Low-value and software development pools

Low-value pools

You can work out the decline in value of certain depreciating assets through a low-value pool.

Low-value pools established before 1 July 2001 continue and you treat them as if they were established under UCA. Use the closing balance of the pool worked out under the former rules to start working out the decline in value of the depreciating assets in the pool under UCA.

Under 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) at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose.

A low-value asset is a depreciating asset that is all of the following:

• isn't a low-cost asset
• has an opening adjustable value for the current year of less than $1,000 (using the diminishing value method)
• you use the diminishing value method to work out any deductions for decline in value for a previous income year.

Work out the decline in value of an asset (that you hold jointly with others) on the cost of your interest in the asset. This means that you can allocate your interest in the asset to your low-value pool if the cost of your interest in the asset, or the opening adjustable value of your interest, is less than $1,000. See, Jointly held depreciating assets.

You can't allocate the following depreciating assets to a low-value pool:

• assets for which you use 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 entity concessions
• assets that cost $300 or less and that you use to earn income other than from a business (for which you can claim an immediate deduction), see Immediate deduction for certain non-business depreciating assets (costing $300 or less)
• assets that you use in carrying on research and development activities for which you're entitled to a tax offset for a deduction in their decline in value. Work out your entitlement to that tax offset under Division 355 of the ITAA 1997
• portable electronic devices, computer software, protective clothing, briefcases and tools of trade, if your employer either
  • provides the item
  • pays for or reimburses you for some or all of the cost of the item, 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.

From 1 July 2017, special rules apply to certain second-hand depreciating assets in residential rental premises. For information on how the rules for low-value pools apply to these assets, see Rental properties guide 2025.

Allocating depreciating assets to a low-value pool

You establish a low-value pool the first time you 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 you allocate it to the pool (for a low-value asset). This percentage is known as the asset’s ‘taxable use percentage’.

It's this taxable use percentage of the cost or opening adjustable value that is written off through the low-value pool.

Once you allocate an asset to the pool, you can't 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 allocate a low-cost asset 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 doesn't 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 allocate 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 isn't necessary to work out its adjustable value or decline in value separately. You only need to do one annual calculation for the decline in value for all of the depreciating assets in the pool.

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 you may allocate assets to the pool throughout the income year. This eliminates the need to make separate calculations for each asset using the date you allocate it to the pool.

To work out the decline in value of the depreciating assets in a low-value pool, add:

• 18.75% of both 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
  • taxable use percentage of any amounts included in the second element of cost for the income year of both
    • all assets in the pool at the end of the previous income year
    • low-value assets allocated to the pool for the income year.

You then add:

• 37.5% of both the
  • closing pool balance for the previous income year
  • taxable use percentage of the opening adjustable value of any low-value assets allocated to the pool for the income year.

The closing balance of a low-value pool for 2024–25 is:

• the closing pool balance for 2023–24, plus
• the taxable use percentage of the cost (first and second elements) of any low-cost assets allocated to the pool in 2024–25, plus
• the taxable use percentage of the opening adjustable value of low-value assets allocated to the pool in 2024–25, plus
• the taxable use percentage of any amounts included in 2024–25 in the second element of cost of both
  • assets in the pool at the end of 2023–24
  • low-value assets allocated in 2024–25
• less, the decline in value of the assets in the pool in 2024–25.

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 isn't 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.

To help you work out your deductions for depreciating assets in a low-value pool, see Worksheet 2: Low-value pool.

Software development pools

You may choose to deduct amounts for expenditure you incur on in-house software through a software development pool.

What is in-house software?

In-house software is computer software, or a right (for example, a licence) to use computer software, you acquire or develop (or have another entity develop) and the following apply:

• it is mainly for your use in performing the functions for which you develop it
• no amount is deductible for the in-house software outside 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 isn't in-house software. A deduction for such expenditure is allowable in the income year you incur the expense.

Expenditure to develop software for exploitation of the copyright isn't in-house software. The copyright is intellectual property, which is a depreciating asset, and you calculate the decline in value using the prime cost method and an effective life that is either 25 years or the copyright period, whichever is shorter.

Under UCA, you can deduct expenditure on in-house software using the prime cost method in the following ways:

• The decline in value of in-house software you acquire, such as off-the-shelf software, you work out using an effective life of either
  • 4 years (if you start to hold the in-house software under a contract you enter into after 7:30 pm AEST on 13 May 2008 or otherwise start to hold it after that day)
  • 5 years (if you use or first install ready for use the in-house software on or after 1 July 2015).
• Expenditure you incur in developing (or having another entity develop) in-house software, you may (or may need to) allocate it to a software development pool.
• If expenditure you incur in developing (or having another entity develop) in-house software that you don't allocate to a software development pool, you can capitalise into the cost of a resulting unit of in-house software. Work out its decline in value under the prime cost method, from the time the software's first use or when you first install it ready for use, using an effective life of either
  • 4 years (if the development starts after 7:30 pm AEST on 13 May 2008)
  • 5 years (if you use or first install ready for use the in-house software on or after 1 July 2015).
• If in-house software costs $300 or less and you use it 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 don't use and decide never to use, is zero. As a result, you can claim an immediate deduction for the adjustable value (or if it has not been used, the cost) of the software at that time.

You can also claim an immediate deduction for expenditure you incur on an in-house software development project (that you don't allocate to a software development pool) if you both:

• don't use the software or install it ready for use
• decide that you'll never use it or install it 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 incur the expenditure, you intend to use the software, or have it installed ready for use, for a taxable purpose.

For information on the deductibility of website expenses, see Taxation Ruling TR 2016/3 Income tax: deductibility of expenditure on a commercial website.

Software development pools

Under UCA, you can choose to allocate to a software development pool expenditure that you incur on developing (or on having another entity develop) 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 you incur 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 another entity develop) in-house software.

You can't allocate expenditure on developing in-house software that you don't intend to use solely for a taxable purpose and expenditure on acquiring in-house software to a software development pool.

If you're entitled to claim a GST input tax credit for expenditure you allocate to a software development pool, the expenditure in the pool for the income year in which you're entitled to the credit is reduced by the amount of the credit. Certain adjustments under the GST legislation for expenditure you allocate to a software development pool are treated as an outright deduction or income. Other adjustments reduce or increase the amount of the expenditure that you allocate to the pool for the adjustment year.

You don't get any deduction for expenditure in a software development pool in the income year in which you incur it. For expenditure you incur in an income year starting on or after 1 July 2015, you're allowed deductions at the rate of 30% in each of the next 3 years and 10% in the year after that.

If you allocate 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.

You must also include any recoupment of the expenditure in your assessable income.

If you receive consideration from a non-arm’s length dealing and the amount you receive is less than the market value, you're taken to receive the market value instead.

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