Calculate tax depreciation on Australian business assets using ATO-approved methods: Prime Cost (straight-line) and Diminishing Value.
| Year | Prime Cost ($) | Diminishing Value ($) | DV Book Value |
|---|
Prime Cost (PC): Annual deduction = Cost × (Days/365) × (100%/Effective life). Equal deductions each year. Simpler to calculate.
Diminishing Value (DV): Annual deduction = Opening value × (Days/365) × (200%/Effective life). Higher deductions in early years. Most taxpayers prefer DV.
From 1 July 2025, small businesses (turnover <$10M) can immediately deduct the cost of assets under $20,000. Check ATO.gov.au for current thresholds.
The ATO allows two methods for claiming depreciation (decline in value) on business assets. You choose which method to use for each asset and cannot switch once chosen. The method you select significantly affects when you claim the deduction — not the total amount over the asset's life.
| Feature | Prime Cost (Straight Line) | Diminishing Value |
|---|---|---|
| Formula | Cost × (Days/365) × (100% / effective life) | Opening value × (Days/365) × (200% / effective life) |
| Annual deduction | Equal amounts each year | Higher in early years, declining |
| Best for | Assets with consistent use over time | Assets losing value quickly; maximising early deductions |
| DV rate | — | 200% (assets from 10 May 2006) |
| Year | Prime Cost Deduction | Diminishing Value Deduction |
|---|---|---|
| Year 1 | $5,000 | $10,000 |
| Year 2 | $5,000 | $5,000 |
| Year 3 | $5,000 | $2,500 |
| Year 4 | $5,000 | $1,250 |
| Total deducted | $20,000 | $18,750 (plus residual) |
The ATO also allows eligible small businesses to immediately deduct the full cost of eligible assets under the instant asset write-off provisions. Check the ATO's current threshold and eligible business size for the current year — this threshold has changed multiple times in recent years.
What is the diminishing value depreciation rate in Australia?
For assets acquired after 10 May 2006, the ATO's diminishing value rate is 200% divided by the effective life of the asset in years. For an asset with a 5-year effective life, the DV rate is 40% per year applied to the opening value. This results in higher deductions in early years.
What is an effective life for ATO depreciation purposes?
The ATO publishes a table of effective lives for thousands of asset types, representing how long the asset is expected to provide economic benefit. You can use the ATO's published figure or self-assess a different effective life if you have evidence your use shortens the asset's life. The effective life determines your annual depreciation deduction under both the prime cost and diminishing value methods.
Can I claim depreciation on rental property?
Yes. For residential investment properties, capital works deductions (Division 43) allow 2.5% of construction cost per year for 40 years. For properties purchased after 9 May 2017, plant and equipment (Division 40) depreciation is only available on new items you personally install, not on assets existing when you purchased the property.