Capital Allowances: low-value pool - disposal of pre-CGT asset

Are the balancing adjustment rules for low-value pool assets in section 40-445 of the Income Tax Assessment Act 1997 (ITAA 1997) modified if the low-value asset the taxpayer disposed of from the pool was acquired by them before the introduction of the capital gains tax (CGT) regime?

No. The balancing adjustment rules for low-value pool assets in section 40-445 of the ITAA 1997 are not modified for pre-CGT assets.

The taxpayer acquired a depreciating asset before the introduction of the CGT regime on 20 September 1985. The taxpayer used the asset wholly for income producing purposes and depreciated it under the diminishing value method.

The asset's undeducted cost at 30 June 2001 was less than $1,000.

The taxpayer allocated the asset to a low-value pool for the 2002 income year and disposed of the asset during the 2003 income year.

Subdivision 40-E of the ITAA 1997 contains a number of provisions that specifically apply for depreciating assets allocated to a low-value pool. These specific provisions apply for depreciating assets allocated to a low-value pool in preference to the equivalent general provisions that apply for most other depreciating assets. In particular, section 40-440 of the ITAA 1997 sets out how to work out the decline in value of pooled assets and section 40-445 of the ITAA 1997 sets out the consequences of balancing adjustment events occurring for pooled assets.

For the purpose of working out the decline in value of low-value assets allocated to the pool, step 3 of the method statement in subsection 40-440(1) of the ITAA 1997 requires you to add only the taxable use percentage of the asset's opening adjustable value. For low-value assets, the taxable use percentage is estimated by reference to only the remaining effective life of the asset.

Similarly, under the balancing adjustment rules, subsection 40-445(1) of the ITAA 1997 requires you to reduce the closing pool balance by only the taxable use percentage of the asset's termination value.

The effect of these specific rules for pooled assets, including low-value assets, is that any capital gain or loss referable to the taxable use percentage of the asset is dealt with under Division 40 of the ITAA 1997. Any capital gain or loss referable to the use of a pooled asset for a purpose other than a taxable purpose is dealt with under the CGT provisions through CGT event K7 (section 104-235 of the ITAA 1997).