EF 2014/1 - Explanatory statement


COMMONWEALTH OF AUSTRALIA

Income Tax Assessment Act 1997

Explanatory Statement

General outline of Instrument

The authority for making an effective life determination is provided by subsection 40-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

The proposed Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2014 (No 1) will be a legislative instrument for the purposes of the Legislative Instruments Act 2003.

Date of effect

This instrument applies from 1 July 2014.

What this instrument is about:

The instrument provides taxpayers in specific industries and for specific assets with effective lives as a basis to calculate the decline in value (depreciation) of an asset for income tax purposes.

What the effect of this instrument is:

Compliance cost impact: Low. The instrument will affect only a small proportion of businesses and confirms existing practice. There is no ongoing compliance cost impact and a low implementation impact reflecting the need for some taxpayers to be aware of the change and make some minor adjustments to their processes.

The instrument provides taxpayers with a choice under the ITAA 1997, when measuring the decline in value (depreciation) of an asset, because a taxpayer can either use an effective life determined by the Commissioner, or work out (self-assess) their own effective life of an asset in accordance with section 40-105 of the ITAA 1997.

Effective lives determined by the Commissioner provide what is referred to as a 'safe harbour' for taxpayers, as it provides certainty to taxpayers that these lives will be accepted by the Commissioner.

Background:

The policy of effective life depreciation came into effect on 1 July 1991. On 21 September 1999, accelerated depreciation was removed.

As part of that policy, the Government also endorsed the Review of Business Taxation's recommendation that the Commissioner institute an ongoing revision of the effective life schedule (Recommendation 8.5 of A Tax System Redesigned).

The ATO has been undertaking a comprehensive review of the Commissioner's determinations of effective life. In doing so, the Commissioner consults with a number of key stakeholders, including taxpayers, industry associations, industry engineers and manufacturers of the assets.

The current review is the most comprehensive ever undertaken in terms of the information gathered and the consideration given to different factors.

Taxation Ruling 2014/4 explains the factors the Commissioner takes into account when making effective life determinations. Those factors include commercial and technical obsolescence; to the extent it is predictable. The review is not focusing on the physical life of assets to the exclusion of economic influences on effective life.

Ultimately, the Commissioner's determinations must satisfy the question of how long the depreciating asset can be used by any entity for a taxable purpose.

The new determinations of effective life do not represent any change in policy. They represent proper administration of the law.

The new determinations have been arrived at by a proper process. An independent review panel has confirmed that sufficient consultation was undertaken.

Consultation:

Notifications of the various reviews being conducted are listed on the ATO website with an invitation to participate in the reviews.

Draft effective lives are also published along with requests for feedback, and these drafts are also sent to key stakeholders, including industry participants and associations, for comment. After considering the feedback, final effective lives are published in Taxation Ruling 2014/4 on the ATO website.

A review panel including representatives from the Corporate Tax Association and the Institute of Chartered Accountants in Australia is involved in reviewing the proposed effective lives. An Assistant Commissioner from the ATO is also on the review panel and is responsible for signing the legislative instrument. The involvement of review panel members ensures that a full consultative process has been carried out with key stakeholders when conducting effective life reviews.

The final effective lives are also sent to all taxpayers that participated in the review, and the determination is published on the ATO website.

Statement of Compatibility with Human Rights

This statement is prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2014 (No. 1)

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

The instrument provides taxpayers with a choice under the ITAA 1997, when measuring the decline in value (depreciation) of an asset, because a taxpayer can either use an effective life determined by the Commissioner, or work out (self-assess) their own effective life of an asset in accordance with section 40-105 of the ITAA 1997.

Effective lives determined by the Commissioner provide what is referred to as a 'safe harbour' for taxpayers, as it provides certainty to taxpayers that these lives will be accepted by the Commissioner

Human rights implications

This Instrument does not engage any of the applicable rights or freedoms. The instrument provides taxpayers in specific industries and for specific assets with effective lives as a basis to calculate the decline in value (depreciation) of an asset for income tax purposes.

Conclusion

This Instrument is compatible with human rights as it does not raise any human rights issues.



8th day of May 2014.

Michael Gabriel Tenace
Acting Assistant Commissioner, Public Groups and International

Subject References:
capped lives
determination of effective life
decline in value
depreciating assets
depreciation
effective life
effective life determination

Legislative References:

Income Tax (Effective life of Depreciating Assets) Determination 2001

Income Tax Assessment Act 1997
Div 40
40-70(1)
40-72(1)
40-75(1)
40-95
40-100
40-100(5)
40-100(6)(b)
40-105
40-110

Taxation Administration Act 1953
Pt IVAAA


Taxation Laws Amendment Act (No. 4) 2002


Legislative Instruments Act 2003

Related Legislative Determinations:
EF 2013/1 - Legislative Determination

Related Rulings/Determinations:
TR 2007/3
TR 2008/4
TR 2009/4
TR 2010/2
TR 2011/2
TR 2012/2
TR 2013/4
TR 2014/4
Previous Rulings/Determinations:
TR 2000/18
TR 2006/5
TR 2006/15

Other References:
Recommendation 8.5 of The Review of Business Taxation Report: 'A Tax System Redesigned'