From 1 July 2000, an optional low-value pooling arrangement for plant was introduced. It applied to certain plant costing less than $1,000 or having an undeducted cost of less than $1,000. Such plant could be allocated to a low-value pool and depreciated at statutory rates.
The UCA adopts most of the former rules for a low-value pool. From 1 July 2001, the decline in value of certain depreciating assets can be worked out through a low-value pool.
Transitional rules apply so that a low-value pool created before 1 July 2001 continues and is treated as if it were created under the UCA. The closing balance of the pool worked out under the former rules is used to start working out the decline in value of the depreciating assets in the pool under the UCA.
Under the UCA, you can allocate low-cost assets and low-value assets to a low-value pool.
A low-cost asset is a depreciating asset whose cost is less than $1,000 (after GST credits or adjustments) as at the end of the income year in which you started to use it, or had it installed ready for use, for a taxable purpose.
A low-value asset is a depreciating asset:
- that is not a low-cost asset
- that has an opening adjustable value for the current year of less than $1,000, and
- for which you used the diminishing value method to work out any deductions for decline in value for a previous income year.
The decline in value of an asset that you hold jointly with others is worked out on the cost of your interest in the asset. This means that if you hold an asset jointly and the cost of your interest in the asset or the opening adjustable value of your interest is less than $1,000, you can allocate your interest in the asset to your low-value pool; see Jointly held depreciating assets.
The following depreciating assets cannot be allocated to a low-value pool:
- assets for which you used the prime cost method to work out any deductions for decline in value for a previous income year
- horticultural plants
- assets for which you deduct amounts under the simplified depreciation rules; see Small business entities
- assets that cost $300 or less for which you can claim an immediate deduction; see Immediate deduction (for certain non-business depreciating assets costing $300 or less)
- assets that you either use, or have used, in carrying on research and development activities for which you are entitled to a tax offset for a deduction in their decline in value, and your entitlement to that tax offset is worked out under Division 355 of the Income Tax Assessment Act 1997, or
- portable electronic devices*, computer software, protective clothing, briefcases and tools of trade, if the item was provided to you by your employer, or some or all of the cost of the item was paid for or reimbursed by your employer, and the provision, payment or reimbursement was exempt from fringe benefits tax.
* Portable electronic devices include laptops, portable printers, personal digital assistants, calculators, mobile phones and portable GPS navigation receivers.
Allocating depreciating assets to a low-value pool
A low-value pool is created when you first choose to allocate a low-cost or low-value asset to the pool.
When you allocate an asset to the pool, you must make a reasonable estimate of the percentage of your use of the asset that will be for a taxable purpose over its effective life (for a low-cost asset) or the effective life remaining at the start of the income year for which it was allocated to the pool (for a low-value asset). This percentage is known as the asset’s ‘taxable use percentage’.
It is this taxable use percentage of the cost or opening adjustable value that is written off through the low-value pool.
Example: Working out the taxable use percentage
Kate allocates a low-cost asset to a low-value pool. The asset has an effective life of three years. Kate intends to use the asset 90% for taxable purposes in the first year, 80% in the second year and 70% in the third year. A reasonable estimation of the taxable use percentage would be the average of these estimates, that is, 80%.
End of exampleOnce you have allocated an asset to the pool, you cannot vary your estimate of the taxable use percentage even if the actual use of the asset turns out to be different from your estimate.
Once you choose to create a low-value pool and a low-cost asset is allocated to the pool, you must pool all other low-cost assets that you start to hold in that income year and in later income years. However, this rule does not apply to low-value assets. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.
Once you have allocated an asset to the pool, it remains in the pool.
Working out the decline in value of depreciating assets in a low-value pool
Once you allocate an asset to a low-value pool, it is not necessary to work out its adjustable value or decline in value separately. Only one annual calculation for the decline in value for all of the depreciating assets in the pool is required.
You work out the deduction for the decline in value of depreciating assets in a low-value pool using a diminishing value rate of 37.5%.
For the income year in which you allocate a low-cost asset to the pool you work out its decline in value at a rate of 18.75% or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year. This eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool.
To work out the decline in value of the depreciating assets in a low-value pool, add:
- 18.75% of
- the taxable use percentage of the cost (first and second elements) of low-cost assets you have allocated to the pool for the income year, and
- the taxable use percentage of any amounts included in the second element of cost for the income year of all assets in the pool at the end of the previous income year, and
- low-value assets allocated to the pool for the income year
- 37.5% of
- the closing pool balance for the previous income year, and
- the taxable use percentage of the opening adjustable value of any low-value assets allocated to the pool for the income year.
Example: Working out the decline in value of depreciating assets in a low-value pool, ignoring any GST impact
During the 2013–14 income year, John bought a printer for $990. John allocated low-cost assets to a low-value pool in the 2012–13 income year so he had to allocate the printer to the pool because it too was a low-cost asset. He estimated that only 60% of its use would be for taxable purposes. He therefore allocated only 60% of the cost of the printer to the pool, that is, $594.
Assume that at the end of the 2012–13 income year, John’s low-value pool had a closing pool balance of $5,000. Also assume that John did not allocate any other low-cost or low-value assets to the pool for the 2013–14 income year. John’s deduction for the decline in value of the assets in the pool for the 2013–14 income year would be $1,986. This is worked out as follows:
18.75% of the taxable use percentage of the cost of the printer allocated to the pool during the year |
$111 |
plus 37.5% of the closing pool balance for the previous year |
$1,875 |
End of example
The closing balance of a low-value pool for an income year is:
- the closing pool balance for the previous income year
plus - the taxable use percentage of the cost (first and second elements) of any low-cost assets allocated to the pool for the income year
plus - the taxable use percentage of the opening adjustable value of low-value assets allocated to the pool for the income year
plus - the taxable use percentage of any amounts included in the second element of cost for the income year of
- assets in the pool at the end of the previous income year, and
- low-value assets allocated for the income year
- the decline in value of the assets in the pool for the income year.
Example: Working out the closing balance of a low-value pool, ignoring any GST impact
Following on from the previous example, and assuming that John made no additional allocations to or reductions from his low-value pool, the closing balance of the pool for the 2013–14 income year would be $3,608:
Closing pool balance for the 2012–13 income year |
$5,000 |
plus the taxable percentage of the cost of the printer |
$594 |
less the decline in value of the assets in the pool for the income year |
($1,986) |
End of example
Balancing adjustment event for a depreciating asset in a low-value pool
If a balancing adjustment event occurs for a depreciating asset in a low-value pool, you reduce the amount of the closing pool balance for that income year by the taxable use percentage of the asset’s termination value. If the taxable use percentage of the asset’s termination value exceeds the closing pool balance, you reduce the closing pool balance to zero and include the excess in your assessable income.
A capital gain or capital loss may arise if the asset is not used wholly for a taxable purpose. The difference between the asset’s cost and its termination value that is attributable to the estimated use for a non-taxable purpose is treated as a capital gain or capital loss.
Example: Disposal of a depreciating asset in a low-value pool, ignoring any GST impact
Following on from the previous examples, during the 2014–15 income year John sells the printer for $500. Because he originally estimated that the printer would only be used 60% for taxable purposes, the closing balance of the pool is reduced by 60% of the termination value of $500, that is, $300.
A capital loss of $196 also arises. As the printer’s taxable use percentage is 60%, 40% of the difference between the asset’s cost ($990) and its termination value ($500) is treated as a capital loss.
Assuming that John made no additional allocations to or reductions from his low-value pool, the closing balance of the pool for the 2014–15 income year is $1,955:
Closing pool balance for the 2013–14 income year |
$3,608 |
less the decline in value of the assets in the pool for the year (37.5% x $3,608) |
($1,353) |
less the taxable use percentage of the termination value of pooled assets that were disposed of during the year |
($300) |
End of example
This guide includes a worksheet to help you work out your deductions for depreciating assets in a low-value pool.
In-house software
In-house software is computer software, or a right (for example, a licence) to use computer software:
- that you acquire or develop (or have another entity develop) that is mainly for your use in performing the functions for which it was developed, and
- for which no amount is deductible outside the UCA or the simplified depreciation rules for small business entities.
If expenditure on software is deductible under the ordinary deduction provisions of the income tax law, the software is not in-house software. A deduction for such expenditure is allowable in the income year in which it is incurred.
Expenditure to develop software for exploitation of the copyright is not in-house software. The copyright is intellectual property, which is a depreciating asset, and the decline in value would be calculated using an effective life of 25 years and the prime cost method.
Under the UCA, expenditure on in-house software may be deducted in the following ways:
- the decline in value of acquired in-house software, such as off-the-shelf software, is worked out using an effective life of four years (if you started to hold the in-house software under a contract entered into after 7.30 PM AEST on 13 May 2008 or otherwise started to hold it after that day) and the prime cost method
- expenditure incurred in developing (or having developed) in-house software may be (or may need to be) allocated to a software development pool
- if expenditure incurred in developing (or having another entity develop) in-house software is not allocated to a software development pool, it can be capitalised into the cost of a resulting unit of in-house software and its decline in value can then be worked out using an effective life of four years (if the development started after 7.30 PM AEST on 13 May 2008) and the prime cost method from the time the software is first used or installed ready for use
- if in-house software costs $300 or less and it is used mainly for producing non-business assessable income, an immediate deduction may be allowable; see Immediate deduction (for certain non-business depreciating assets costing $300 or less).
The termination value of in-house software that you still hold but stop using and expect never to use again or decide never to use is zero. As a result, you can claim an immediate deduction for the cost of the software at that time.
You can also claim an immediate deduction for expenditure incurred on an in-house software development project (not allocated to a software development pool) if you have not used the software or had it installed ready for use and decide that you will never use it or have it installed ready for use. The amount you can deduct is your total expenditure on the software less any amount you derive for the software or a part of it. Your deduction is limited to the extent that, when you incurred the expenditure, you intended to use the software, or have it installed ready for use, for a taxable purpose.
Software development pools
The choice of allocating expenditure on developing in-house software to a software development pool was available before 1 July 2001 and continues under the UCA.
Under the UCA rules, you can choose to allocate to a software development pool expenditure that you incur on developing (or on having developed) in-house software that you intend to use solely for a taxable purpose. Once you allocate expenditure on such in-house software to a pool, you must allocate all such expenditure incurred in that year or a later year to a software development pool. A different pool is created for each income year in which you incur expenditure on developing (or on having developed) in-house software.
Expenditure on developing in-house software that you do not intend to use solely for a taxable purpose and expenditure on acquiring in-house software cannot be allocated to a software development pool.
If you are entitled to claim a GST input tax credit for expenditure allocated to a software development pool, the expenditure in the pool for the income year in which you are entitled to the credit is reduced by the amount of the credit. Certain adjustments under the GST legislation for expenditure allocated to a software development pool are treated as an outright deduction or income. Other adjustments reduce or increase the amount of the expenditure that has been allocated to the pool for the adjustment year.
You do not get any deduction for expenditure in a software development pool in the income year in which you incur it. You are allowed deductions at the rate of 40% in each of the next two years and 20% in the year after that.
If you have allocated software development expenditure on a project to a software development pool and the project is abandoned, the expenditure remains to be deducted as part of the pool.
If you have pooled in-house software development expenditure and you receive consideration for the software (for example, insurance proceeds on the destruction of the software), you must include that amount in your assessable income unless you make the choice for rollover relief to apply and do so. Choice of rollover relief is only available in this context where a change occurs in the holding of, or of interests in, the software; see Rollover relief.
You must also include any recoupment of the expenditure in your assessable income.
If the receipt of consideration arises from a non-arm’s length dealing and the amount is less than the market value of what the receipt was for, you are taken to receive that market value instead.