relation to depreciation methods, please refer to:
https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules—capital-allowances/prime-cost-(straight-line)-and-diminishing-value-methods/


Diminishing Value Depreciation Method

The following formula is used for the diminishing value method:

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

Example

If the asset cost $80,000 and has an effective life of five years, the claim for the first year will be:

$80,000 × (365/365) × (200%/5) = $80,000 x 40% = $32,000

The cost includes the amount you paid for the asset (excluding GST if entitled to claim it) as well as any additional amounts paid for transport, installation or making it ready to use.

The base value reduces each year by the decline in the value of the asset. This means the base value for the second year will be $48,000; that is, $80,000 minus the $32,000 decline in value in the first year.

The claim for the second year will be:

$48,000 × (365/365) × (200%/5) = $48,000 x 40% = $19,200

In the third year, the base value will be $28,800 and the claim will be $11,520.

In the fourth year, the base value will be $17,280 and the claim will be $6,912.

This will continue until the value reaches zero.

For further information on ATO requirements in relation to depreciation methods, please refer to:
https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules—capital-allowances/prime-cost-(straight-line)-and-diminishing-value-methods/


Low Value Pool

Also known known as Uniform capital allowance system

From 1 July 2001, the uniform capital allowance (UCA) rules apply to most depreciating assets. Taxpayers calculate deductions for the decline in value of their depreciating assets using these rules.

The UCA system adopts most of the former rules for low-value pools. Under the UCA rules, the decline in value of most depreciating assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool at a rate of 37.5%.

The rules also provide an immediate deduction for certain assets costing $300 or less.

If you are using the simplified depreciation rules, generally you will not use the UCA rules for low-value pools. Under the simplified depreciation rules you can claim an immediate deduction for most depreciating assets costing less than $20,000 and pool most other depreciating assets.

You can use the simplified depreciation rules if you are a small business entity (2007-08 and later income years).

You must use the simplified depreciation rules for income years where you were in the simplified tax system (2006-07 and earlier income years).

For further information on ATO’s requirements under Low Value Pooling, please refer to:
https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/in-detail/low-value-pools/uniform-capital-allowance-system–low-value-pools/