13 July

Choosing tax depreciation methods – diminishing value vs prime cost

As a property investor claiming tax depreciation, you have the option to choose which Method of Depreciation you would like to claim.

Tax depreciation can be calculated according to two different methods, the Diminishing Value method and Prime Cost method. A quality depreciation schedule prepared by a qualified quantity surveyor, such as Capital Claims Tax Depreciation, will report both methods of depreciation for the full ‘depreciable’ life of the property. This enables the investor to use the method that best suits their tax and investment circumstances.

An investor selects which method they will use when they first apply the depreciation results, they must then continue to use the same method for the remainder of the life of the investment. It is up to the investor, often with the advice of their accountant, to apply whichever strategy is most appropriate to their circumstances. Factors to consider include projected future annual incomes, the diminishing value and opportunity cost of cash today versus future cash, and future use of the property. Descriptions of each method follows:

Diminishing Value Method

The Diminishing Value method of depreciation applies the nominated depreciation rate, continually, to the written-down value of the asset each year. This method means that higher depreciation values are claimed earlier in the life of the asset, and lesser depreciation values later in the life of the asset. This method provides a greater tax deduction and return to the investor up front, with deductions diminishing over time.

Prime Cost Method

The Prime Cost method of depreciation simply applies a consistent rate of tax depreciation to the starting value of the asset, so that it depreciates at the same value every year for the life of the asset. This strategy means a more consistent value of deductions and returns are achieved for the investor over the life of the property. The following table illustrates and compares how the two methods work.

Table Illustrating Diminishing Value and Prime Cost Methods

Consider the example of depreciating a security system. For the purpose of this example, we will estimate the cost of the security system (including installation) as $2,500.00, and that installation is recent. The ATO prescribes that the current effective life of the security system is five years.

diminshing value method and prime cost method

* Table and graph showing the comparison of tax depreciation deductions over time using both Prime Cost and Diminishing Value methods.

Selecting a Quantity Surveyor

In order to maximise your deductions and minimise your risk, we recommend using a qualified quantity surveyor to undertake the process of inspecting (when required), researching and preparing your capital allowance and tax depreciation schedule.

Are all quantity surveyors and tax depreciation service providers equal?

Absolutely not. But the range in pricing of tax depreciation schedules, compared to the dollars that can be saved over the years, is small. When selecting a quantity surveyor to produce your tax depreciation schedule, you can use the following checklist.

Your quantity surveyor should be:

  • Appropriately qualified with a Bachelor of Construction Management or similar;
  • A member of a recognised association or body, such as the Australian Institute of Quantity Surveyors;
  • A Registered Tax Agent (this is a requirement of the Tax Practitioners Board for all quantity surveyors producing tax depreciation schedules to be relied upon for tax purposes).

In order to report the most accurate and maximum deductions, your quantity surveyor’s report should include:

  • A schedule of Division 40 assets and the deductions claimable;
  • A schedule of Division 43 costings and capital allowances claimable;
  • Reporting of deductions using the Diminishing Value method;
  • Reporting of deductions using the Prime Cost method;
  • Dates and costings of additions and improvements made to the property by previous owners;
  • Dates and costings of additions and improvements you have made to the property;
  • Scrapping of any assets removed from the property for replacement during renovations (where applicable);
  • Grouping and reporting of low-cost pooling;
  • Grouping and reporting of low-value pooling;
  • Reporting of assets eligible for immediate write-off;
  • Pro-rata reporting for the first year of ownership.

Depreciation calculator

Here at Capital Claims Tax Depreciation, we complete a free feasibility on every investment property. We want our clients to make sure that their one-time investment of our tax depreciation schedule is worth it. Our depreciation calculator is our expert team viewing your property with our online systems and software.

We want to give you a personal estimate of what you can expect to receive in tax depreciation deductions in the first full financial year. If we do not achieve the depreciation estimate given, our guarantee to you is your tax depreciation schedule will be free!

To speak to one of our tax depreciation experts about your investment property, you can reach us on 1300 922 220 or, visit our website or, send us an email at info@capitalclaims.com.au. We would be more than happy to give you a personalised quote plus estimate.

 

About Mark Wilkins

Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.

View all posts by Mark Wilkins

Recent posts

New call-to-action

Tags

See all