• Effective life of an asset

    The decline in value of a depreciating asset is generally based on its effective life; that is, how long it can be used to produce income, taking into account:

    • whether it's subject to wear and tear at a reasonable rate
    • whether it's maintained in reasonably good order and condition
    • the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.

    The effective life is used to work out the asset’s decline in value (or depreciation) for which an income tax deduction can be claimed.

    For most depreciating assets, you can use the ATO's determinations of effective life, published in taxation rulings (updated annually). For some types of transport and agricultural machinery and gas production and distribution plant, the ATO's determination of effective life is capped by statute.

    Alternatively, you can work out the asset’s effective life yourself, by determining how many years it will reasonably be expected to produce income given the specific way it's likely to be used.

    In some situations, you don't have a choice. For example, if you acquire the asset from an associate (such as your spouse or business partner), you must use the same effective life they used (if they used the diminishing value method) or the effective life that is yet to elapse (if they used the prime cost method). For some intangible depreciating assets, including intellectual property, you must use the effective life set out in the uniform capital allowance rules.

    See also:

    Recalculating effective life

    You can choose to recalculate the effective life of an asset if circumstances change and the effective life you've been using is no longer accurate. You may have to recalculate the effective life if you make an improvement to an asset that increases its cost by 10% or more in a year.

    See also:

    How the ATO determines the effective lives of assets

    The ATO determines effective lives through an effective life review process.

    In carrying out these reviews we consult directly with owners, sellers, manufacturers and users of assets to come up with an agreed life for specific types of assets. Each year we review a large number of assets and publish the new effective life determinations in a taxation ruling.

    See also:

    Reviews in progress

    The industries and assets currently under review are listed in Reviews in progress.

    If you're interested in participating in a review, and assisting us to establish draft effective lives, you can contact the relevant officers shown for each review.

    We also welcome comments on draft effective lives published in draft determinations. These will usually appear between September and March depending on how a review is progressing.

    Completed and further reviews

    The industries for which we've completed effective life determinations are set out in Completed effective life reviews. If your industry is listed here, we have reviewed assets used in the industry and published determinations of effective life in a taxation ruling.

    If any assets are missing, or you would like your industry reviewed and effective life determinations made, email effectivelifecoe@ato.gov.au

    Last modified: 24 Jun 2015QC 45985