Capital Allowances: low-value assets allocated to low-value pools

Can a depreciating asset that has not been used for a taxable purpose be allocated to a low-value pool as a low-value asset under subsection 40-425(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. A depreciating asset that has not been used for a taxable purpose may be allocated to a low-value pool as a low-value asset under subsection 40-425(3) of the ITAA 1997.

A taxpayer purchases a property on 1 July 2003 and lives in the property until 15 June 2005. They then list the property for rent with a real estate agent, and the property is subsequently rented on 15 July 2005.

As a consequence of purchasing the property the taxpayer became the holder of a depreciating asset with a cost of $1,100.

The opening adjustable value of the asset at the beginning of the 2004-05 income year, worked out using the diminishing value method was less than $1,000.

You can choose to allocate a low-value asset to a low-value pool under subsection 40-425(3) of the ITAA 1997.

Subsection 40-425(5) of the ITAA 1997 defines a low-value asset as a depreciating asset, except a horticultural plant, you hold: • if you have deducted or can deduct amounts for it under Division 40 of the ITAA 1997 for a previous income year, for which you used the diminishing value method (paragraph 40-425(5)(a) of the ITAA 1997), and • the opening adjustable value for the current year is less than $1,000, worked out using the diminishing value method (paragraph 40-425(5)(b) of the ITAA 1997), and • it is not a low-cost asset (paragraph 40-425(5)(c) of the ITAA 1997).

An asset starts to decline in value when it is first used or installed ready for use for any purpose (section 40-60 of the ITAA 1997). In this case the asset began to be used and to decline in value from the time it was held on 1 July 2003. Subsection 40-25(1) of the ITAA 1997 provides the authority to deduct an amount equal to the decline in value for the asset. However, as the asset was used solely for private purposes during the 2003-04 income year, the amount the taxpayer can deduct for the decline in value of the asset for that income year is reduced by subsection 40-25(2) of the ITAA 1997 to a nil amount. The definition of amount in section 995-1 of the ITAA 1997 includes a nil amount. Therefore the requirement of paragraph 40-425(5)(a) of the ITAA 1997 that an amount can be deducted in an earlier year is satisfied.

On 1 July 2004 the asset had an opening adjustable value, worked out using the diminishing value method of less than $1,000 and it is not a low-cost asset. Therefore the requirements of paragraphs 40-425(5)(b) and 40-425(5)(c) of the ITAA 1997 are met.

The asset meets the requirements for a low-value asset under subsection 40-425(5) of the ITAA 1997. It can be allocated to a low-value pool under subsection 40-425(3) of the ITAA 1997 in a year that it meets those requirements even though it had not been used for a taxable purpose.