The low value pool deduction is a clever strategy that lots of property investors don’t realise they can take advantage of during tax time.
So what can you do to make sure that you can keep more money in your pocket? By using low value pool deductions, you can depreciate the value of your assets at an accelerated rate. You have the potential to depreciate the bulk of your assets’ value within 3 to 4 years as opposed to the ATO’s prescribed effective life.
You do need to follow some rules in the first year compared with the following years to take advantage of the low-value pool deduction, but it’s not too hard to follow. By being aware of the rules, you can make the most of the low value pool deduction and your assets.
In this article, we’ll go through how low value pooling works, the rules around it, and how you can take advantage of it this financial year.
What is Tax Depreciation?
It’s important to take a step back and make sure you understand just what tax depreciation is.
Tax depreciation is the wear and tear that happens to your assets as they get older. As this happens, the value of your possessions decreases.
When we’re looking at property investment, your assets are referred to as either Plant and Equipment or Capital Works. The wear and tear that happens to your plant and equipment or building in your investment property are referred to as tax depreciation.
Understanding Tax Depreciation Categories
The ATO categorises depreciation into two distinct divisions:
Division 40 (Plant and Equipment) refers to easily removable or mechanical items such as air conditioning units, blinds and curtains, hot water systems, security systems, light fittings, and swimming pool filtration systems.
Division 43 (Capital Works) covers structural and permanent elements including buildings and extensions, structural improvements, driveways, fencing, and walls and roofing.
How Low Value Pooling Works
The depreciation of certain low cost and low value assets can be calculated by putting them into a ‘low value pool‘ and then depreciating the assets at a set annual rate.
The two types of assets that can be placed into a low value pool to claim as a low value pool deduction are:
Low Cost Assets
Low Cost Assets are those that cost less than $1,000 (after GST credits or adjustments) at the end of the financial year. When determining the value of these assets, you must include any delivery and installation costs in the total valuation.
Low Value Assets
Low Value Assets are items that, while not qualifying as low-cost assets, have an open adjustable value of less than $1,000 when calculated using the diminishing value method.
Smart Timing for Better Returns
Here’s a clever tip that many investors miss: the timing of your purchases can significantly impact your deductions.
When you first add an asset to your low value pool, it depreciates at 18.75% for that year. After that, the rate jumps to 37.5% per year.
By purchasing assets strategically near the end of the financial year, ideally in late June, you can minimise the time you’re stuck with the lower rate and maximise your deductions in the following years.
What You Can and Can’t Include
Not everything can go into your low value pool, and it’s important to know the boundaries. You can include assets you use for work as an employee or to earn rental income.
However, there are some key restrictions. You can’t include:
- Assets that cost $100 or less
- Assets for which you previously calculated depreciation using the prime cost method
- Certain electronic devices provided by your employer
- Horticultural plants
- Assets for which you can claim deductions under simplified depreciation rules
Remember that once you allocate an asset to the pool, it must remain there.
Example:
Lucy has bought a new printer for her home-based business that costs $899.
As the purchase price was less than $1,000, it’s considered a low-cost asset. Lucy has allocated this to the low value pool and evaluated that the printer has an effective life of three years.
Lucy intends to use the printer 80% for taxable purposes in the first year that she has it, 70% in the second, and 60% in the third. A reasonable estimate of the printer’s taxable use percentage would be the average of the estimates. In this case, Lucy’s printer estimate is 70%.
What Is the Low Value Pool Depreciation Rate?
According to the ATO, to calculate the depreciation on the assets in your low value pool, you will need to keep in mind when you acquired each asset.
In the first year that an asset is acquired and allocated to the low value pool, its low value pool deduction can be calculated at a rate of 18.75%.
This rate applies regardless of when within the year you allocated the asset into the pool.
Every year after that, you calculate the depreciation of your assets at an annual rate of 37.5%.
If you have been using the diminishing value method for an asset in a previous tax year and the value of the asset has fallen below $1,000, then this low value asset can be moved over to your low value pool and immediately be depreciated at a rate of 37.5%.
Example:
In 2018-19, Mario allocated several low cost assets into a low value pool for his investment property. This means that Mario automatically had to allocate his couch to the low value pool as it was a low cost asset.
During 2019-20, Mario bought a new couch for $950.
Mario estimated that the couch would be used for 70% taxable purposes. Therefore, he allocated 70% of the couch’s cost to the low value pool, which is $665.
At the end of 2018-19, the closing balance of Mario’s low value pool was $4,000. In 2019-2020, the new couch was the only asset added to the pool.
Mario’s deduction for the decline in value of the assets in his low value pool is $1624.69, worked out as follows:
| 18.75% of the taxable use percentage of the cost of the couch allocated to the pool in 2019-2020 (18.75% x $665 = $124.69) | $124.69 + |
| Plus 37.5% of the closing balance of the pool in 2018-19 (37.5% x $4,000 = $1,500) | $1,500 |
| Total = | $1,624.69 |
Low Value Pool Deduction Key Takeaways
- Working with a qualified quantity surveyor is invaluable for low value pooling calculations, as getting them right can be challenging.
- A quantity surveyor can assist in identifying qualifying assets, monitoring when assets become eligible as their value drops below $1,000 and ensuring compliance with ATO regulations.
- Though low value pooling may initially appear complex, it’s an effective tool for maximising tax benefits – success lies in understanding the fundamentals and seeking professional advice when needed to optimise investment property deductions.
To find out just how much you can take advantage of low value pooling, get in touch with us at Duo Tax Quantity Surveyors to order yourself a tax depreciation schedule.
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Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.
