In broad terms, 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, having regard to the wear and tear you reasonably expect from your expected circumstances of use and assuming reasonable levels of maintenance. 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 a choice to either work out the effective life yourself or use an effective life determined by the Commissioner.
The choice must be made for the income year in which the asset's start time occurs. Generally, the choice must be made by the time you lodge your income tax return for that year.
However, the choice is not available for:
- most intangible depreciating assets – see Effective life of intangible depreciating assets
- a depreciating asset 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
- a depreciating asset which you start to hold if 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 Holder changes but user same or associate of former user.
Working out the effective life yourself
If you decide to work out the effective life yourself, you need to take into account:
- how long you expect the asset can be used for a taxable purpose or for the purpose of producing exempt income, irrespective of who uses it
- the wear and tear you reasonably expect from your expected circumstances or use
- that it will be maintained in reasonably good order and condition
- how you expect to use the asset
- whether it would be likely for the asset to be scrapped or abandoned before the end of its useful life.
The sort of information which you could use to make an estimate of effective life of an asset includes:
- manufacturer’s specifications
- independent engineering information
- 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
- scrapping or abandonment practices
- the physical life of the asset.
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 the depreciating asset is new and has regard only to general industry circumstances of use.
The table attached to Taxation Ruling IT 2685 Income tax: depreciation lists the effective life of various items of plant as determined by the Commissioner. IT 2685 was issued on 11 June 1992 and remained in force until it was replaced by Taxation Ruling TR 2000/18 Income tax: depreciation effective life. TR 2000/18 came into force on 1 January 2001 and lists the Commissioner's determination of effective life for various depreciating assets. To find out how to get these rulings, see the inside front cover.
As a general rule, the schedule of effective lives accompanying IT 2685 should be used for depreciating assets acquired or started to be constructed before 1 January 2001. The schedule accompanying TR 2000/18 should be used for depreciating assets acquired or constructed on or after 1 January 2001.
Because the Commissioner often reviews his determinations of effective life, more than one determination might be in force during an income year. You generally adopt the determination that is in force at the time you enter into a contract to acquire an asset, you otherwise acquire it, or you start to construct it. However, if the asset's start time does not occur within 5 years of this time, you must use the determination that is in force at the asset's start time. For a depreciating asset acquired under a contract or otherwise, or started to be constructed before 11.45 am (by legal time in the ACT) on 21 September 1999, there is no restriction on the period within which the asset must be first used.
Note: IT 2685 contains depreciation rates-accelerated rates and broadbanded rates-which should only be used for plant that was acquired before 21 September 1999 or by certain small business taxpayers before 1 July 2001, see Accelerated depreciation.
For an extract from the rulings showing the effective lives of some commonly used items, see Extracts from Taxation Ruling IT 2685 and Taxation Ruling TR 2000/18-effective lives.
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 |
2 Innovation patent |
8 |
3 Petty patent |
6 |
4 Registered design |
15 |
5 Copyright |
The shorter of 25 years from when you acquire it or the period until the copyright ends |
6 A licence (except a copyright or in-house software) |
The term of the licence |
7 a licence relating to a copyright |
The shorter of 25 years from when you become the licensee or the period until the licence ends |
8 In-house software |
2 1/2 |
Spectrum licence |
The term of the licence |
Datacasting transmitter licence |
15 |
The effective life of an intangible depreciating asset listed in the table above cannot be self-assessed or recalculated.
The effective life of an indefeasible right to use an international telecommunications submarine cable system is the effective life of the international telecommunications submarine cable over which the right is granted.
The effective life of any other intangible depreciating asset is limited to 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 table above from a former holder (except items 5, 7 or 8) and you choose to calculate the asset's decline in value under the prime cost method, you must adjust the prime cost formula. Instead of using the effective life shown in the table above in the formula, you must use the number of years remaining in that effective life as at the start of the year you acquired the asset. For information on the prime cost method, the prime cost formula and the adjusted prime cost formula, see Methods of working out decline in value.
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 of the nature of your use have changed. You can recalculate an asset's effective life each time your 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 your use of the 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 being used to produce that will result in the plant being scrapped
- legislation prevents the asset’s continued use
- changes in technology make the asset redundant.
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 for information on accelerated rates of 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 if its cost is increased by 10 per cent 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 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 is the same.
You may also be required to recalculate the effective life of a depreciating asset 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
- become the holder of 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 Holder changes but user same or associate of former user.
How to recalculate effective life
The recalculated effective life is worked out from the depreciating asset's start time. You use the same principles to recalculate the effective life of a depreciating asset as you would to work out the original effective life, 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, the new estimate of effective life is used in the formula as the asset's effective life. Under the prime cost method, the adjusted prime cost formula must be used from the year in which you recalculate the asset's effective life, see Methods of working out decline in value for information about the adjusted prime cost formula.