Diminishing value vs prime cost — how to depreciate your financed business assets and maximise tax deductions over time.
Depreciation is the tax mechanism that lets you deduct the declining value of a business asset over its useful life. Instead of claiming the full cost in the year of purchase (unless the instant asset write-off applies), you spread the deduction across multiple years based on the asset's effective life.
Depreciation applies when you own the asset — so it's relevant to chattel mortgage and hire purchase, but not to finance leases or operating leases (where the lessor claims depreciation instead, and you claim lease payments as expenses).
Calculates depreciation on the remaining (written-down) value of the asset each year. This front-loads deductions — you claim more in the early years and less later.
Formula: Base value × (days held ÷ 365) × (200% ÷ effective life in years)
Calculates depreciation as a fixed percentage of the original cost each year. Deductions are equal throughout the asset's effective life.
Formula: Cost × (days held ÷ 365) × (100% ÷ effective life in years)
Example: $100,000 truck with an effective life of 8 years
| Year | Diminishing Value | Prime Cost |
|---|---|---|
| 1 | $25,000 | $12,500 |
| 2 | $18,750 | $12,500 |
| 3 | $14,063 | $12,500 |
| 4 | $10,547 | $12,500 |
| 5 | $7,910 | $12,500 |
| 6 | $5,933 | $12,500 |
| 7 | $4,449 | $12,500 |
| 8 | $3,337 | $12,500 |
| Total | $89,989* | $100,000 |
*Diminishing value never reaches zero — the remaining balance is written off when the asset is disposed of or falls below the instant asset write-off threshold.
| Factor | Diminishing Value | Prime Cost |
|---|---|---|
| Early deductions | Higher — better for cash flow | Lower — spread evenly |
| Total deductions | Same over full life | Same over full life |
| Simplicity | More complex calculation | Simple, consistent amounts |
| Best for | Businesses wanting max early tax benefit | Businesses wanting predictable deductions |
| Common usage | Most popular for vehicles/equipment | Often used for buildings/longer-life assets |
Most businesses choose diminishing value for vehicles and equipment because it maximises early-year deductions. This is especially beneficial when combined with asset finance — you get larger tax deductions in the same years you're making loan repayments.
The ATO publishes effective life determinations for most asset types. Here are some common ones:
| Asset | Effective Life | DV Rate | PC Rate |
|---|---|---|---|
| Trucks (general freight) | 8 years | 25% | 12.5% |
| Utes / light commercial | 8 years | 25% | 12.5% |
| Excavators | 10 years | 20% | 10% |
| Tractors | 12 years | 16.67% | 8.33% |
| Forklifts | 11 years | 18.18% | 9.09% |
| Trailers | 15 years | 13.33% | 6.67% |
| Computers / laptops | 4 years | 50% | 25% |
You can also self-assess the effective life if you have evidence that the asset's useful life in your business differs from the ATO determination.
If your business has an aggregated turnover under $10 million, you can use simplified depreciation rules:
This is significantly simpler than tracking individual assets using either depreciation method, and often results in faster write-offs.
| Structure | Who Depreciates? | What You Claim |
|---|---|---|
| Chattel Mortgage | You (the borrower) | Depreciation + interest expense |
| Hire Purchase | You (at end of term) | Depreciation + interest expense |
| Finance Lease | Lessor/lender | Lease rental payments |
| Operating Lease | Lessor/lender | Lease rental payments |
No. Once you choose a method for a particular asset, you must use that method for the asset's entire life. However, you can choose different methods for different assets — e.g., diminishing value for your truck and prime cost for your office fit-out.
If you're GST registered, you depreciate the GST-exclusive cost (because you've claimed the GST back). If you're not registered for GST, you depreciate the full GST-inclusive amount.
If you sell for more than the written-down value, the difference is a "balancing adjustment" — effectively assessable income. If you sell for less, you can claim the difference as a deduction. This applies to individually tracked assets (not pooled assets).
No. Depreciation is a non-cash deduction — it reduces your taxable income without any additional cash outflow. This is why it's so valuable: you reduce your tax bill while keeping cash in the business.
Our calculator models depreciation and tax benefits across different structures so you can compare the true after-tax cost.
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