Updated: August 2023
What is Low-Value Pooling?
Low value pooling is an ATO approved tax depreciation method used to maximise the tax deductions for investment property assets.
What is Tax Depreciation?
Tax Depreciation is the annual tax reduction claim for the wear and tear on assets within your investment property. This is done by preparing a tax depreciation schedule, which lists all assets in your investment property, assigning them a market value and annual depreciation rate.
It is prepared by a qualified quantity surveyor, like WRCQS and is used by your specialist property accountant.
Tax Depreciation Categories
The Australian Taxation office has broken down the various asset types found in investment properties into two main categories.
Division 40 Depreciation (Plant & Equipment)
plant and equipment is the ‘easily removable’ fixtures and fittings found in and on your property.
Items like, carpet, appliances, light shades, pool pumps, etc
Division 43 Depreciation(Capital Works)
Division 43 depreciation refers to the structural and permanent elements of your building, out buildings and landscaping. It includes items like the house, sheds, driveways, pools, painting, renovations and more
What can I claim as low value pooling deductions?
When it comes to claiming tax deductions for your investment property you want to claim as much as possible – as soon as possible.
This is where Low-Value Pooling in your depreciation report does the heavy lifting.
Unlike the Capital Works (division 43) schedule, which typically only allows for depreciation at 2.5% pa.
…and unlike Division 40 (plant and equipment) for assets with a value greater than $1,000 that depreciate at various rates ranging from just 3% pa to 25% pa…
The Low Value Pool schedule is specifically for items/assets with a value equal-to or less-than $1,000.
What is the Low Value Pool Depreciaiton Rate?
The low value pool depreciation rate is 18.75% pa in the first financial year the assets were used for income producing purposes.
In the 2nd year, and each and every year thereafter, you can depreciate them at 37.5% pa. until the item has zero value (on paper).
How do items get into the Low Value Pool
The ATO has determined items equal-to or less-than $1,000 fall into the low value pool category.
But they get there via different paths…
- Pathway One: the Low Cost Asset
- Pathway Two: the Low Value Asset
Low Cost Assets:
Low cost assets are the plant and equipment items (division 40) within your investment property that have an opening balance value of $1,000 or less.
note: Delivery and installation costs for each asset is also included in that valuation.
An example:
A rangehood that cost $400 to buy, $100 to deliver and $150 to install has a total cost of $650
Therefore, the rangehood can be depreciated at 18.75% in the first financial year… then 37.5% so each year thereafter.
Low Value Assets:
Low value assets are a little more complicated. This category is for items that originally had an opening balance greater than $1,000 but over time have now declined in value to the point that they are under $1,000.
When an item in the Diminishing Value method schedule drops below $1,000 it can be moved across (by your quantity surveyor) to the LVP for faster depreciation at the higher % rates.
An example:
Let’s say you had an oven that cost $2,000.
After a few years of depreciation at 16.67% it drops below $1,000 in residual value.
When that happens your quantity surveyor moves it into the Low value pool where it can then be depreciated at 18.75% in the first year then 37.5% each year thereafter
So for maximum tax relief, it’s essential that your quantity surveyor allocates your building assets to the Low Value Pool schedule as soon as possible.
How to benefit from Low Value Pooling (as a property investor)
If you want to maximise your yearly tax deductions it’s best to maximise the number of items that fall into the low value pool.
You also want to minimise the number of days items are in the LVP in the first year.
And there’s are few ways you can do it…
How to minimise the first year deductions at 18.75%:
To minimise the number of days your items depreciate at just 18.75%, it’s essential to only spend your money on your investment property improvements late in the financial year.
Ideally late June. But make sure it’s done and paid for before the midnight June 30 deadline.
And remember: the items have to be Installed and available for use by the tenants to be able to claim the deductions.
There’s no use buying up new appliances and ceiling fans in late June, storing them in your garage for a month, only to install them in July.
That’ll mean you have to go a full year to claim them at the lower 18.75% pa.
Alternatively, installing on June 30 means just 1-day at 18.75% before you roll over into the more favourable 37.5% pa category.
How to Maximise your Low Value Pool deductions with more items:
Simply try to keep your spending below $1,000 on items for your investment property.
Tip: don’t forget that the delivery and installation costs get added onto the purchase price.
So if you buy a brand new appliance for $850 plus delivery at $100 and installation at $200, the total is now $1,150… Kicking it out of the low value pool and into the Diminishing Value method at just 16.67% pa.
Another Tip:
When buying sets of items (dining settings for example); the items are valued as a set, not as individual items.
This means, a $3,000 3-piece lounge is considered a $3,000 item and claimed in the Diminishing Value method schedule at 15% pa… not 3X $1,000 items claimed at 37.5% pa.
A way around this is to buy mixed sets.
For example: a table and chairs set made up of different chairs. It could even be considered stylistically odd or trendy. Either way, who cares?. As it means the chairs are ‘substantially different’ enough to mean they are not a ‘set’ and can be claimed as individual items. Therefore keeping them under $1,000
All of this may sound confusing and complicated but is second nature to me.
I can ensure your property has the maximum deductions squeezed out of it in the shortest possible time.
To find out how much tax you’re entitled to save simply get in touch here.
Knowing exactly how and why to claim improvements made to your property can be tricky and confusing.
Yet, my team at WRC Quantity Surveying will always be able to point you in the right direction and ensure your tax deductions are fully maximised to be the most tax advantageous they can be.
To find out more or to get your free quote, simply get in touch with us here and we will get back to you within 24-hrs (usually within 2-hrs)
Want to see some real world results
The best place to see what other investors are getting in tax depreciation deductions for properties similar to yours is by visiting our client portfolio page here
For further reading on more of our quantity surveyor articles click here
Or to visit our home page for Brisbane tax depreciation services click here
This article was written by William Callaghan A.A.I.Q.S.
2nd generation Quantity Surveyor and founder of WRC Quantity Surveying
