Low Value Pooling (LVP) is just another form of depreciation available to the taxpayer. The advantages of a LVP are it allows you to accelerate your depreciation effectively depreciating the bulk of the asset within 3-4 years instead of the ATO prescribed effective life.
There are some rules surrounding the use of the LVP and the rates that apply in first year versus subsequent years.
Rule no.1 is that you must be using the diminishing value method of depreciation to be able to utilise a LVP.
Rule no. 2 if you adopt the diminishing value method for one low-cost asset (an asset costing less than $1,000) you must use it for all low-cost assets across the life of the assets. You cannot transfer one low-cost asset to the LVP and the leave the other assets out. However for low-value assets (an asset where the depreciated value has fallen below $1,000) you can decide on a asset by asset basis whether or not to move into the LVP. Equally if you are using the Prime Cost method you must use this method for all assets.
Once using the diminishing value method (which is the most popular) you can then transfer your assets into the LVP. There is 2 rates of depreciation, 18.75% for the first year and 37.5% for subsequent years. If you have already been using the diminishing value method for a previous tax year and the value of an asset falls below $1,000 then all low value assets can be transferred to the LVP can immediately attract the 37.5% rate. If this is the first time you have started to own and depreciate the asset and you want to use the pool then the 18.75% rate applies. Any new assets purchased and installed ready for use during the tax year must first be depreciated at 18.75% and then 37.5% for subsequent years. For new assets, it does not matter if you purchase them at the beginning of the tax year or on the 30th June, you can still depreciate the asset at the full 18.75%
Example (to show the accelerated advantages of using a LVP)
|Asset||Diminishing Value Method||LVP Method|
|Cost of Ducted Air Conditioning Unit (Effective Life 20 Years)||$8,970||$8,970|
|Depreciation Year 1||$897||$1,682|
|Depreciation Year 2|
|Depreciation Year 3||$727||$1,708|
|Depreciation Year 4||$654||$1,068|
|Total Depreciation after 4 years||$3,085||$7,191|
|Residual Value of Asset after 4 Years||$5,885||$1,779|
*Note: the above information applies to taxpayers who are not adopting any of the simplified taxation rules for small business.