Capital Allowances: low-value pool - change of taxable use of depreciating assets after those assets have been allocated to the pool

Does a taxpayer continue to work out the decline in value of a depreciating asset allocated to a low-value pool based on their original reasonable estimate of the taxable use percentage of that asset under section 40-435 of the Income Tax Assessment Act 1997 (ITAA 1997), if the percentage of their use of that asset for a taxable purpose changes?

Yes. The taxpayer must continue to work out the decline in value of a depreciating asset allocated to a low-value pool based on their original reasonable estimate of the taxable use percentage of that asset under section 40-435 of the ITAA 1997, even though the percentage of their use of that asset for a taxable purpose has changed.

The taxpayer allocated some depreciating assets in their rental property to a low-value pool. At the time of allocation, the taxpayer intended to rent the property on a long-term basis. As such, the taxpayer estimated the taxable use percentage of the assets allocated to the low-value pool to be 100 per cent.

The taxpayer later moved into the rental property due to a change of circumstances that was neither expected nor foreseeable by the taxpayer. Therefore, the depreciating assets in the property were no longer being used for a taxable purpose.

Under Subdivision 40-E of the ITAA 1997, a taxpayer may choose to work out the decline in value of certain low-cost and low-value depreciating assets through a low-value pool using set rates.

When a taxpayer allocates a depreciating asset to a low-value pool, section 40-435 of the ITAA 1997 requires the taxpayer to make a reasonable estimate of the percentage of their use of the asset for a taxable purpose. This percentage is known as the asset's taxable use percentage. It is this taxable use percentage of the cost or opening adjustable value of the depreciating assets in the pool that is used to work out the decline in value of the assets under section 40-440 of the ITAA 1997.

The estimate needs to take into account the taxpayer's use of the asset (including any past use) that will be for a taxable purpose over: • the asset's effective life (for a low-cost asset), or • any period of the asset's effective life that is yet to elapse at the start of the income year for which the asset is allocated to the pool (for a low-value asset).

The estimate must be done on a reasonable basis. This determination is an objective test that requires reasonable judgement to be exercised as to the prospective use of a depreciating asset. As a result, a taxpayer needs to estimate the taxable use percentage of a depreciating asset on a reasonable basis as a reasonable, independent person would having regard to the relevant facts and circumstances about the depreciating asset.

In this case, since the taxpayer intended to rent the property on a long-term basis and the change of circumstances was neither expected nor foreseeable, it is considered that the taxpayer made a reasonable estimate of the taxable use percentage of the assets allocated to the low-value pool. As such, the taxpayer can continue to work out the decline in value of those assets based on that percentage notwithstanding the percentage of their use of the assets for a taxable purpose has changed.

Subsection 40-25(2) of the ITAA 1997 reduces the deduction for decline in value of a depreciating asset for an income year if there is any non-taxable use of the asset. However, subsection 40-25(5) of the ITAA 1997 prevents this rule applying to depreciating assets allocated to a low-value pool.

For a depreciating asset allocated to a low-value pool, any use of the asset for a non-taxable purpose is reflected purely in the asset's taxable use percentage, which is worked out when the asset is allocated to the pool.