Maximising the Low Value Pool for your clients
This month, we are looking at the opportunities provided by the Low Value Pool.
You asked for it. Well, maybe not you specifically, but accountants and advisers often ask us questions about how to make the most of depreciation.
We’ve been doing this for over 20 years and have dealt with tens of thousands of clients and helped out hundreds and hundreds of accountants. We’re putting together a series of regular and timely emails to help share our knowledge and experience with you.
Perhaps there is something you like us to cover down the track? Please let us know.
Key points for the Low Value Pool
- The Low Value Pool isn’t in every Depreciation Schedule – but it is in ours.
- Put as many assets as possible in the Low Value Pool to increase depreciation in the early years.
- The Low Value Pool can increase depreciation in the early years by at least 20%.
Why isn’t the Low Value Pool used by all providers ?
There are two questions everyone asks when enquiring about a residential Depreciation Schedule: what is your fee, and does the Schedule run for 40 years? What’s never asked is: ‘Does it include the Low Value Pool?’ Very few clients know about the Low Value Pool, and not all Depreciation Schedule providers include it.
With the average property investor claiming thousands of dollars in depreciation deductions every year, you’d think there would be some industry standards for Depreciation Schedules. Maybe even some guidelines from the ATO. There aren’t.
Having as many assets in the Low Value Pool as possible increases the depreciation claim considerably in the short term, and that’s the goal of most investors. Uninformed investors might save a few dollars upfront by using a provider that does not use the Low Value Pool, only to lose far more by not taking full advantage of the Low Value Pool.
Getting Assets into the Low Value Pool early is key. How do we do this ?
Three common mistakes with Low Value Pooling include not treating assets correctly, not claiming all components of a system, and not splitting the assets correctly when the property is owned equally by two or more parties.
- Not treating assets as individual items when multiples of the same item are installed, assuming they are not part of a set. This can happen when invoices don’t provide a breakdown, e.g. there’s a $1600 invoice for an oven and cooktop, but it’s actually two separate items, both under $1000 and they can therefore go into the Pool.
- Not claiming all components of a system. A solar power system, for example, has panels and an inverter. An invoice may just say $5000 for a 5KW solar power system with an inverter. If the inverter is under $1000, it can go into the Pool.
- Not splitting assets correctly when the property is owned equally by two or more parties. For example, if there are two owners of a $1400 oven, each party owns a $700 oven, and the item can be Pooled.
Maximising the Low Value Pool can increase depreciation by 20% over the first 5 years
We know you love numbers, and there’s no better way to quickly show how maximising the use of the Low Value Pool accelerates depreciation claims.
The following table shows depreciation on assets in a typical new house over the first five years with and without the Low Value Pool being used. As you can see, using the Low Value Pool increases the depreciation by over 20% in this example.
|
Total Asset Value $20,155.00 |
||||||
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Cumulative |
|
|
Depreciation (no LVP) |
$3,448.82 |
$3,623.43 |
$2,734.77 |
$2,091.98 |
$1,619.43 |
$13,518.43 |
|
Depreciation (with LVP) |
$4,225.44 |
$5,200.03 |
$3,698.23 |
$2,714.95 |
$1,819.10 |
$17,657.75 |
|
Extra claimed with LVP |
$4,139.32 |
|||||
|
Extra % with LVP |
30.62% |
|||||
This example is based on the first year being 245 days
News: Recent increased building costs means more depreciation
There’s been a lot of news lately about rising inflation, locally and globally. Even if you never watch the news, it’s obvious the cost of living has increased. The construction industry has been affected more than most. We’ve had fires destroying timber, floods, building supplies stuck in the Suez canal, COVID related global supply issues, and labour shortages.
Core Logic’s Cordell Construction Cost Index shows us that the cost of residential construction rose by 7.3% in 2021 and further a 11.9% in 2022. The latter increase was the largest on record.
The net result is an increase of almost 20% in residential construction costs over just a 2 year period.
The rate of these increases seems to be slowing down, but time will tell.
The effect on depreciation is significant. Depreciation on buildings is determined by construction costs, so properties built in the last 2-3 years will have a significantly higher claim than those built before that date.
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