Common-rate pools
Since 1991-92, taxpayers have had the option of combining items of plant that have the same depreciation rates so that they can make a single calculation of deductions. This is known as common-rate pooling and the following rules apply:
- Depreciation deductions for pooled items are worked out using the diminishing value method only.
- Plant depreciated at certain special prime cost rates cannot be pooled-for example, plant being depreciated under one of the repealed 5 year or 3 year concessions cannot be pooled as they were prime cost systems only.
- Plant acquired part way through an income year cannot be pooled until the beginning of the next year.
- Items of plant can be pooled regardless of when they were acquired or whether they were previously depreciated under the prime cost method.
- Items of plant can be pooled only if they are used exclusively for income-producing or business purposes
- When items are pooled, their balance of undeducted costs is simply added to the opening balance of the pool at the beginning of the year.
- An item of plant can be taken out of a pool by deducting its reconstructed undeducted cost at the start of the year from the opening balance of the pool-the reconstructed undeducted cost is the amount that would have been the undeducted cost of the item if it had never been pooled.
- Depreciation deductions for items taken out of a pool can be worked out only by using the diminishing value method, even if the prime cost method was used before the item was placed into the pool.
On the disposal of a pooled item of plant, the following options are available:
- Take the item out of the pool as described above, and treat the difference between any termination value and the undeducted cost or written down value in the usual manner. This treatment will depend on whether the disposal was before or after 11.45am on 21 September 1999-for more information see What happens if you no longer own an item of plant.
- Leave the undeducted value of the item in the pool and either treat the lesser of the item's termination value and its cost as assessable income or use that amount in one or more of the alternative treatments explained in What happens if you no longer own an item of plant.
Low-value pools
From 1 July 2000, an optional low-value pooling arrangement for plant has been introduced. It will apply to plant costing less than $1,000 or having an undeducted cost of less than $1,000 at the start of the income year provided it has been depreciated using the diminishing value method. From 1 July 2000, such low-value plant can be allocated to a low-value pool and depreciated at statutory rates as a single item of plant.
However, this does not apply to taxpayers who qualify as small business taxpayers for capital allowances purposes. Small business taxpayers can continue to claim an immediate deduction for items of plant costing $300 or less.
Taxpayers who can choose low-value pooling
All taxpayers (including partnerships and individuals who are not carrying on a business) who acquire or hold eligible plant on or after 1 July 2000 can choose to use low-value pooling. Small business taxpayers cannot choose to use low-value pooling.
Plant that can be allocated to a low-value pool
Two classes of depreciable plant can be allocated to a low-value pool from 1 July 2000:
- low-cost plant-individual items of plant you acquired on or after 1 July 2000 that cost less than $1,000 and
- low undeducted-cost plant-items of plant you held in the previous year of income that you have already (or could have) depreciated using the diminishing value method to an undeducted cost of less than $1,000.
Plant that cannot be allocated to a low-value pool
The following plant cannot be allocated to a low-value pool:
- plant that costs $300 or less which you acquired before 1 July 2000 (you are entitled to an immediate deduction for such plant if you used it solely for income-producing purposes)
- plant with an undeducted cost of less than $1,000 which has been depreciated using the prime cost method
- plant that has already been allocated to a common-rate pool
- software
- in addition, the New Business Tax System (Capital Allowances) Bill 2000 Exposure Draft contains a proposal to reinstate the immediate write-off for plant costing $300 or less for certain taxpayers who use the plant predominantly to produce assessable income that is not derived from carrying on a business in the 2001 income year. Plant covered by this proposal will not be able to be allocated to a low-value pool.
Method of depreciation
The low-value pool is depreciated using the diminishing value method. Items of plant in the pool have an effective life of 4 years. The pool is depreciated using 2 statutory depreciation rates.
Rates of depreciation
There are 2 statutory depreciation rates that must be used together to calculate the total depreciation deduction for the low-value pool in a year of income. In a year of income, you must calculate your depreciation deduction for a low-value pool using the following 2 statutory rates:
- for low-cost plant that has been allocated to the pool for the first time in that income year-18.75 per cent (which is 50 per cent of the pool depreciation rate) of the total cost of that plant allocated, regardless of when during that year the item(s) was actually acquired. This eliminates the need to calculate a pro-rata depreciation deduction for each item of plant, based on the actual date it was pooled. It is consistent with the simplification aim of the low-value pooling measure and
- for all other plant in the pool (that is, plant that has been allocated to the pool in a previous year and low undeducted-cost plant allocated to the pool in the year of income)-37.5 per cent of the sum of:
- the pool closing balance from the previous year, and
- the total undeducted cost of any low undeducted-cost plant allocated to the pool in the year of income.
Plant that must be allocated once a low-value pool is created
Once you choose to create a low-value pool and an item of low-cost plant is allocated to the pool, all other low-cost plant acquired in that year and later years must be allocated to the low-value pool.
Additionally, once you allocate an item of low-cost plant to the low-value pool, it must remain in the pool. This means the initial choice to use the low-value pooling arrangement for low-cost plant is a once-and-for-all choice.
Allocating items to the low-value pool
The low-value pool is created in the year in which you first choose to allocate an item of plant to it. The low-value pool then contains all items that you allocate to it, regardless of the year in which they were first allocated.
Items of low-cost plant and/or low undeducted-cost plant are allocated to the same low-value pool simply by recording the income year in which they are first allocated. They must then be depreciated at a statutory rate as if the pool were a single item of plant. There is no requirement to record the low-value pool depreciation percentage as the rate for low-value pooled plant is set by law. This is in contrast to the existing 'common-rate' depreciation pooling rules.
Plant that has previously been depreciated under the prime cost method
Plant that has previously been depreciated to an undeducted cost of less than $1000 using the prime cost method is not eligible to be allocated to a low-value pool. You will still have to continue to depreciate these items of plant under the prime cost method.
Plant used partly for non-income-producing purposes
When you first allocate an item of plant to the pool, you need to make and record a reasonable estimate of the percentage of any proposed non-income-producing use. The cost or undeducted cost of the plant that you allocate to the pool is reduced by that percentage of non-income-producing use.
The cost or undeducted cost of plant (whichever is relevant) must be less than $1000 for it to be allocated to a low-value pool, irrespective of the estimated percentage of non-income-producing use. Once you have allocated the plant to the pool, you cannot vary your estimate of non-income-producing use if it changes in a later year.
Disposal of an item of plant from a low-value pool
If an item of plant from a low-value pool is disposed of (sold, lost, scrapped or destroyed) in a year of income, the pool closing balance for that year is reduced by the disposal proceeds (if any) of that plant. However, you do not include in the disposal proceeds the percentage that you estimated the plant would be used for non-income-producing purposes.
Disposal proceeds exceed the pool closing balance
Where you dispose of items of plant from a low-value pool and the disposal proceeds exceed the pool closing balance the excess must be included in your assessable income.
Capital gains tax (CGT) and low-value pooling
Items of plant allocated to a low-value pool are excluded from the CGT regime.
Record keeping requirements
You must record in writing the first income year in which you choose to allocate plant to a low-value pool. This initial choice to use low-value pooling creates the low-value pool. Items of plant are allocated to the low-value pool by recording in writing the income year in which they are allocated to the pool.
You must also make an estimate of the percentage (if any) of non-income-producing use of an item of plant when you allocate it to the pool.
Items will only need to be identified as low-value pooled plant at the time of disposal-details such as date or value at time of purchase will not be required.