Tax Depreciation Schedules: Increasing your cashflow through low value pooling

Increasing your cashflow through low value pooling

Low-value pooling is a method of depreciating plant and equipment items at a higher rate to maximise deductions.

The ATO allows investors to calculate the depreciation of certain low-cost and low-value assets by allocating them to a low-value pool and depreciating them at a set annual rate.

low-cost asset is one that costs less than $1,000 after deducting any GST credits you’re entitled to claim.

low-value asset is an asset that has depreciated over one or more years and now has a written-down value of less than $1,000, but only if you’ve previously worked out deductions for it using the diminishing value method.

Starting a low-value pool

You start a low-value pool when you first choose to allocate a low-cost or low-value asset to it. You calculate the depreciation of all the assets in the low-value pool at the annual rate of 37.5%.

If you acquire an asset and allocate it to the pool during an income year, you calculate its deduction at a rate of 18.75% (that is, half the pool rate) in that first year. This rate applies regardless of at what point during the year you allocate the asset to the pool.

There are many instances where this is advantageous and will bring forward your deductions. Items such as ovens, hot water systems and window blinds will depreciate to a written down value of less than $1,000 within the first few years of installation, making them eligible to be placed in the low-value pool.

The following example demonstrates the benefits.

An item was installed on July 2021 for $1,500. It has an effective life of 10 years. The decline in value is worked out as 1,500 x (365 ÷ 365) x (200% ÷ 10), or $300 in the first year. Part way through the second year, the written-down value becomes less than $1,000 and the asset can be allocated to the low-value pool.

The table below compares the deductions over the first 5 years comparing continuing diminishing claims as normal versus allocating the asset to a low value pool once eligible:

 Year 1Year 2Year 3Year 4Year 5Total deductions
Standard methodology$300$240$192$153.60$122.88$1008.48
Low-value pooling$300$225$365.63$228.52$142.82$1,261.96

You can see that low-value pooling is a powerful method of maximising your deductions when you need it most – those early years when cashflow is so important.

Vanguard Valuations will always use low-value pooling to increase the rate of depreciation, boosting your cash returns as early as possible.

Leave a Reply