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Effective life

Last updated 12 February 2020

The effective life of plant is the period it can be used by any entity for income-producing purposes based on your expected use and assuming it is maintained in reasonably good order and condition.

Determining effective life

You can either make your own estimate of the effective life of the plant or adopt the effective life determined by the Commissioner.

Taxation Ruling IT 2685 - Income tax: depreciation and its attachments list 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 which came into force on 1 January 2001.

If you were entitled to deduct an amount of depreciation for plant based on the effective life specified in IT 2685, you continue to use that effective life as the basis for your deduction otherwise you use the effective life contained in TR 2000/18.

Further clarification about which Commissioner's effective life you should use is proposed in the exposure draft on the New Business Tax System (Capital Allowances) Bill 2000. This exposure draft proposes that for plant acquired after 21 September 1999 you can use the effective life contained in the particular ruling that was in force at the relevant time, provided you start to use it or have it installed ready for use within three years of the relevant time. The relevant time is the time:

  • you entered into the contract to acquire it
  • you started to construct it, or
  • you otherwise acquired it.

If you do not start to use the plant or have it installed ready for use within the required three-year period, then the ruling that will apply is the one that is in force at the date you first use it or have it installed ready for use.

However, where the plant was acquired under a contract or otherwise acquired or construction of it commenced before 21 September 1999, the appropriate ruling to be applied is that which was in force at that time. There is no restriction on the period within which this plant must be used.

Making your own estimate of effective life

If you decide to make your own estimate of effective life, you need to take into account:

  • how long you expect the plant to be used irrespective of who uses it
  • how you expect to use it and
  • whether you would be likely to scrap it before the end of its useful life.

The sort of information which you could use to make an estimate includes:

  • manufacturer's specifications
  • independent engineering information
  • your own past experience with similar items of plant
  • the past experience of other users of similar items
  • the level of repairs and maintenance commonly adopted by users of the plant
  • retention periods
  • scrapping or abandonment practices and
  • the physical life of the item of plant.

Changing your estimate of effective life

You can change the effective life for an item of plant unless you are a small business taxpayer using accelerated depreciation rates. The change can be made whether you worked out the previous effective life yourself or adopted the effective life determined by the Commissioner. You can choose to work out a new effective life of plant if:

  • there are changed circumstances that make an earlier estimate no longer accurate and
  • either:  
    • you became the owner of the plant under a contract entered into after 11.45am (by legal time in the ACT) on 21 September 1999, or
    • you constructed the plant and the construction started after that time or
    • you acquired the plant in some other way after that time.

Changed circumstances that result in working out a new effective life

Some examples of circumstances that would make an earlier estimate of effective life no longer accurate are:

  • your use of the plant turns out to be more or less rigorous than you expected or was anticipated by the Commissioner's determination
  • there is a downturn in the demand for the goods or services that the plant is being used to produce that will result in the plant being scrapped
  • government legislation prevents the plant's continued use
  • changes in technology make the plant redundant.

Effect of making a new estimate of effective life

The new estimate is used in the formula for calculating your depreciation deduction for the income year for which you make the estimate.

If you are re-estimating the effective life of an item of plant and you are using the prime cost method, you use the plant's undeducted cost as at the start of the income year for which you made the choice as its cost in the formula.