Capital Allowances: stop holding depreciating assets allocated to a low value pool

Where the taxpayer stops holding all the depreciating assets allocated to a low value pool, should the taxpayer continue to work out their deduction for any pool balance remaining under section 40-440 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Once depreciating assets are allocated to a low value pool, the taxpayer is required to work out their deduction for the decline in value of these assets under section 40-440 of the ITAA 1997 until the pool balance is exhausted, even if the taxpayer does not continue to hold the related assets.

A taxpayer purchases a property on 1 December 2003 and as a result becomes the holder of several depreciating assets costing less than $1000. The property is immediately rented and the depreciating assets are allocated to a low-value pool.

The taxpayer sells the property on 30 June 2006 and as a consequence ceases to be the holder of the depreciating assets. The termination value of the depreciating assets is less than the closing balance for the pool.

All legislative references in this Interpretative Decision are to the ITAA 1997 unless otherwise stated.

Subdivision 40-E contains a number of provisions that specifically apply to depreciating assets allocated to a low-value pool (pooled assets). These specific provisions apply to 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 sets out how to work out the decline in value of pooled assets.

While the decline in value of pooled assets is worked out in Subdivision 40-E (subsection 40-65(5)), the authority to deduct the amount worked out is contained in the general provisions of Subdivision 40-B. In particular, subsection 40-25(1) authorises a deduction each year of an amount equal to the decline in value for that income year of a depreciating asset held for any time during the year.

However, subsection 40-25(5) provides an exception to subsection 40-25(1) for depreciating assets allocated to a low-value pool. It provides that despite not continuing to hold these assets you can continue to deduct the amounts worked out under section 40-440 for these pool assets.

Section 40-445 provides the simplified balancing adjustment rules for pooled assets under which the pool balance is reduced (but not below zero) by the taxable use percentage of the termination value of any asset the taxpayer ceases to hold. If the taxable use percentage of the termination value exceeds the closing pool balance, the pool balance is exhausted and any excess is included in your assessable income.

The effect of these rules for pooled assets is that once established, a low-value pool remains in existence until the pool balance is exhausted. This is so even if all assets allocated to the pool are no longer held. Where a closing pool balance remains after the taxpayer ceases to hold all the assets, the taxpayer continues to be required to work out their decline in value under section 40-440 in order to claim their deduction.