Taxation Ruling

TR 2012/2

TR 2012/2 - Income tax: effective life of depreciating assets (applicable from 1 July 2012)

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Appendix 1 - Explanation

Exclamation This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.


25. This Ruling is being issued because of:

an ongoing review of the Commissioner's effective life determinations being undertaken by the ATO; and
a change in the system of public rulings following the enactment of the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 . The category of legally binding rulings has been expanded to cover matters about the administration and collection of particular taxes, including income tax.

26. There are periodic consolidations of Tables A and B of the schedule of effective life determination to reflect changes in the Commissioner's determinations.

27. The Commissioner has made new determinations that commence on 1 July 2012 pursuant to section 40-100, determining the effective life of assets covered by the following descriptions:

Animal feed manufacturing assets;
Coffee manufacturing assets;
Conrete product manufacturing - concrete roof tile manufacturing;
Conrete product manufacturing - fibre cement building board manufacturing assets;
Edible oil or fat (blended) manufacturing assets;
Ethanol manufacturing assets;
Frozen pre-prepared meals and selected snacks manufacturing assets;
Health and fitness centre operation assets;
Motor vehicle manufacturing - automotive metal stamping and blanking assets;
Motor vehicle manufacturing - motor car engine manufacturing and assembly assets;
Radio broadcasting assets;
Steel coil roll forming, slitting, blanking and sheet metal forming assets;
Sheet metal tank manufacturing assets; and
Tea manufacturing assets.

28. These new determinations, as well as the removal of some previous determinations that formerly appeared in the schedules attached to TR 2011/2, are now incorporated in the attached consolidated Tables A and B which are contained in the new '1 July 2012 Schedule'.

Context of Commissioner's review

29. The Commissioner advised the Review of Business Taxation, chaired by John Ralph AO, that the ATO would progressively update and expand the effective life schedule attached to the former IT 2685 to ensure it is as representative as possible. The first tranche of the review was contained in TR 2000/18 which first issued on 21 December 2000.

30. The review is continuing and will take some time to complete.

31. The review is based on extensive enquires made by the ATO and, in some instances, on reports prepared by independent consultants.

Basic principles of depreciation

32. From an economic point of view, business income arises from two sources:

net annual flows from business activities associated with the use of business assets and liabilities; and
the change in the market value of those business assets and liabilities.

33. Subject to tax timing rules for income recognition, increases in the market value of assets and decreases in the market value of liabilities add to business income. Decreases in the market value of assets and increases in the market value of liabilities reduce business income.

34. The current taxation system, through the application of the capital allowances rules in Division 40, for example, already recognises the change in market value of depreciating assets in working out taxable income. In particular, recognising that the loss of market value in most depreciating assets cannot be directly measured, it allows the write off of those assets to be based on an estimate of effective life.

35. The deductions based on effective life are intended to reflect an appropriate allowance for the diminution of economic value of an asset over its period of use.

36. Where the estimate is incorrect, the balancing adjustment provisions ensure that in cases where the depreciating asset has stopped being held or used, the actual loss in value over the period of use is allowed as a deduction.

How does the Commissioner determine the effective life of a depreciating asset?

37. The Commissioner makes a determination of the effective life of a depreciating asset by estimating the period (in years, including fractions of years) it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non exempt income and, if relevant for the asset:

assuming it will be subject to wear and tear at a rate that is reasonable for the Commissioner to assume;
assuming it will be maintained in reasonably good order and condition; and
having regard to the period within which it is likely to be scrapped, sold for no more than scrap or abandoned (see section 40-100).

38. In making a determination, the Commissioner considers the factors listed in paragraph 39 of this Ruling (which are not intended to be exhaustive). Where appropriate, each factor is considered on the basis of historical information and future expectations. No one factor is necessarily conclusive and the relative importance of each will vary depending on the nature of the asset. In considering these factors, the Commissioner only takes account of normal industry practices.

39. The factors the Commissioner considers in making a determination include:

the physical life of the asset;
engineering information;
the manufacturer's specifications;
the way in which the asset is used by an industry;
the past experience of users of the asset;
the level of repairs and maintenance adopted by users of the asset;
industry standards;
the use of the asset by different industries;
retention periods;
scrapping or abandonment practices;
if the asset is leased, the period of the lease;
economic or financial analysis indicating the period over which that asset is intended for use; and
where the asset is actively traded in a secondary market, conditions in that market.

Physical life

40. As set out in paragraph 37 of this Ruling, subsection 40-100(4) requires an estimate of the period a depreciating asset can be used by any entity for the relevant purposes. It is arguable that an asset can be used for these purposes while it continues to have a physical existence, that is, until it is physically exhausted.

41. Physical life, therefore, can be seen as the outer limit of an asset's effective life and is a useful starting point for an analysis of all the factors set out in paragraph 39 of this Ruling. Historical physical life is best determined by empirical evidence.

Engineering information/manufacturer's specifications

42. An estimate of the physical life of a new asset, however, cannot be based solely on what has occurred in the past. An analysis of engineering information and manufacturer's specifications is important when estimating future physical lives. There are various reasons why the expected life of a new asset may differ from that achieved in the past. These reasons include advances in technology, different construction materials, intensity of use and the levels of repairs and maintenance.

Physical life/effective life

43. It is important to note that the Commissioner does not consider that the physical life of an asset is necessarily its effective life because, as previously mentioned, all the factors must be considered before an estimate of effective life is made. A consideration of these factors may often indicate that an asset's effective life is a period shorter than its physical life.

The way in which an asset is used by an industry / the past experience of users of the asset

44. How intensively an industry uses an asset may have a direct impact on the asset's effective life. In establishing what the industry norm is, the relevant industry has been consulted wherever possible.

45. Often assets are not used for the relevant purposes for the whole of their life. For example, assets may be retired from use for the relevant purposes but be retained as a source of spare parts. In this instance, their effective life may end at the time they are retired.

Repairs and maintenance

46. It might be suggested that the life of an asset can be extended indefinitely if there is unlimited expenditure on repairs and maintenance. However, paragraph 40-100(4)(b) requires the Commissioner to assume that an asset will be maintained only in reasonably good order and condition. Accordingly, the effective life of an asset may end when it is no longer economic to maintain it, even though it may still be possible to do so. In establishing that point in time the industry norm is considered.


47. Another reason why the level of repairs and maintenance is considered is to determine if it is possible to ascertain a point in time when an asset has been wholly or substantially physically replaced. If an asset has been wholly or substantially physically replaced then its effective life is considered to have ended as it is, in fact, a new asset.

Industry standards

48. There may be industry standards/regulations which set the level of repairs and maintenance that must be carried out. In addition, these standards/regulations may dictate the time at which a particular asset must be retired from use by an industry. These factors are considered when building up a complete picture of the effective life of an asset.

Use of the asset by different industries

49. The use of an asset by different industries is another important factor. The use may be parallel or consecutive. An example of parallel use is the use of a car as a taxi compared to the use of a car for relevant purposes generally. In these circumstances, the Commissioner has determined that the effective lives are different. This reflects the increased wear and tear experienced by a car used as a taxi.

50. The consecutive use of an asset arises where it is used by different taxpayers for different purposes during its physical life. In determining the effective life of some assets, the period for which a particular asset can be used by any taxpayer for its intended purpose been estimated, without regard to the possible subsequent use of the asset by another taxpayer for an entirely different purpose. However, that approach has only been taken where the subsequent change in use is significant and the proceeds received on disposal are small relative to the asset's original cost. An example of this is a shipping container which, at the end of its effective life as a shipping container, may be used for a variety of other purposes, including as a storage shed. In that situation, the container would, nevertheless, have an effective life in the hands of the purchaser when it commences to be used as a storage shed.

Retention period

51. The retention period is the period any one taxpayer generally holds an asset. Subject to paragraph 50 of this Ruling, the effective life of an asset is the total period it can be used by any entity for the relevant purposes. That may not necessarily be the period a particular taxpayer expects to hold it before replacing it. For example, it is common practice for some businesses to dispose of a car after it has done a pre-determined number of kilometres. The effective life of the car does not end at that time if it can still be effectively used as a car for the relevant purposes.


52. The Commissioner considers obsolescence when determining the effective life of an asset.

53. An asset may become obsolete for both commercial and technological reasons.

54. Commercial obsolescence may occur if, for instance, market demand for the goods produced by the asset ceases through consumer preference or Government regulation. It may also occur if the raw material the asset processes becomes unavailable.

55. Technology may advance so that another asset is better suited for the relevant purpose for which an existing asset is used. The point to note about technological advances, however, is that an asset's effective life does not necessarily end with each technological advance. A taxpayer can still use an asset for the relevant purposes even though a newer model has come on to the market.

56. Obsolescence is only considered when it prevents the continued use of the asset for the relevant purposes. This is best evidenced by scrapping practices.

57. There are two types of obsolescence - that which can be predicted at the time the asset is first used (predictable) and that which emerges later (unpredictable). Clearly, unpredictable obsolescence cannot be taken into account when making an estimate of effective life. The Commissioner would only take obsolescence into account if it can be predicted with a high level of certainty across a majority of users.

58. Taxpayers faced with predictable obsolescence that impacts only on their business may choose to work out the effective lives of the assets themselves rather than adopt the effective lives determined by the Commissioner.

59. In addition, taxpayers can work out a new effective life under section 40-110 where during the life of the asset, facts emerge that result in the asset being scrapped before its originally estimated effective life has ended. For example, unpredictable obsolescence.

Scrapping or abandonment practices

60. Once a taxpayer has scrapped or abandoned an asset, there is a presumption it can no longer be used by anyone for the relevant purposes. The scrapping of an asset demonstrates that the asset is either physically exhausted or obsolete. A taxpayer may abandon an asset if it is too difficult or costly to remove it from its place of operation.

61. This factor is only relevant to the Commissioner's determination of the effective life of an asset if a general scrapping or abandonment practice can be established across users of the asset. Evidence that one group of users traditionally scraps an asset while others do not will not be sufficient to establish the asset as one that is generally scrapped for the purpose of the Commissioner's determination. However, taxpayers within the group that scrapped the asset could choose to work out the asset's effective life themselves.

Lease periods

62. Because effective life is, among other things, the period a depreciating asset can be used for the relevant purposes, it is unlikely that an asset would be leased for a period greater than its effective life. Consideration of this factor will, in many instances, suggest that the effective life of an asset is no shorter than the period it is leased.

Financial analysis

63. As with lease periods, economic or financial analysis indicating the period over which an asset is intended for use gives guidance that the effective life is no shorter than that period. In many instances, the analysis may only reflect the capital cost recovery period or the term of a contract when in fact the asset may be used for the relevant purposes by any entity for a much longer time.

Market value

64. The defining character of a depreciating asset is that its market value actually falls, or is expected to fall, over time. An analysis of the decline of market values of an asset class, therefore, is an important factor together with those set out above to ensure that a determination of effective life provides appropriate deductions.

Working out your own effective life

65. The non-exhaustive factors outlined in paragraphs 38 to 64 of this Ruling are essentially the same factors the Commissioner considers you would use if you worked out the effective life of an asset yourself. There is, however, one critical difference.

66. As mentioned in paragraph 38 of this Ruling, the Commissioner only takes account of normal industry practices when estimating effective life. However, taxpayers who choose to self-assess can take account of their own particular circumstances of use (see subsection 40-105(1)).

67. The Commissioner only makes determinations of the effective life of new assets. The purchaser of a second-hand asset, who decides its second-hand condition justifies a shorter life than that determined by the Commissioner, can self-assess. A taxpayer who self-assesses the effective life of plant or a depreciating asset acquired after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 is no longer required to assume that it is new.


68. Tables A and B in the schedule attached to this Ruling contain only effective lives. Rates have not been included. Working out a rate is not a separate step in the process, but has been incorporated into the calculation formulas: see subsections 40-70(1) and 40-72(1) (diminishing value) and 40-75(1) (prime cost).


69. Table A of the attached schedule is an industry table which contains assets under industry headings that have, where possible, been drawn from the ANZSIC subject categories. The table lists, under each industry heading, specific assets that are peculiar to that industry or for which a special effective life is justified because of the use to which those assets are put by the industry. Under some industry headings, the list of assets also contains a general grouping or class of assets that is identified by reference to the specific industry function or process for which the assets are employed.

70. Table B is an asset table that contains generic assets which may be used by more than one industry.

71. Whilst some assets are included in both tables with the same effective life, this is the exception rather than the norm. Generally, an asset would be included in an industry list only if the Commissioner determined a different effective life for use in that industry.

New and reviewed items

72. New and reviewed items have been marked with an asterisk (*) in column 3 of Tables A and B .


73. Industry bodies and interested taxpayers have been consulted during the course of the effective life reviews undertaken since 1999. An independent review panel has also checked each review process to confirm the level of industry consultation was appropriate. That panel presently comprises a representative from the Corporate Tax Association, The Institute of Chartered Accountants in Australia, The Treasury, the Australian Valuation Office and the Australian Taxation Office.

Statutory caps

74. Statutory caps on the Commissioner's determined effective lives apply to certain assets. Where the Commissioner has determined effective lives for assets in excess of the statutory caps or proposed caps for those assets, they have been marked with a hash (#) in column 3 of Tables A and B .

Water assets

75. Effective lives have been determined for various assets that are used in relation to water. These lives may be used where the assets qualify for a decline in value deduction under Subdivision 40-B. The application of Subdivision 40-B to some of these assets may depend on the prior application of Subdivision 40-F (water facility) or Subdivision 40-G (landcare operation).

Not issued as a draft


ATO references:
NO 99/132027; 2000/20567; 2003/11601; 2004/17815;

ISSN: 1039-0731

Related Rulings/Determinations:

IT 2685
TR 2000/18
TR 2006/5
TR 2006/15
TR 2007/3
TR 2008/4
TR 2009/4
TR 2010/2
TR 2011/2

Subject References:
Commissioner's determination of effective life
Commissioner's effective life schedule
decline in value
depreciating assets
depreciation rates
effective life
self assessment of effective life

Legislative References:
ITAA 1997
ITAA 1997 Div 40
ITAA 1997 40-70(1)
ITAA 1997 40-72(1)
ITAA 1997 40-75(1)
ITAA 1997 40-95
ITAA 1997 40-100
ITAA 1997 40-100(4)
ITAA 1997 40-100(4)(b)
ITAA 1997 40-105(1)
ITAA 1997 40-110
ITAA 1997 Subdiv 40-B
ITAA 1997 Subdiv 40-E
ITAA 1997 Subdiv 40-F
ITAA 1997 Subdiv 40-G
ITAA 1997 40-520
ITAA 1997 40-555(1)
ITAA 1997 Subdiv 42-M
ITAA 1997 Div 43
ITAA 1997 Subdiv 328-D
TAA 1953
Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005

TR 2012/2 history
  Date: Version: Change:
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