Tax & ATO
Prime cost vs diminishing value
Depreciation spreads the cost of a business asset across its effective life, claimed as a tax deduction each year instead of all at once. Australian businesses choose between the prime cost method, which claims equal amounts annually, and the diminishing value method, which claims more in the early years.
The ATO allows two calculation methods, and the choice is made per asset when you first claim it. Prime cost (straight-line) spreads the deduction evenly: the annual claim is the asset's cost multiplied by days held over 365, multiplied by 100 per cent divided by the effective life. A $10,000 asset with a five-year effective life gives $2,000 a year.
Diminishing value front-loads the deduction: the annual claim is the asset's base value (its written-down value at the start of the year) multiplied by days held over 365, multiplied by 200 per cent divided by the effective life. The same $10,000 asset attracts 40 per cent of the declining balance each year, so bigger claims early and smaller ones later.
Effective life comes from the ATO's published determinations (updated regularly for hundreds of asset types) or you can self-assess if you have grounds to. The formulas and current determinations are set out in the ATO guide to prime cost and diminishing value methods.
Businesses with aggregated turnover under $10 million can elect the simplified depreciation rules instead, and most do because the outcomes are faster. Assets costing under the instant asset write-off threshold ($20,000 per asset for 2025-26) are deducted immediately in the year first used or installed ready for use. Everything else goes into a single small business pool, deducted at 15 per cent in the first year and 30 per cent of the opening balance in each later year, regardless of each asset's individual effective life. If the pool's closing balance falls below the write-off threshold, the whole pool is deducted in that year.
The election is all-or-nothing: once you use simplified depreciation you apply it to all eligible assets, not just the convenient ones. Businesses outside the small business rules can still use a low-value pool for assets under $1,000 (deducted at 18.75 per cent in the first year and 37.5 per cent thereafter) and can claim capital works on buildings and structural improvements separately, typically at 2.5 per cent a year over 40 years.
Here is how the two general methods compare for a $10,000 machine with a five-year effective life, held for the full year from 1 July (diminishing value rate 200% / 5 = 40%):
| Year | Prime cost deduction | Diminishing value deduction | DV written-down value |
|---|---|---|---|
| 1 | $2,000 | $4,000 | $6,000 |
| 2 | $2,000 | $2,400 | $3,600 |
| 3 | $2,000 | $1,440 | $2,160 |
| 4 | $2,000 | $864 | $1,296 |
| 5 | $2,000 | $518 | $778 |
Both methods deduct broadly the same total over time, but diminishing value delivers roughly twice the deduction in year one and never quite reaches zero (the tail is cleaned up when the asset is sold or scrapped via a balancing adjustment). Businesses wanting deductions sooner usually pick diminishing value; those wanting predictable, even claims pick prime cost. Run your own numbers with the OneBookPlus depreciation calculator.
Depreciation is often a small business's largest non-cash deduction, and it directly shapes both your tax bill and your accounts. On the tax side, the timing choice (immediate write-off, pool, prime cost or diminishing value) can shift thousands of dollars of deductions between years, which matters when your income fluctuates or when you are trying to stay under a tax bracket or turnover threshold. On the management side, depreciation is what makes your profit and loss honest: a van that costs $40,000 and lasts eight years costs the business roughly $5,000 a year, not $40,000 in the year you happened to buy it.
Practical hygiene: keep an asset register recording each asset's cost, date of first use, method, effective life and written-down value. When you dispose of an asset, a balancing adjustment brings to account the difference between sale proceeds and written-down value, as assessable income or a further deduction. And remember that buildings are different: structural works are claimed as capital works deductions rather than plant depreciation, and those claims reduce the building's CGT cost base when you eventually sell.
The definitions above only get you so far; the free OneBookPlus depreciation calculator turns them into your own figures in seconds, no sign-up needed.
Neither is universally better. Diminishing value claims about twice as much in the first year, which suits businesses that want deductions sooner. Prime cost gives identical, predictable claims each year, which suits stable planning. The total deducted over the asset's life is broadly the same.
No. Once you choose prime cost or diminishing value for a particular asset, you keep that method for its whole life. You can, however, choose different methods for different assets.
The number of years the asset can reasonably be expected to produce income. Most businesses use the ATO's published effective life determinations, which cover hundreds of asset types by industry, but you can self-assess a shorter or longer life if your circumstances justify it and you keep evidence.
Last reviewed and updated: by Bishal Shrestha