Taxation Ruling

TR 2011/2

Income tax: effective life of depreciating assets (applicable from 1 July 2011)

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Ruling

Preamble

What this Ruling is about

1. This Ruling discusses the methodology used by the Commissioner of Taxation in making determinations of the effective life of depreciating assets under section 40-100 of the Income Tax Assessment Act 1997 (ITAA 1997). ^[1]

2. The effective life of a depreciating asset is used to work out the asset's decline in value. To the extent the asset is used for a taxable purpose, a deduction may be available, under Division 40, for its decline in value. However some depreciating assets, depending on the circumstances of their use, may qualify for capital works deductions under Division 43.

3. Determinations of the effective life of depreciating assets made by the Commissioner are reproduced in Tables A and B of the attached schedule. These determinations are not appropriate to calculate capital works deductions for depreciating assets that qualify for Division 43. Depreciating assets that qualify for capital works deductions under Division 43 may only have deductions worked out by the method specified in that Division.

4. You may choose to use the Commissioner's determination of the effective life of a depreciating asset or you may make your own estimate (see section 40-95). The explanation of the methodology used by the Commissioner in making determinations of effective life provided in this Ruling may assist taxpayers who choose to make their own estimate of the effective life for a depreciating asset.

Previous Rulings

5. This Ruling replaces Taxation Ruling TR 2010/2, which is withdrawn on and from 1 July 2011. To the extent that the Commissioner's views in that Ruling still apply, they have been incorporated into this Ruling.

Ruling

6. The Commissioner's determination of the effective life of depreciating assets has been amended with effect from 1 July 2011. For ease of reference, the Australian Taxation Office (ATO) has prepared a consolidated version of the amended determination which is set out in the Schedule to this Ruling. If, for a particular asset, you were using an effective life from the determination as in force before the latest amendment (for example, as contained in the Schedule to TR 2010/2), you should continue to use that life for that asset.

7. The date a determination comes into force is set out in column four of Tables A and B of the attached schedule.

Acquisitions of plant pre 21 September 1999

8. For plant:

•

you entered into a contract to acquire;

•

you otherwise acquired; or

•

you started to construct

before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999, you may use the effective life for the plant set out in the former Taxation Ruling IT 2685 Income tax: depreciation regardless of when you first used it or had it installed ready for use.

Acquisitions of plant/depreciating assets post 21 September 1999

9. If you start to use other plant or a depreciating asset or have it installed ready for use within five years of the time (the relevant time):

•

you entered into the contract to acquire it;

•

you started to construct it; or

•

you otherwise acquired it,

then the determination of effective life that will apply is the one that was in force at the relevant time (see section 40-95).

10. If you do not start to use the plant or depreciating asset or have it installed ready for use within the required five year period as set out in paragraph 9 of this Ruling, then the determination that will apply is the one that is in force at the date you first use it or have it installed ready for use for any purpose (see section 40-95).

Definitions - rental properties

11. The terms ' Freestanding' and ' Fixed' are used to describe certain residential rental property assets listed in Table A of the attached schedule. For the purposes of the determination of effective life for such assets they have the following meanings:

Freestanding - items designed to be portable or movable. Any attachment to the premises is only for the item's temporary stability.

Fixed - annexed or attached by any means, for example screws, nails, bolts, glue, adhesive, grout or cement, but not merely for temporary stability.

Definitions - agriculture and services to agriculture

12. The terms ' Environmental control structure' and ' Protective structure' are used to describe certain agricultural assets listed in Table A of the attached schedule. For the purposes of the determination of effective life for such assets they have the following meanings:

Environmental control structure - is designed to provide a protective environment within which the operator is able to monitor and manipulate factors influencing the growing environment such as temperature, humidity, air movement, light, water and pests to enable the greatest efficiency in producing the desired product.

Protective structure - is a structure used primarily and principally for protecting a growing product from one or more natural elements such as sun, hail, birds and wind.

Replacements

13. It had been a longstanding practice to permit taxpayers to treat the initial purchase of certain assets as not depreciable but to claim an immediate deduction for the cost of their replacement. The practice principally related to low cost items that had very long or indeterminate lives, were difficult to keep track of, and were subject to frequent replacement through loss or breakage (for example, crockery).

14. For some taxpayers, the $300 immediate write-off provisions were replaced with a new system which applied from 1 July 2000 (see Subdivision 42-M). Division 40 introduced a similar system from 1 July 2001 for depreciating assets, which allows certain taxpayers to pool assets costing less than $1,000 each and to write off the assets under the diminishing value method using an effective life of four years (see Subdivision 40-E).

15. Commencing with the 2007/08 income year, small business entities can choose to calculate depreciating assets deductions under Division 328-D. Under these provisions, small business entities have access to an immediate write off for depreciating assets costing less than $1000 each and a simple pooling facility for other depreciating assets.

16. The $300 immediate write-off provision was retained for assets used by taxpayers predominantly in deriving non-business income.

17. For these reasons, the replacement basis for deductions is not available for assets you first use (or have installed ready for use) for relevant purposes after 30 June 2000.

Horticultural plants

18. Horticultural plants are depreciating assets. The deduction for a horticultural plant is also based on its effective life and is available under Subdivision 40-F.

19. The methodology used to establish the effective life of a horticultural plant involves a consideration of the factors set out in paragraph 39 of this Ruling to the extent that they are relevant. Issues such as the varieties and location of plants grown, the age planted out, the years required to come into production and the number of years production was anticipated, have been canvassed. Consumer demand for new varieties may cause commercial obsolescence and, therefore, is a major factor in determining the effective life of horticultural plants.

20. Crop management techniques, such as regeneration and topworking/reworking, where trees are cut back to the stump, have also been taken into account in determining the effective life of horticultural plants. Where topworking/reworking involves grafting a new variety onto the old root system, with the result that a new plant has been established, deductions will be based on the effective life of the new plant.

How to use this schedule

21. The entries for the effective life of assets listed under a particular industry in Table A must only be used by members of that industry. If an asset is listed in Table A under a particular industry heading and also in Table B , then you must use the industry table if you are a member of that industry. Taxpayers not in that industry must use Table B .

22. If an asset used by an industry member is not listed under its industry heading, either specifically or under the general functional group/class, then the member should use the effective life of the asset listed in Table B .

23. If an asset is not listed in either Table A or B then the Commissioner has not made a determination of its effective life and you will need to work out its effective life yourself.

Date of effect

24. This Ruling applies on and from 1 July 2011 - see section 40-95. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling.

Commissioner of Taxation
29 June 2011

Not issued as a draft

References

ATO references:
NO 99/132027; 2000/20567; 2003/11601; 2004/17815;

Related Rulings/Determinations:

IT 2685
TR 2000/18
TR 2006/5
TR 2006/15
TR 2007/3
TR 2008/4
TR 2009/4
TR 2010/2

Subject References:
Commissioner's determination of effective life
Commissioner's effective life schedule
decline in value
depreciating assets
depreciation
depreciation rates
effective life
self assessment of effective life

Legislative References:
ITAA 1997
ITAA 1997 Div 40
ITAA 1997 40-70(1)
ITAA 1997 40-72(1)
ITAA 1997 40-75(1)
ITAA 1997 40-95
ITAA 1997 40-100
ITAA 1997 40-100(4)
ITAA 1997 40-100(4)(b)
ITAA 1997 40-105(1)
ITAA 1997 40-110
ITAA 1997 Subdiv 40-B
ITAA 1997 Subdiv 40-E
ITAA 1997 Subdiv 40-F
ITAA 1997 Subdiv 40-G
ITAA 1997 40-520
ITAA 1997 40-555(1)
ITAA 1997 Subdiv 42-M
ITAA 1997 Div 43
ITAA 1997 Subdiv 328-D
TAA 1953
Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005