Two depreciation methods to pick from to suit your investment strategy

By the resi financial blog team, 03 February 2015

Two depreciation methods to pick from to suit your investment strategy

The Australian Taxation Office (ATO) allows investors to choose between two alternative methods of claiming depreciation on plant and equipment assets. These are the diminishing value and the prime cost methods of depreciation.


When an investor makes their depreciation claim, they can choose only one of these methods, so it is important for them to understand how this choice will affect their investment returns.
Both the diminishing value and the prime cost methods claim the total depreciation value available over the life of a property. However the two methods use different formulas to calculate depreciation deductions, achieving different short and long term cash flow positions for the property investor.
Under the diminishing value method, the deduction is calculated as a percentage of the balance you have left to deduct. The formula a Quantity Surveyor will use to calculate depreciation using the diminishing value method is shown below.


 
Under the prime cost method, the deduction for each year is calculated as a percentage of the cost. The formula a Quantity Surveyor will use to determine the amount of depreciation deduction under the prime cost method is shown below.


 
The strategy of the individual investor must be considered when determining which method is the best choice for them.


If an investor makes their claim using the diminishing value method, they are claiming a greater proportion of the assets cost in the earlier years of the effective life of the asset as set by the ATO, therefore receiving greater deductions in the earlier years of owning the property. Alternatively, by selecting the prime cost method the investor is claiming a lower but more constant proportion of the available deductions over a longer period.


No matter what strategy an investor has, it is recommended they seek advice from an Accountant when making a decision. A specialist Quantity Surveyor will always be able to provide a Capital Allowance and Tax Depreciation Schedule which outlines the depreciation deductions available to claim using both of these methods for comparison.


To learn more about property depreciation, visit BMT Tax Depreciation’s property investor page on their website by clicking here. Alternatively, speak with one of their expert staff for advice today on 1300 728 726.


Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Managing Director of BMT Tax Depreciation. 
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.
 

Categories: depreciation, tax depreciation