The prime cost method is one of two ways the ATO allows you to calculate depreciation on plant and equipment (Division 40 assets) in a rental property. Under this method, you claim the same amount every year for the entire effective life of the asset. It is the simpler and more predictable of the two options.
The formula is straightforward: asset cost multiplied by (days held / 365) multiplied by (100% / effective life in years).
How It Works in Practice
If you install new carpet costing $4,000 with an effective life of 10 years, the prime cost deduction is $400 every year for 10 years. The deduction stays the same from the first year to the last. After 10 years, you have claimed the full $4,000 cost.
Compare this to the diminishing value method, where you would claim $800 in the first year but progressively less each year after that.
When to Use It
The prime cost method is a good choice when you want predictable, consistent deductions over the life of an asset. Some investors prefer the certainty of knowing exactly how much they will claim each year. It is also the method used for Division 43 capital works deductions (the building structure), where the rate is always 2.5% per year.
Once you choose a method for a particular asset, you are locked in for the life of that asset. You can use different methods for different assets if you wish.
Why It Matters for Landlords
The choice between prime cost and diminishing value affects your cash flow and tax planning. Prime cost gives you smaller deductions in the early years but larger ones later compared to diminishing value. Over the full effective life of the asset, the total amount claimed is the same either way; the difference is in the timing.
If you are working with a depreciation schedule, your quantity surveyor will typically present both methods so you can choose. You can also use our depreciation calculator to compare the two methods. propkt tracks your actual depreciation claims each year so your records always match what you report to the ATO.