The diminishing value method is one of two ways the ATO lets you calculate depreciation on plant and equipment (Division 40 assets) in your rental property. Under this method, the deduction is calculated as a percentage of the asset's remaining value each year, which means you claim more in the early years and less as time goes on.
The formula is: asset's opening value multiplied by (days held / 365) multiplied by (200% / effective life in years). The "200%" factor is what makes the early-year deductions larger.
How It Works in Practice
Suppose you install a new split-system air conditioner for $3,000 with an effective life of 10 years. In the first full year, the diminishing value deduction is $3,000 multiplied by 200% divided by 10, which is $600. In the second year, the opening value is $2,400 ($3,000 minus $600), so the deduction drops to $480. Each year, the deduction gets smaller as the remaining value decreases.
Compare this to the prime cost method, where you would claim $300 per year (the same amount every year) for 10 years.
When to Use It
The diminishing value method is generally better if you want to maximise your deductions in the first few years of owning an asset. This is useful if you have higher income now and want to reduce your tax bill sooner. It is the more popular choice among property investors for Division 40 assets.
You choose the method when you first start claiming the asset, and you cannot switch methods for that particular asset later. For a detailed walkthrough of how both methods work, see our guide on how to calculate depreciation on your rental property.
Why It Matters for Landlords
Choosing between the diminishing value method and the prime cost method affects how much you can claim each year. For most investors, the diminishing value method provides a bigger tax benefit in the early years when cash flow is often tighter. Your quantity surveyor or tax accountant can advise on which method suits your situation. Try the depreciation calculator to compare both methods.
propkt lets you record depreciation claims however your schedule is structured, so you can track the actual deduction amounts year by year.