Prime cost method
Straight-line depreciation — the same deduction each year of the effective life.
The prime cost method claims the same amount of decline in value each year over an asset’s effective life. The ATO formula is: cost × (days held ÷ 365) × (100% ÷ effective life). Days held are the actual days in the year you held the asset, so a mid-year purchase is prorated, and the figure can be 366 in a leap year.
Prime cost is simpler to follow and suits assets whose usefulness is spread evenly. The alternative, diminishing value, claims more in the early years. Whichever you choose for an asset, you generally keep it for that asset’s life.
Worked example
A $2,000 laptop, two-year effective life, bought on 1 January and held 181 days to 30 June: $2,000 × 181 ÷ 365 × 50% = $496 of decline in year one. Year two is a full $1,000, and the remaining $504 lands in year three.
Common mistake
Claiming a full year in the year of purchase. The days-held fraction is part of the formula, and a December purchase earns roughly half a year’s decline, not a whole one.
Grounded in ATO — Prime cost and diminishing value methods guidance. Figures last checked . General information, not tax advice.
Related terms
Diminishing value method
Front-loaded depreciation — a bigger claim early, shrinking each year.
Effective life
How many years an asset is expected to be used — the base of every depreciation rate.
Depreciation (decline in value)
Claiming the cost of a big asset gradually over its life.
Instant asset write-off
Immediately deduct an eligible asset instead of depreciating it.
← Back to the full glossary.
Questions about this term
Prime cost method: common questions
- How is the prime cost deduction worked out?
- Cost × (days held ÷ 365) × (100% ÷ effective life). A $2,000 laptop with a two-year life bought on 1 January and held 181 days to 30 June gives $2,000 × 181 ÷ 365 × 50% = $496 in year one. Year two is a full $1,000, and the remaining $504 lands in year three.
- Do I get a full year’s depreciation if I buy an asset in December?
- No — the days-held fraction is part of the formula, so a December purchase earns roughly half a year’s decline, not a whole one. The leftover pushes into an extra year at the end of the schedule; nothing is lost, only shifted.
- Can I switch an asset from prime cost to diminishing value later?
- Generally not — whichever method you choose for an asset, you keep it for that asset’s life. Prime cost suits assets whose usefulness is spread evenly; diminishing value claims more in the early years. The choice is made per asset at the start.
- Why might the days-held figure be 366?
- Because it counts the actual days in the year you held the asset, and a leap year has 366. The formula uses the real calendar rather than a fixed fraction, which is why a mid-year purchase is prorated to the day.
Let Fin handle the jargon for you
Connect your bank and Fin sorts your income, expenses and GST automatically — so terms like this just become numbers that are already worked out. Free to start, no card needed.
Get 2Fin free →