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  • Recalculating effective life

    For plant acquired from 21 September 1999 and for depreciating assets acquired from 1 July 2001, the calculation of decline in value is generally based on the effective life of the plant or asset rather than on the accelerated rates of depreciation that were previously available.

    See also:

    You can choose to recalculate the effective life of a depreciating asset if the nature of your use of that asset changes and those changed circumstances make your current estimate inaccurate. Your choice to recalculate applies where:

    • you acquired the depreciating asset, or its construction began from 1 July 2001
    • you acquired the plant, or its construction began between 21 September 1999 and 30 June 2001.

    You can reassess effective life, regardless of whether you made the existing estimate yourself, or adopted the effective life specified by the Commissioner of Taxation

    You can only make a new estimate of effective life after the end of the income year in which you first started to use the asset for any purpose (including a non-income producing purpose).

    When you must recalculate effective life

    You must recalculate the effective life of a depreciating asset if the asset's cost increases by at least 10% in an income year and you:

    • self-assessed the effective life of the asset
    • used the Commissioner's determination of effective life and the prime cost method to calculate the asset's decline in value.

    You may conclude that the effective life has not changed.

    There are special rules for recalculating effective life where depreciating assets are transferred between associates.

    When you can't recalculate effective life

    You can't recalculate the effective life of a depreciating asset where:

    • accelerated depreciation rates are available for the asset
    • the asset is an intangible asset, such as a licence, copyright or software
    • you simply miscalculated the existing effective life – so your circumstances of use have not changed. In this case, you may be able to correct the miscalculation by seeking an amendment of your existing estimate from the time allowed under the amendment provisions of the law.

    Changed circumstances

    Changed circumstances that could result in your estimate of effective life becoming inaccurate include:

    • your use of the asset turns out to be more or less rigorous than expected
    • the asset is scrapped because of a downturn in demand for the goods or services it is used to produce
    • legislation prevents the asset's continued use
    • new technology makes the asset redundant.

    Example

    A depreciating asset used to produce insecticide has a remaining effective life of ten years. The government decides that use of the insecticide is to be phased out and legislates to end production within two years. The depreciating asset can't be used for any other purpose so will be scrapped in two years. The effective life of the depreciating asset may then be re-estimated to reflect the loss of eight years of its previously estimated effective life.

    End of example

    How to make a new estimate of effective life

    The process of recalculating effective life is the same as the process of estimating effective life. To make a new estimate, you estimate the period (in years) the asset can be used for income-producing purposes by any entity from the time you first started to use the asset for any purpose. The period is based on your expected use of the asset and assumes that it is maintained in reasonably good order and condition.

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    The new estimate of effective life takes effect for the year in which you make it.

    Example

    DA Pty Ltd acquires a depreciating asset on 1 July 2001 and starts to use it on the same day. The company works out that the effective life of the asset is seven years. During 2001–02, the company is advised that use of the asset will be prohibited by law from 1 July 2003.

    The effective life can't be recalculated for 2001–02 because this is the year in which the company started to use the asset. However, for 2002–03 the company may recalculate the effective life at two years. The recalculated effective life is worked out from the time the company first started to use the asset to the date when it can no longer be used for income-producing purposes.

    End of example
      Last modified: 04 Jul 2017QC 16295