What is a pool for fixed asset depreciation purposes?
Under general rules, depreciation for tax purposes must be calculated on an asset-by-asset basis with the depreciation allowances being prescribed by the ATO (using their best estimate of the reasonable life of each type of asset).
However, in certain circumstances, the ATO allows taxpayers to “pool” their assets and calculate tax depreciation based on the overall value of the pool. This eases the compliance burden for taxpayers as well as, in some cases, offering favourable treatment.
There are three main types of pool in use that we handle in AssetAccountant™. We’ll look at each of them in turn:
Low Value Pool
The Low Value Pool (or “LVP”) is widely used in Australia by businesses of all size. This pool is effective at simplifying depreciation calculations for assets that either cost or have a tax written down value of less than $1,000. These are called “Low Cost Assets” or “Low Value Assets”.
Assets in the LVP are depreciated using the Diminishing Value method at a rate of 37.5% (although note that depreciation on Low Value Cost assets in the year they are entered into the pool only can use half that rate – 18.75%).
A taxpayer may choose to allocate a Low Value Asset to a pool at any time. However, once a pool has been established, all new Low Value Cost assets that are bought by the business must be allocated to the LVP.
There are a number of other rules relating to the use of LVPs, including:
- If allocating a Low Value Asset to the LVP, it cannot have been previously depreciated by the Prime Cost method
- Certain assets may not be put in the pool such as:
- horticultural plants
- assets for which you deduct amounts under the simplified depreciation rules
- those that have been used for R&D in certain situations or have been co-funded by an employer
In practice this means that a fixed asset management system should give you the option to add Low Value Assets to an LVP each year and allocate Low Cost Assets to the LVP.
Small Business Pool
The Small Business Pool (“SBP”) may be used by entities that have consolidated turnover under a certain amount as prescribed by the ATO (currently $10m).
There are rules in place to ensure that turnover from related parties must also be considered when applying this turnover test (which must be performed each year).
If this test is satisfied then eligible small businesses may choose to calculate deductions for depreciating assets using the rules as follows:
- an instant asset write-off for assets that cost less than the relevant threshold
- a general small business pool for assets that cost the same or more than the relevant threshold, which has simplified calculations to work out the depreciation deduction.
AssetAccountant™ handles all of these scenarios.
There are also currently a number of Covid-19 related reliefs regarding temporary full expensing and under the Backing Business Investment rules.
AssetAccountant™ is free to use or trial for up to 25 assets.
Software Development Pool
Taxpayers who develop in-house software may choose to allocate the cost of this to a Software Development Pool (“SDP”) as long is the software is used solely for a taxable purpose.
Once expenditure on such in-house software has been allocated to a pool, all related expenditure incurred in that year and future years must be included in a SDP (although note that a different SDP is created for each income year in which the taxpayer incurs costs on in-house software).
No deduction is available for costs incurred and placed into an SDP in the year that SDP is created. Then deductions are calculated at the rate of 30% in each of the next three years and 10% in the fourth year. Software development expenditure on a project that is included in an SDP but has been abandoned remains to be deducted as part of the pool as though it was an ongoing project.
There are also other rules related to the scenario where the taxpayer derives income from its in-house software where this income may be required to be treated as taxable income by the taxpayer.
It’s amazing we calculated this year’s depreciation in just a matter of minutes!
Veenith Singh - Group Finance Operations Manager, Beca Group