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Rental Income Tax: Understanding low-cost vs low-value assets
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. Those with low cost, or low tax value are often grouped together in a low-value pool to allow for a single deduction instead of a myriad of small ones. Baxton Property Management looks at how this works.
What is a low-cost asset?
Let’s say that you bought and installed a bar fridge in your investment property, to create extra rental income. At the end of the first year that you 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 you can group your low-cost and low-value assets into what is called a low-value pool. This means that you only make one calculation for depreciation of the entire pool of assets, and not have to do one for each individual asset. It therefore provides you with one deduction amount for all of them that you can use as a claim against the rental income it has been used to help generate.
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.
- 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.
Baxton, as quality rental property managers, will assist you in running your rental property as efficiently as possible. We will also keep you informed on all issues that are relevant to rental properties, owners, investors and their tenants. Browse our informative blogs on the Baxton website.
Written and syndicated by
– Baxton Media.
- Property Owners’ Tax: How do I claim on borrowing expenses?
- Rental property tax: Interest, land tax and other deductibles
- 6 things you can claim to maximise tax savings
We hope you enjoyed this article
The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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