Recalculating a depreciating asset's effective life

You can choose to recalculate the self-assessed effective life of an asset if circumstances relating to its use change and the effective life you've been using is no longer accurate.

The effective life cannot be recalculated for assets with an effective life determined by us or for certain intangible assets.

You may have to recalculate the effective life if the asset's cost increased by 10% or more in an income year.

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.

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.

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.

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

Recalculating a depreciating asset's decline in value

You can use either the prime cost (straight line) or diminishing value methods to calculate the new estimate of the decline in value of the asset.

In the adjusted formulas, the asset's opening adjustable value (plus the cost of any improvements made to the asset during the year) is substituted for the asset's cost. For effective life, you substitute the period of the recalculated effective life that remains at the start of the year in which you make the new estimate.

Depreciating asset's adjustable value

An asset's adjustable value at a particular time is its cost less its decline in value up to that time. The adjustable value at the start of an income year (the opening adjustable value), is the same as its adjustable value at the end of the previous income year. The adjustable value of a newly acquired asset is generally the asset's cost.