Diminishing value or prime cost: which method to choose

Division 40 of the Income Tax Assessment Act 1997 gives two ways to work out how much of a depreciating asset's cost is deducted each year (section 40-65). Both spread the cost over the asset's effective life, for rental property usually the Commissioner's figure for that kind of asset; they differ in how they spread it.

Prime cost (section 40-75) deducts the same share of the asset's cost every year: cost × (days held ÷ 365) × (100% ÷ effective life).

Diminishing value deducts a share of what is left: base value × (days held ÷ 365) × (200% ÷ effective life) for an asset you started to hold on or after 10 May 2006 (section 40-72), or 150% ÷ effective life for one you started to hold before that day (section 40-70). The base value is the cost in the first year and what is left of it after that, so the deductions are larger early and smaller later.

A split-system air conditioner installed new in 2025 cost about $2,719 in our cost database, and its effective life is 10 years: 20% a year under diminishing value, 10% under prime cost. Held for whole years, prime cost deducts $272 a year until its cost is written off. Diminishing value deducts $544 in the first year, then $435, $348, $278 and $223: $1,828 in five years against prime cost's $1,360, leaving a written-down value of $891.

Over an asset's life neither method deducts more in total: each deducts its cost, less anything it is sold for. Prime cost reaches nil at the end of the effective life. Diminishing value never quite does, and what is left is deducted when the asset is scrapped or sold for less (a balancing adjustment, section 40-285). Only the timing differs.

Diminishing value brings deductions forward, which most investors prefer: money now is worth more than money later, and the first years after a purchase are often when cash flow is tightest. Prime cost suits someone who expects a higher tax rate in later years or wants even deductions.

Either way, each item's deductions start from its cost and its effective life. Our dwelling pages list the plant each kind of home typically has, with each item's effective life and its price installed new: a townhouse in Queensland, for instance, with ducted air conditioning and a gas hot water system, and an apartment in Western Australia, whose list includes the building's lift and water pump, shared by unit entitlement.

An asset of $300 or less used to earn rent is generally deducted in full in its first year (section 40-80(2)), so it needs no method at all. Under $1,000 there is the low-value pool, whose rates take the place of either method (section 40-65(5)). An asset that cost less than $1,000 can go into it in its first year, at 18.75% of its cost whatever the days held, then 37.5% a year of what is left. An asset on diminishing value whose written-down value falls under $1,000 can join it in a later year, at 37.5%; one on prime cost cannot, since only an asset depreciated by diminishing value becomes a low-value asset (section 40-425(5)).

The split system's written-down value falls under $1,000 at the end of its fifth year, at $891, so from its sixth year it can go into the pool. The guide to the low-value pool covers sets of items and co-owners' shares.

The choice is made for each asset, not for the property as a whole (section 40-65(1)), so one schedule can use diminishing value for some items and prime cost for others. It must be made by the day you lodge your return for the income year it first applies to, or within further time the Commissioner allows, and once made it applies to that year and every later one (section 40-130): an asset cannot be moved to the other method later. An asset acquired from an associate who was depreciating it stays on the associate's method (section 40-65(2)).

A schedule that shows both methods year by year lets you and your accountant compare them before the first return is lodged. Our schedules pool the assets that cost less than $1,000 and are not written off at once in the diminishing value columns only, and in the prime cost columns depreciate them over their effective lives. An owner who uses prime cost may pool them too: an asset that cost less than $1,000 is a low-cost asset whatever the method (section 40-425(1) and (2)), and the pool's figures for it are the ones the diminishing value schedule gives. Plant that came with a second-hand property is another matter: for an individual who bought since 9 May 2017 it is generally not deductible under either method (see the 2017 rules).

Both methods pro-rate the first year by the number of days the asset is held: settle in March and the first year's deduction covers only the days to 30 June, and the first full year starts on 1 July. An asset that goes into the pool in its first year is the exception, at 18.75% of its cost whatever the number of days.