All Topics / Legal & Accounting / Which method do you prefer?

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  • Profile photo of CeliviaCelivia
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    @celivia
    Join Date: 2003
    Post Count: 886

    I recently had a depreciation schedule done.
    As you probably know, there are two options of claiming the amounts; you can either use the Diminishing Value Method or the Prime Cost Method.

    The Diminishing Value Method seems more attractive to me, not only because of the higher claims over the first few years, but also because the total amount claimable is a few thousand dollars higher over the 10 years compared to the Prime Cost Method.

    My question is, am I overlooking something about the Prime Cost Method? Are there benefits in using the Prime Cost Method that make it a more attractive option?

    Which method do others use and why?

    Thanks for any feedback.

    Celivia

    Profile photo of depreciatordepreciator
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    @depreciator
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    Once we’ve done a Tax Depreciation Schedule for somone, we never know what method investors (or tbeir accountants) end up using. All Schedules should provide both methods so you’ve got the choice.
    The building depreciates at a consistent 2.5% (or 4%)pa.
    It’s the assets where you have a choice.
    I believe once you start using one method, you can’t switch to the other method.
    The Diminishing Value Method gives you more in the first 4-5 years. After that, the Prime Cost method will generally start to take over.
    You are able to use the Low Value Pool with both methods, but with the Prime Cost method only items which start out valued between $300 and $1,000 can be in the Pool. Other items cannot enter the Pool in subsequent years when they become Low value Assets.
    The Pool is optional. One thing to bear in mind is that if you are planning a renovation and there will be assets disposed of, you cannot write them off immediately if they have been in the Pool. Once they enter the Pool, they stay there. This means if, say, you did a kitchen makeover you could end up with 2 ovens in the Pool – the old one which you threw out, and the new one.

    Not sure if all that makes sense. Some of it veers into accountant territory and I’m not an accountant. If anybody has questions, feel free to call – 1300 660033.

    Scott

    Profile photo of IbuycashflowIbuycashflow
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    @ibuycashflow
    Join Date: 2004
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    The Diminishing Value method will give you more money in the hand in the first few years. How wisely you use this money determines the real advantage.

    I use DV on all chattels. If you try to maintain the standard of your property throughout you will probably end up replacing certain chattels before the end of their useful life.

    The cost method is only more advantageous if the cahttels tend to appreciate rather than depreciate. When this happens you may have “depreciation recovered” up to the extent of depreciation already claimed.This is treated like taxable income.

    My opinion, use the DV method and use the additional savings to acquire more IP’s or reduce loans.

    Cheers
    Jeff

    Profile photo of CeliviaCelivia
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    @celivia
    Join Date: 2003
    Post Count: 886

    Thanks Scott and Jeff.

    Jeff, could you give an example of chattels that tend to appreciate rather than depreciate? [blush2]

    Celivia

    Profile photo of IbuycashflowIbuycashflow
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    @ibuycashflow
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    Chattels that appreciate could be antique furniture, art or sometimes you just get a good bargain and end up selling the chattel at higher than cost. These are anomalies though. The common depreciable asset that appreciates is the building itself.

    Cheers
    Jeff

    Profile photo of melbearmelbear
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    @melbear
    Join Date: 2003
    Post Count: 2,429

    Cel, I would always use DV, as you get higher amounts back in the first few years, plus as time goes on, the $$ are worth less thanks to inflation, so in effect you will be getting less of today’s $$ back in future years….

    Cheers
    Mel

    Profile photo of CeliviaCelivia
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    @celivia
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    Thanks for your input, depreciator, Ibuycashflow and Melbear; I much appreciate it. [smiling]

    Celivia

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
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    Hi,

    Great discussion.

    May I just add that the amount of depreciation for accounting purposes (matching expense with income) is rarely the same as the amount of depreciation that can be claimed as a tax deduction (using rates as set out by the ATO).

    Any difference is reconciled through the ‘tax reconciliation’, which is a document that equates taxable income back to accounting profit.

    Just something else to bear in mind.

    Cheers,

    Steve McKnight

    **********
    Remember that success comes from doing things differently.
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    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
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    Success comes from doing things differently

    Profile photo of melbearmelbear
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    @melbear
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    Originally posted by SteveMcKnight:
    May I just add that the amount of depreciation for accounting purposes (matching expense with income) is rarely the same as the amount of depreciation that can be claimed as a tax deduction (using rates as set out by the ATO).

    Any difference is reconciled through the ‘tax reconciliation’, which is a document that equates taxable income back to accounting profit.

    Hi Steve

    Huh?[confused2] Can you please explain?[biggrin]

    Cheers
    Mel

    Profile photo of Steve McKnightSteve McKnight
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    @stevemcknight
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    Hi Mel,

    It’s accoutning talk mate.

    Just that the amount of depreciation as shown for accounting purposes (i.e. financial statements) is not necessarily the same as what is an allowable deduction for tax purposes (i.e. tax return).

    The reason for this is because of different rates being used.

    For example, buildings are depreciated for accounting purposes but not for tax purposes. Also, sometimes the ATO allows adavnced depreciation (such as a 100% writeoff for low cost items), where as this is generally not allowed for accounting purposes.

    I’ll grant you that it’s a little murky, but that’s they way things are!

    Cheers,

    Steve McKnight

    **********
    Remember that success comes from doing things differently.
    **********

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
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    Originally posted by Celivia:

    The Diminishing Value Method seems more attractive to me, not only because of the higher claims over the first few years, but also because the total amount claimable is a few thousand dollars higher over the 10 years compared to the Prime Cost Method.

    Hi Celivia,

    I also use the DVM for my depreciation claims as the claims are weighted a little at the start of the period of ownership. Any reduction in claims can be offset, to varying degrees, by some increases (subject to market conditions) to rental returns over the same period of time.

    I must say I am intrigued by the discrepancy on figures between DVM and PCM – and maybe Scott can clarify.

    I would ague the totals should be the same irrespective of the method of depreciation used as the depreciable value of the property should, in my opinion be the same – certainly the reports I sight have the same totals, it is just the distribution of the claims that varies.

    Derek
    [email protected]

    Property Investment Support Available. Ongoing and never stopping. PM welcome.

    Profile photo of AphexAphex
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    @aphex
    Join Date: 2003
    Post Count: 25

    With the prime cost method, if you have a few solid items of furniture in a rental property, it could be forseeable that you could end up depreciating these items beyond their original purchase price. If this occurs and the items are still in use, do you need to exclude them from future calculations?

    Profile photo of depreciatordepreciator
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    @depreciator
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    Post Count: 541

    Hi Derek,
    Yep, the total amount claimable is of course the same regardless of what method is used.
    Perhaps Celivia has some items with effective lives of over 10 years.
    Floating timber floors, for example, now have a 15 year life. Using the PC method the depreciation per year is the same for all 15 years. Using the DM method, there would be very little to claim after year 10.
    With carpets, which have an effective life of 10 years, the total claimed over the 10 years is the same.

    James, I’m not exactly sure what you mean by your question.

    Profile photo of AphexAphex
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    @aphex
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    Don’t wory Depreciator – you answered my question.

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