How we conduct an effective life review
An effective life review is an open, transparent and objective process. The objective of a review is to work out the effective life of assets used in an industry based on how that industry most commonly uses them. However, we do not try to work out an effective life that can be used by all participants in an industry – we only try to identify the circumstances of use that are consistent with standard industry practices. Previously, most of the effective life determinations were based on an estimate of the average circumstances of use in an industry.
The participation of key industry stakeholders is critical to the success of an effective life review. At the outset, we consult with representative industry associations to secure their participation in the review. If there is no industry association or if the association declines to participate, we approach the major industry participants directly. Representative associations and major industry participants usually recognise the value of making an active contribution to these reviews because they have a vested interest in the outcome and recognise that any previous determinations that have been made may be inconsistent with current industry practice.
Effective life reviews are not audits; rather, they are consultative processes. Any information we obtain in the course of a review is only used for the purposes of the review and is strictly classified as 'commercial–in–confidence'. We keep participants fully informed of the progress of the review and seek their feedback about the information we obtain and the conclusions we reach.
Once we have secured the participation of representative industry associations and major industry participants, we work to identify the assets that will be reviewed. In some reviews, this may be a straightforward matter. However, sometimes these assets are not identified until the final stages of a review.
Early in the review, we carry out site visits and interviews at industry participants' business premises. These visits help us identify assets and obtain evidence relevant to the factors listed in paragraph 23 of TR 2016/1. During these visits, we interview people who are familiar with the operation, repair, and maintenance of these assets, as well as accounting staff. We also obtain vital information about the circumstances of use of the assets. Some of the questions we typically ask during a site visit include:
- What depreciating assets is your business using now?
- How long have you been using each asset?
- Were any bought second-hand?
- When would you expect to replace each asset? Will you sell it or scrap it?
- What will cause you to make that replacement decision? For example, breakage, worn out, no longer efficient or changing fashions.
- Do you think obsolescence drives the replacement of any particular assets? Do you think that obsolescence is predictable for the future, to a high degree of certainty?
- Are there any industry or government standards that require some assets to be replaced after a certain number of years?
- Do you lease or rent any of these assets? If so, how long does that arrangement run for and do you expect to buy the asset from the lease/finance company at the end?
- What has your past experience with asset lives been? For example, at what ages have you replaced assets in the past?
- Looking ahead to the next few years, do you think any assets will have a working life different to the life of today’s assets?
- Can you give us a rough idea of the cost of replacing your assets today? This would help us understand which depreciating assets are most valuable.
During the next stage of the review, we consult with other stakeholders such as manufacturers and suppliers of the assets, industry regulators, and independent third parties.
When we reach agreement with industry participants on the list of assets we will review, we invite all parties we have consulted to estimate of the effective life for each asset and provide any evidence to support those estimates. We then analyse all the evidence we have obtained, prepare a report, and draft recommendations of effective life for those assets. We circulate these draft recommendations to all the industry stakeholders we consulted during the review and allow them a minimum of one month to provide feedback on those recommendations.
If we do not obtain feedback that convinces us our recommendations are invalid, we will submit our report and recommendations to the effective life review panel. This panel typically comprises representatives from:
- the Institute of Chartered Accountants in Australia
- the Corporate Tax Association
- the ATO.
The panel considers, amongst other things, the process we used in the review and how adequately the evidence we obtained supports the proposed effective lives. The decision to proceed with new effective life determinations for the assets involved then rests with the Commissioner.