Taxation Ruling

TR 2016/1

TR 2016/1 - Income tax: effective life of depreciating assets (applicable from 1 July 2016)

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• Please note that the PDF version is the authorised consolidated version of this ruling and amending notices.
  This Ruling, which applies from 1 July 2016, replaces TR 2015/2 (see paragraph 5 of this Ruling for further details).
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Preamble

Executive summary

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

2. Determinations made by the Commissioner of the effective life of depreciating assets apply for the purposes of provisions of Division 40 under which the effective life of a depreciating asset is used to work out the asset's decline in value.^[2] The effective life determination is made having regard to the period the depreciating asset can be used for a purpose specified in subsection 40-100(5) (a specified purpose^[3]), one of which is use for a taxable purpose. To the extent that the asset is used for a taxable purpose, a deduction may be available under Division 40 for the depreciating asset's decline in value (see section 40-25).

3. Effective life determinations made to date are consolidated in Tables A and B in the Schedule to this Ruling.

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 provided in this Ruling of the methodology used by the Commissioner in making a determination of effective life may assist taxpayers who choose to make their own estimate of the effective life of a depreciating asset.

Previous ruling

5. This Ruling replaces Taxation Ruling TR 2015/2, which is withdrawn from 1 July 2016. To the extent that the Commissioner's views in that Ruling still apply, they have been incorporated into this Ruling.

Ruling

Effective life determination

6. The Commissioner has made a determination of the effective life of certain depreciating assets which takes effect from 1 July 2016. This determination has been incorporated into Tables A and B in the Schedule to this Ruling.

7. The date from which an effective life determined by the Commissioner is applicable is set out in the fourth column of Tables A and B.

Effective life applicable

8. If you first use a depreciating asset or have it installed ready for use within five years of the time (the relevant time):

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you entered into the contract to acquire it

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you started to construct it, or

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you otherwise acquired it,

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

9. If you do not start to use a depreciating asset or have it installed ready for use within the five year period, then the effective life that will apply is the one that is in force at the date you first use the depreciating asset or have it installed ready for use for any purpose (see section 40-95).

How to use Tables A and B

10. Table A is an industry category table which lists assets that are peculiar to a particular industry or for which a particular effective life is appropriate because of the way the asset is used in that industry. The industry headings in Table A are drawn, where possible, from the classification subject categories in the Australian and New Zealand Standard Industrial Classification (ANZSIC) codes.

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Only a participant of a listed industry can use the Table A entries for that industry.

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If an asset either corresponds exactly to a description in Table A for the industry in which it is used or it satisfies the general description of an asset used in the functional process of that industry, the effective life is the life specified.

•

If the particular asset is not listed under the relevant industry heading in Table A, either specifically or under a general functional group/class, then the industry participant can use a relevant effective life shown in Table B.

11. Table B is an asset category table which covers assets generally:

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Taxpayers in industry can only use Table B entries if the particular asset is not listed under the relevant industry heading in Table A.

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If the taxpayer is not using the asset in an industry specified in Table A and the asset corresponds to a description in Table B, the effective life is the life specified for that description.

12. Before using an effective life determination in Table A or B, taxpayers must first be satisfied that the asset in question is a depreciating asset for the purposes of Division 40. An asset being a depreciating asset as used by a particular taxpayer or industry may not necessarily be a depreciating asset for another taxpayer or industry.

13. If a particular 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 (see section 40-105 and Appendix 1, Working out your own effective life - paragraphs 46 to 49 below).

Date of effect

14. This Ruling applies from 1 July 2016. 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 2016

Appendix 1 - Explanation

Overview

15. This Ruling is issued as part of an ongoing review of the Commissioner's effective life determinations.

16. There are periodic consolidations of Tables A and B to incorporate further effective life determinations made by the Commissioner as a result of reviews undertaken. Industry bodies and interested taxpayers are consulted during the course of effective life reviews and, in some instances, reports prepared by independent consultants are used. An independent review panel also checks each review process to confirm the level of industry consultation was appropriate. That panel typically comprises representatives from the Corporate Tax Association, Chartered Accountants Australia and New Zealand and the Australian Taxation Office.

17. The Commissioner has made a determination of the effective life of certain depreciating assets in Tables A and B to take effect from 1 July 2016. The Table A assets which are the subject of the new determination are assets used in the following industries and industry activities:

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Bee farming

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Coal seam gas extraction

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Confectionery manufacturing

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Courier pick-up and delivery services

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Cured meat and smallgoods manufacturing

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Dairy cattle farming - robotic milking systems

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Ice manufacturing

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Milk and cream processing

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Parking services

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Postal delivery services

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Rental cars

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Rigid and semi-rigid polymer product manufacturing, and

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Road transport - hire cars and limousines.

18. This determination also withdraws or amends some entries in Tables A and B and these changes are also incorporated into the tables.

19. The removal of assets from Table A or B does not indicate that the Commissioner no longer considers them to be depreciating assets. In some cases, it has been due to the difficulties in determining an appropriate effective life that accurately reflects all the facts and circumstances particular to that asset. In these cases, you will need to work out its effective life yourself (see section 40-105 and Appendix 1, Working out your own effective life - paragraphs 46 to 49 below).

20. An asset may be a depreciating asset when used by a particular taxpayer or industry but not necessarily a depreciating asset when used by another taxpayer or industry. This is typically the case where the asset is an improvement to land. For example, effective lives have been determined for swimming pools in Table B. However, these effective life determinations only apply to the swimming pools that are used as plant in a business. A residential property owner cannot use these effective life determinations because a swimming pool used in a residential rental property setting is not plant (and not a depreciating asset) to which Division 40 applies.

How does the Commissioner determine the effective life of a depreciating asset?

21. The Commissioner makes a determination of the effective life of a depreciating asset by estimating the period (in years, including fractions of years) the asset can be used by any entity for a specified purpose and if relevant for the asset:

(a)

assuming it will be subject to wear and tear at a rate that is reasonable for the Commissioner to assume

(b)

assuming it will be maintained in reasonably good order and condition, and

(c)

having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned (see section 40-100).

22. In determining an effective life, the Commissioner considers the factors listed in the paragraph below. The list is not intended to be exhaustive. For example, in determining the effective life of horticultural plants, in addition to the listed factors issues such as crop management techniques (crop regeneration and topworking/reworking where trees are cut back to the stump) were also taken into account. Where appropriate, each factor is considered on the basis of historical information and future expectations. No one factor is necessarily conclusive and the relative importance of each will vary depending on the nature of the asset.

23. The factors the Commissioner considers include:

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physical life

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manufacturing specifications/engineering information

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use of the asset in a particular industry

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use of the asset in different industries

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industry standards

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repairs and maintenance

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retention period

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obsolescence

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scrapping or abandonment practices

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lease periods

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financial analysis, and

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market value.

Physical life

24. An asset can be used while it continues to have a physical life, that is until it is physically exhausted.

25. An effective life determination is an estimate of the period the asset can be used by any entity for a specified purpose. Often an asset is not used for a specified purpose for the whole of its physical life. For example, an asset may be retired from use for a specified purpose but be retained as a source of spare parts. In this instance, the effective life would end at the time the asset is retired.

26. An asset's physical life, then, can be seen as the outer limit of its effective life and is a useful starting point for an analysis of the factors to be considered in determining the effective life of the asset.

Manufacturing specifications/Engineering information

27. The effective life of a new asset cannot be based solely on evidence of past use of the asset. The current design may differ for a variety of reasons including advances in technology and different construction materials. Accordingly, an analysis of manufacturing specifications and engineering information relevant to the new asset is an important factor in estimating its effective life.

Use of the asset in a particular industry

28. How intensively an asset is used in an industry would have a direct impact on the asset's effective life. In establishing the industry norm, the relevant industry is consulted wherever possible.

Use of the asset in different industries

29. The use of an asset in different industries is another important factor. For example, the use of a car in the taxi industry would subject the car to more wear and tear than the use of a car in another industry. Accordingly, the effective life determined by the Commissioner in each industry would be different, reflecting that different use.

Industry standards

30. Industry standards and regulations may dictate the time at which a particular asset must be retired from use in an industry.

31. There may also be industry standards and regulations which set the level of repairs and maintenance that must be carried out.

Repairs and maintenance

32. It might be suggested that the life of an asset can be extended indefinitely if there is unlimited expenditure on repairs and maintenance. However, paragraph 40-100(6)(b) requires the Commissioner to assume that an asset will be maintained only in reasonably good order and condition. Accordingly, an asset's effective life will generally be limited by the period it is economic to maintain the asset, even though it would still be possible to continue repairs and maintenance to keep it operational.

33. An asset can be subject to such a level of repairs and maintenance that the point of time arrives when it has been wholly or substantially physically replaced. In those circumstances, the effective life of the asset would be considered to have ended and a new asset to have come into place.

Retention period

34. The effective life of an asset is the total period it can be used by any entity for a specified purpose. The retention period is the time a particular taxpayer expects to hold a depreciating asset for any purpose. For example, it is common practice in some businesses to dispose of a car after it has been driven a pre-determined number of kilometres. That would be the retention period for that taxpayer. The effective life of the car, however, would end only when the car cannot be used by any taxpayer for a specified purpose.

Obsolescence

35. The Commissioner considers obsolescence when determining the effective life of an asset.

36. An asset may become obsolete because of commercial or technological reasons.

37. Commercial obsolescence may occur if, for instance, market demand for the goods produced by the asset ceases through consumer preference or Government regulation. It may also occur if the raw material the asset processes becomes unavailable.

38. Technology may advance so that another asset is better suited for the relevant purpose for which an existing asset is used. The point to note about technological advances, however, is that an asset's effective life does not necessarily end with each technological advance. A taxpayer can still use an asset for a specified purpose even though a newer model has come on to the market.

39. There are two types of obsolescence - that which can be predicted at the time the asset is first used and that which is unpredictable and emerges later. Unpredictable obsolescence cannot be taken into account when making an estimate of effective life. Predicted obsolescence would only be taken into account if it is predicted with a high level of certainty across a majority of users.

40. Taxpayers faced with a predicted obsolescence that would arise only because of their particular use of the asset may choose to work out the effective life of the asset themselves rather than to adopt the effective life determined by the Commissioner.

Scrapping or abandonment practices

41. Once a taxpayer has scrapped or abandoned an asset, there is a presumption it can no longer be used by anyone for a specified purpose. The scrapping of an asset can demonstrate that the asset is either physically exhausted or obsolete. The abandonment of an asset can demonstrate that it is too difficult or costly to remove it from its place of operation.

42. This factor is only relevant to the Commissioner's determination of the effective life of an asset if a general scrapping or abandonment practice can be established across users of the asset.

Lease periods

43. Because effective life is the period a depreciating asset can be used by any entity for a specified purpose, it is unlikely that an asset would be leased for a period greater than its effective life. Consideration of this factor will, in many instances, suggest that the effective life of an asset is no shorter than the period it is leased.

Financial analysis

44. As with lease periods, economic or financial analysis indicating the period over which an asset is intended for use gives guidance that the effective life is no shorter than that period. In many instances, the analysis may only reflect the capital cost recovery period or the term of a contract when in fact the asset may be used for a specified purpose by any entity for a much longer time.

Market value

45. The defining character of a depreciating asset is that its market value actually falls, or is expected to fall, over time. An analysis of the decline of market value of an asset class, therefore, is an important factor to ensure that a determination of effective life provides appropriate deductions for that decline in value.

Working out your own effective life

46. The Commissioner only takes account of normal industry practice when estimating effective life. Taxpayers who choose to self-assess, however, can take account of their own particular circumstances of use (see section 40-105).

47. The Commissioner only makes determinations of the effective life of new assets. The purchaser of a second-hand asset who decides its second-hand condition justifies a shorter life than that determined by the Commissioner can self-assess. A taxpayer who self-assesses the effective life of a depreciating asset acquired after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 is no longer required to assume that it is new.

48. In addition, taxpayers can recalculate the effective life of a depreciating asset if the effective life being used is no longer relevant because of changed circumstances relating to the use of the asset (see section 40-110). An example would be an unpredicted obsolescence such as more or less rigorous use than anticipated.

49. However, you do not have the choice of either working out the effective life yourself or using an effective life determined by the Commissioner for some assets. In addition, the effective life of these assets cannot be recalculated. The choice is not generally available:

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for most intangible depreciating assets (see subsection 40-95(7))^[4]

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if a depreciating asset was acquired from an associate who claimed or could have claimed deductions for the asset's decline in value (see subsection 40-95(4))

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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 subsection 40-95(5)), and

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if there has been rollover relief (see subsection 40-345(2)).

Capped lives

50. Where a capped life for a depreciating asset is available (see section 40-102), the asset is marked in Table A or B with a hash (#) in the third column.

51. From the 2012-13 income year, a capped life of 10 years is available for eligible shipping vessels but only if certain conditions are met (see subsections 40-102(4) and 40-102(4A)).

52. These conditions mean that not all shipping vessels listed under the Water transport and support services (48100 to 48200 and 52110 to 52190) sub-category in Table A will be eligible for the capped life at any given time.

53. For this reason, no shipping vessels have been marked with a hash (#) in the third column of Table A as would occur with other assets that have no additional eligibility requirements for a capped life.

54. Taxpayers will need to determine if a particular shipping vessel they hold meets the eligibility requirements of subsections 40-102(4) and 40-102(4A) to determine if the capped life can be applied.

Accelerated depreciation for primary producers

55. Primary producers are entitled to claim a deduction over three years for capital expenditure incurred from 7.30pm (AEST), 12 May 2015 on the construction, manufacture, installation or acquisition of a fodder storage asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia. The asset is marked in Table A with a plus (+) in the third column.

56. However, no deduction is available for capital expenditure incurred on acquiring a second-hand fodder storage asset unless it can be shown that no-one else has deducted or could deduct an amount, in any income year, for earlier capital expenditure on the construction, manufacture or previous acquisition of the asset.

Decline in value calculation

57. The effective life shown in Table A or B is a component in the formula under which the decline in value of the depreciating asset is calculated (see subsections 40-70(1) and 40-72(1) for diminishing value and subsection 40-75(1) for prime cost).

New and reviewed effective lives

58. Assets reviewed to date as part of the ongoing review of the Commissioner's effective life determinations are marked with an asterisk (*) in the third column of Tables A and B.

Important terms and definitions in Tables A and B

59. The terms 'freestanding' and 'fixed' are used to describe certain residential rental property assets listed in Table A. 'Freestanding' is also used in Table B in relation to 'light fittings and freestanding lights'. For the purposes of the determination of effective life of such assets, the terms 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.

60. The terms 'environmental control structure' and 'protective structure' are used to describe certain agricultural assets listed in Table A. For the purposes of the determination of effective life of such assets, the terms have the following meanings:

Environmental control structure - is a structure 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.

61. The terms 'including', 'includes' and 'incorporating' have been used in describing certain assets in Tables A and B. Where used the terms have the following meanings:

Including or includes - When an entry is described as 'including' or 'includes' other items, those other items are separate assets, each with the same effective life. For example, the entry 'Refrigeration assets (including chillers, compressors, condensers, evaporative coolers and pumps)' indicates that chillers, compressors, condensers, evaporative coolers and pumps are separate assets within the class of refrigeration assets, all of which have the specified effective life.

Incorporating - When an entry is described as 'incorporating' other items, those other items are not separate assets but are merely components of the one single asset being described. For example, the entry 'Conveyor systems (incorporating structures, belts, gearboxes and motors)' indicates that the structure, belts, gearboxes and motors are components of the one asset, the conveyor system.

62. The terms 'hire cars' and 'rental cars' have been used in describing certain assets in Tables A and B. For the purposes of the determination of effective life of such assets, the terms have the following meanings:

Hire car - A passenger car hired with a driver, not being a taxi.

Rental car - A passenger car hired, leased or rented without a driver.

Appendix 2 - Detailed contents list

63. The following is a detailed contents list for this Ruling.

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

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Schedule - ANZSIC categories in Table A

TR 2016/1 - Effective lives (Industry categories)
Table A as at 1 July 2016

TR 2016/1 - Effective lives (Asset categories)
Table B as at 1 July 2016