Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income:
- having regard to the wear and tear you reasonably expect from your expected circumstances of use
- assuming that it will be maintained in reasonably good order and condition, and
- having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.
Effective life is expressed in years, including fractions of years. It is not rounded to the nearest whole year.
Choice of determining effective life
For most depreciating assets, you have the choice of either working out the effective life yourself or using an effective life determined by the Commissioner.
You must make the choice for the income year in which the asset’s start time occurs. Generally, you must make the choice by the time you lodge your income tax return for that year.
However, the choice is not available:
- for most intangible depreciating assets; see Effective life of intangible depreciating assets
- if a depreciating asset was acquired from an associate who claimed or could have claimed deductions for the asset’s decline in value; see Depreciating asset acquired from an associate
- for a depreciating asset that you started to hold but the user of the asset did not change or is an associate of the former user, for example, under a sale and leaseback arrangement; see Sale and leaseback arrangements
- if there has been rollover relief; see Rollover relief.
Working out the effective life yourself
The sort of information that you could use to make an estimate of the effective life of an asset includes:
- the physical life of the asset
- engineering information
- the manufacturer’s specifications
- your own past experience with similar assets
- the past experience of other users of similar assets
- the level of repairs and maintenance commonly adopted by users of the asset
- retention periods
- scrapping or abandonment practices.
You work out the effective life of a depreciating asset from the asset’s start time.
Commissioner’s determination
In making his determination, the Commissioner assumes that the depreciating asset is new and has regard to general industry circumstances of use.
As a general rule, use the Taxation Ruling or version of the Taxation Ruling schedule that is in force at the time you first use it, or have it installed ready for use. This will usually be when you:
- enter into a contract to acquire an asset
- otherwise acquire it, or
- start to construct it.
However, if the asset’s start time does not occur within five years of this time, you must use the effective life that is in force at the asset’s start time. For an item of plant acquired under a contract entered into, otherwise acquired or started to be constructed before 11.45am (by legal time in the ACT) on 21 September 1999, there is no restriction on the period within which the plant must be used. The general rule in the previous paragraph applies to such plant.
The latest Taxation Ruling at the time of publication of this guide is Taxation Ruling TR 2013/4 – Income tax: effective life of depreciating assets (applicable from 1 July 2013), which lists the Commissioner’s determinations of the effective life for various depreciating assets. However, you should also note that the 2014 effective life of depreciating assets ruling is expected to be published in late June 2014 and will apply to assets purchased after 30 June 2014.
You need to work out which of the following apply:
- Taxation Ruling TR 2013/4 (from 1 July 2013)
- Taxation Ruling TR 2012/2 (from 1 July 2012)
- Taxation Ruling TR 2011/2 (from 1 July 2011)
- Taxation Ruling TR 2010/2 (from 1 July 2010)
- Taxation Ruling TR 2009/4 (from 1 July 2009 to 30 June 2010)
- Taxation Ruling TR 2008/4 (from 1 July 2008 to 30 June 2009)
- Taxation Ruling TR 2007/3 (from 1 July 2007 to 30 June 2008)
- Taxation Ruling TR 2006/15 (from 1 January 2007 to 30 June 2007)
- Taxation Ruling TR 2006/5 (from 1 July 2006 to 31 December 2006)
- Taxation Ruling TR 2000/18 (from 1 January 2001 to 30 June 2006), or
- Taxation Ruling IT 2685.
As a general rule, the table of effective lives accompanying Taxation Ruling IT 2685 should be used only for depreciating assets:
- acquired under a contract entered into
- otherwise acquired, or
- started to be constructed before 1 January 2001.
Taxation Ruling IT 2685 contains depreciation rates (accelerated rates and broadbanded rates) which you should use only for plant that was acquired before 11.45am (by legal time in the ACT) on 21 September 1999 or by certain small business taxpayers before 1 July 2001; see Accelerated depreciation.
For an extract from Taxation Ruling TR 2012/2 showing the effective lives of some commonly used depreciating assets, see Examples of effective lives from Taxation Ruling TR 2013/4 (from 1 July 2013).
Statutory caps on the Commissioner’s determination of effective life
From 1 July 2002 there are statutory caps on the Commissioner’s determined effective life for certain depreciating assets. This means if you choose to use the Commissioner’s determination of effective life for an asset with a capped life, you must use the capped life if it is shorter than the Commissioner’s determination.
Assets with capped lives include aeroplanes; helicopters; certain shipping vessels, certain buses, light commercial vehicles, trucks and trailers; and certain assets used in the oil and gas industries. For more information, see Taxation Ruling TR 2013/4.
Effective life of intangible depreciating assets
The effective life of most intangible depreciating assets is prescribed under the UCA.
Asset |
Effective life in years |
|
|---|---|---|
1 |
Standard patent |
20 |
2 |
Innovation patent |
8 |
3 |
Petty patent |
6 |
4 |
Registered design |
15 |
5 |
Copyright (except copyright in a film) |
The shorter of 25 years from when you acquire it or the period until the copyright ends |
6 |
A licence (except one relating to a copyright or in-house software) |
The term of the licence |
7 |
A licence relating to a copyright (except copyright in a film) |
The shorter of 25 years from when you become the licensee or the period until the licence ends |
8 |
In-house software |
4* |
9 |
Spectrum licence |
The term of the licence |
10 |
Datacasting transmitter licence |
15 |
11 |
Telecommunications site access right |
The term of the right |
* See In-house software for more information
You do not have the choice of either working out the effective life yourself or using an effective life determined by the Commissioner for the intangible depreciating assets in the table above and other intangible depreciating assets. In addition, the effective life of these depreciating assets cannot be recalculated.
The effective life of an indefeasible right to use a telecommunications cable system is the effective life of the telecommunications cable over which the right is granted.
The effective life of any other intangible depreciating asset cannot be longer than the term of the asset as extended by any reasonably assured extension or renewal of that term.
If you acquire any of the intangible assets listed in the above table (except items 5, 7 or 8) from a former holder and you choose to calculate the asset’s decline in value using the prime cost method, in the formula you must use the number of years remaining in that effective life at the start of the income year you acquired the asset, not the effective life shown in the table.
Effective life of intangible depreciating assets that are mining, quarrying or prospecting rights
The effective life of a mining, quarrying or prospecting right is provided in the table below:
Asset |
Effective life in years |
|---|---|
A mining, quarrying or prospecting right relating to mining operations (except obtaining petroleum or quarry materials) |
The life of the mine or proposed mine or, if there is more than one, the life of the mine that has the longest life |
A mining, quarrying or prospecting right relating to mining operations to obtain petroleum |
The life of the petroleum field or proposed petroleum field |
A mining, quarrying or prospecting right relating to mining operations to obtain quarry materials |
The life of the quarry or proposed quarry or, if there is more than one, the life of the quarry that has the longest estimated life |
If you acquire a mining, quarrying or prospecting right listed in the above table, you will need to work out the effective life yourself. You will do this by estimating the period until the end of the life of the mine or proposed mine to which the right relates or, if there is more than one such mine, the life of the mine that has the longest estimated life.
You will have a choice of using either the prime cost or diminishing value method to work out the decline in value of the mining, quarrying or prospecting right.
You will also be able to recalculate the effective life of the mining, quarrying or prospecting right if there are changed circumstances.
Some examples of circumstances that could cause a variation include:
- a considerable structural price change for the mineral being extracted which leads to the mine’s premature permanent closure
- previously uneconomically mineable geologies becoming economically mineable
- a noticeable improvement in extraction methods or transport arrangements from the mine which leads to faster extraction of the mineral and a consequential shortening of the remaining life of the mine
- new information becoming available as a result of further exploration or prospecting on the mining tenement as to the presence of minerals likely to be recoverable which leads to an increase in the remaining life of the mine, or
- a change to the accepted industry practice that affects the estimation of the life of the mine.
Choice of recalculating effective life
You may choose to recalculate the effective life of a depreciating asset if the effective life you have been using is no longer accurate because the circumstances relating to the nature of the asset’s use have changed.
You can recalculate an asset’s effective life each time those circumstances change. It can be done in any income year after the one in which the asset’s start time occurs, and whether you worked out the previous effective life yourself or you used the effective life determined by the Commissioner.
Some examples of changed circumstances relating to the nature of the use of an asset are:
- your use of the asset turns out to be more or less rigorous than expected
- there is a downturn in the demand for the goods or services that the asset is used to produce that will result in the asset being scrapped
- legislation prevents the asset’s continued use
- changes in technology make the asset redundant, or
- there is an unexpected demand, or lack of success, for a film.
You cannot choose to recalculate the effective life of any depreciating asset for which you:
- used accelerated rates of depreciation before 1 July 2001; see Accelerated depreciation, or
- could have used accelerated rates of depreciation before 1 July 2001 if you had used the asset to produce assessable income or had it installed ready for that use.
In addition, the effective life of certain intangible depreciating assets cannot be recalculated; see Effective life of intangible depreciating assets.
Requirement to recalculate effective life
In some circumstances, you must recalculate the effective life of a depreciating asset.
You must recalculate the effective life of a depreciating asset if its cost is increased by 10% or more in an income year after the one in which its start time occurs and you either:
- worked out the effective life of the asset yourself, or
- used the Commissioner’s determination of effective life (or a capped life) and the prime cost method to work out the asset’s decline in value.
Even though you may be required to recalculate the effective life of an asset, you may conclude that the effective life remains the same.
You may also be required to recalculate the effective life of a depreciating asset:
- which you acquired from an associate who claimed or could have claimed deductions for the asset’s decline in value; see Depreciating asset acquired from an associate, or
- for which you became the holder, where the user of the asset does not change or is an associate of the former user, for example, under a sale and leaseback arrangement; see Sale and leaseback arrangements.
How to recalculate effective life
You work out the recalculated effective life from the depreciating asset’s start time. You use the same principles to recalculate the effective life of a depreciating asset that you would to work out the original effective life yourself; see Working out the effective life yourself.
Effect of recalculating effective life
If you recalculate the effective life of a depreciating asset, the new effective life starts to apply for the income year for which you make the recalculation.
If you are using the diminishing value method to work out the decline in value of a depreciating asset, you use the new estimate of effective life in the formula as the asset’s effective life. Under the prime cost method, you must use the adjusted prime cost formula from the year for which you recalculate the asset’s effective life; see Methods of working out decline in value for information about the adjusted prime cost formula.