Show download pdf controls
  • Immediate deduction (for certain non-business depreciating assets costing $300 or less)

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you used it for a taxable purpose during the income year in which the deduction is available.

    The immediate deduction is available if all of the following tests are met in relation to the asset:

    If you are not eligible to claim the immediate deduction, you work out the decline in value of the asset using the general rules for working out decline in value. Alternatively, you may be able to allocate the asset to a low-value pool - see Low-value pools.

    The immediate deduction is not available for the following depreciating assets:

    Cost is $300 or less

    If you are entitled to a GST input tax credit in relation to the asset, the cost is reduced by the input tax credit before determining whether the cost is $300 or less.

    If you hold an asset jointly with others and the cost of your interest in the asset is $300 or less, you can claim the immediate deduction even though the depreciating asset in which you have an interest costs more than $300 - see Jointly held depreciating assets.

    Example: Cost is $300 or less - ignoring any GST impact

    John, Margaret and Neil jointly own a rental property in the proportions of 50%, 25% and 25%. Based on their respective interests, they contribute $400, $200 and $200 to acquire a new refrigerator for the rental property. Margaret and Neil can claim an immediate deduction because the cost of their interest in the refrigerator does not exceed $300. John cannot claim an immediate deduction because the cost of his interest is more than $300.

    End of example

    Used mainly to produce non-business assessable income

    Some examples of depreciating assets used to produce non-business income are:

    • a briefcase or tools of trade used by an employee
    • freestanding furniture in a rental property, and
    • a calculator used in managing an investment portfolio.

    To claim the immediate deduction, you must use the depreciating asset more than 50% of the time for producing non-business assessable income.

    If you meet this test, you can use the asset for other purposes (such as to carry on a business) and still claim the deduction. However, if you use the asset mainly for producing non-business assessable income but you also use the asset for a non-taxable purpose, then the amount of deduction must be reduced by the amount attributable to the use for a non-taxable purpose.

    Example: Depreciating asset used mainly to produce non-business assessable income - ignoring any GST impact

    Rob buys a calculator for $150. The calculator is used 40% of the time by him in his business and 60% of the time for managing his share portfolio. As the calculator is used more than 50% of the time for producing non-business assessable income, Rob can claim an immediate deduction for it of $150.

    If Rob used his calculator 40% of the time for private purposes and 60% of the time for managing his share portfolio, he is still using the calculator more than 50% of the time for producing non-business assessable income. However, his deduction would be reduced by 40% to reflect his private use of the asset.

    End of example

    Not part of a set

    Whether items form a set needs to be determined on a case-by-case basis. Items may be regarded as a set if they are:

    • dependent on each other
    • marketed as a set, or
    • designed and intended to be used together.

    It is the cost of a set of assets you acquire in the income year that must not exceed $300. You cannot avoid the test by buying parts of a set separately.

    Example: Set of items - ignoring any GST impact

    In the 2008-09 income year, Paula, a primary school teacher, bought a series of six progressive reading books costing $65 each. The books are designed so that pupils move on to the next book only when they have successfully completed the previous book. The books are marketed as a set and are designed to be used together. The six books would be regarded as a set. Paula cannot claim an immediate deduction for any of these books because they form part of a set which she acquired in the income year, and the total cost of the set was more than $300.

    End of example

     

    Example: Not a set - ignoring any GST impact

    Marie, an employee, buys a range of tools for her tool kit for work - a shifting spanner, a boxed set of screwdrivers and a hammer. Each item costs $300 or less. While the tools add to Marie's tool kit, they are not a set. It would make no difference if Marie purchased the items at the same time and from the same supplier or manufacturer. An immediate deduction is available for all the items, including the screwdrivers. The screwdrivers are a set as they are marketed and used as a set. However, as the cost is $300 or less, the deduction is available.

    End of example

    A group of assets acquired in an income year can be a set in themselves even though they also form part of a larger set acquired over more than one income year. If the assets acquired in an income year are a set then the total cost of that set must not exceed $300. Assets acquired in another income year that form part of a larger set are not taken into account when working out the total cost of a set and whether items form a set.

    Example: Set of items part of a larger set - ignoring any GST impact

    In the 2008-09 income year, Paula, a primary school teacher, hears about a series of 12 progressive reading books. The books are designed so that pupils move on to the next book only when they have successfully completed the previous book. The first six books are at a basic level while the second six are at an advanced level.

    Paula buys one book a month beginning in January and by 30 June 2009 she holds the first six books (the basic readers) at a total cost of $240. Because of the interdependency of the books, the six books are a set even though they can be purchased individually and they form part of a larger set. An immediate deduction is available for each book because the cost of the set Paula acquired during the income year was not more than $300.

    If Paula acquires the other six books (the advanced readers) in the following income year, they would be regarded as a set acquired in that year.

    End of example

    The concept of a set requires more than one depreciating asset. In some cases, however, more than one item may be a single depreciating asset. An example would be a three volume dictionary. This is a single depreciating asset, not a set of three separate depreciating assets, as the three volumes have a single integrated function.

    Not one of a number of identical or substantially identical items

    Items are identical if they are the same in all respects. Items are substantially identical if they are the same in most respects even though there may be some minor or incidental differences. Factors you would consider include colour, shape, function, texture, composition, brand and design.

    You do not take into account assets that you acquired in another income year.

    Example: Substantially identical items - ignoring any GST impact

    Jan buys three kitchen stools for her rental property in the 2008-09 income year. The stools are all wooden and of the same design but they are different colours. The colour of the stools is only a minor difference which is not enough to conclude that the stools are not substantially identical.

    The stools cost $150 each. Jan cannot claim an immediate deduction for the cost of each individual stool because they are substantially identical and their total cost exceeds $300.

    End of example

     

    Example: Not substantially identical items

    Jan also buys some chairs for her rental property: a canvas chair for the patio, a high-back wooden chair for the bedroom dressing table and a leather executive chair for the study. While these are all chairs, they are not identical or substantially identical. Jan can claim the cost of each chair as an immediate deduction if the chair costs $300 or less.

    End of example

    Effective life

    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:

    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, and
    • 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 and 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 is Taxation Ruling TR 2008/4 - Income tax: effective life of depreciating assets (applicable from 1 July 2008), which lists the Commissioner's determinations of the effective life for various depreciating assets.

    You need to work out which of the following apply:

    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 2008/4 showing the effective lives of some commonly used depreciating assets, see 'Examples of effective lives' from Taxation Ruling TR 2008/4 (from 1 July 2008).

    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 buses, light commercial vehicles, trucks and trailers; and certain assets used in the oil and gas industries. For more information, see Taxation Ruling TR 2008/4.

    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

    1. Innovation patent

     

    8

    1. Petty patent

     

    6

    1. Registered design

     

    15

    1. Copyright (except copyright in a film)

     

    The shorter of 25 years from when you acquire it or the period until the copyright ends

    1. A licence (except one relating to a copyright or in-house software)

     

    The term of the licence

    1. 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

    1. In-house software

     

    2 or 4 (Note)

    1. Spectrum licence

     

    The term of the licence

    1. Datacasting transmitter licence

     

    15

    1. Telecommunications site access right

     

    The term of the right

    Note: 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. 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

    1

    A mining, quarrying or prospecting right relating to mining operations (except obtaining petroleum or quarry materials)

    2

    A mining, quarrying or prospecting right relating to mining operations to obtain petroleum

    3

    A mining, quarrying or prospecting right relating to mining operations to obtain quarry materials

    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.

    Last modified: 12 Aug 2020QC 21774