Property Investors Must Understand Low-Cost vs Low-Value Assets At Tax Time
Not all assets are born or (bought) equal. And they are certainly not treated as such when it comes to dealing with them in terms of tax deductions and depreciation, as property acquisition and tax expert and partner at TLK Partners in Sydney, Matthew Mousa, explains. He takes a look at how low cost and low tax value assets (often grouped together in a low-value pool to allow for a single deduction instead of a myriad of small ones) works.
What is a low-cost asset?
Let’s say a property owner bought and installed a bar fridge in his investment property, to create extra rental income. At the end of the first year that he bought and installed it, it’s worth less than $1000. This is classified as a low-cost asset.
And how about a low-value asset?
The original cost does not determine whether or not a depreciating asset is classified as low-value for tax purposes. This term applies to assets that have been depreciating for some years and whose book value has dropped to less than $1000 as at the middle of the income generating year.
What is a low-value pool?
The tax man, in his infinite wisdom, has decided that rental income property owners can group their low-cost and low-value assets into what is called a low-value pool. This means that only one calculation, for depreciation of the entire pool of assets is made, as opposed to a calculating each individual asset separately. It therefore provides one deduction amount for all of them that can used as a claim against the rental income it has been used to help generate.
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Conditions attached to the low-value pool
There are, however, certain conditions attached to assigning low-cost and low-value assets to a low-value pool. Matthew gives an example of how this might pan out:
- Let’s say you and your wife bought a big deep freezer for the rental property that the two of you own jointly. You also jointly own the deep freezer. Your share of the freezer is less than $1000, so you can add that to your low-value pool.
- Once you have allocated a low-cost asset to a low-value pool, you must then continue to add all other low-cost assets that you purchase from then on, into the pool.
- The same does not apply to a low-value asset. You may choose to add a low-value asset or not, on an asset-by-asset basis.
- Once you have allocated a low-cost or low-value asset to a low-value pool, it must remain there.
- You have to calculate the depreciating value using the diminishing value rate of 37.5%.
- If you add a new low-cost asset to the pool during the year, you must use a depreciation rate of 18.75%. This is merely an acknowledgement that assets are added to the pool throughout the year. It also means it is not necessary to calculate, separately, the depreciation of each new asset, according to when it entered the pool.
- Now you have to estimate the percentage of use of the asset in generating rental income over its effective life. Let’s say you bought a new lawn mower and you use it 80% of the time to keep your rental properties clean, and 20% for your own residential property. The lawn mower costs $900. 80% is $720. This becomes the value allocated to the machine, over its effective life, which you use to calculate the depreciation. This is known in tax parlance as the asset’s taxable use percentage.
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“When it comes to property investment acquisition and property tax advice experience is everything and our investor clients trust TLK Partners experience and advice,” Matthew concludes.
TLK Partners Wealth Management Companies Kingsgrove, Beverly Hills | Tax Accountant & Agent | Property Adviser are wealth advisers serving enterprises and private individuals who hope to take care of their future through sound financial management. Visit their website or contact them at (02) 8090 4324 for an appointment to discuss your financial management and investment needs.
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