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Edited version of your private ruling
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Ruling
Subject: Ability to recalculate the effective life of depreciating assets.
Question 1
Will the Company (as head company of a tax consolidated group) be entitled to recalculate the effective life of depreciating assets under section 40-110(1) of the ITAA 1997?
Answer
Yes.
This ruling applies for the following periods:
The 2011 income year.
The scheme commences on:
Prior to the 2011 income year.
Relevant facts and circumstances
The Company is an Australian resident for income tax purposes and is listed on the Australian Stock Exchange (ASX).
The Company is the head company of an income tax consolidated group (the Group).
The Company used effective lives determined by the Commissioner under section 40-100 of the Income Tax Assessment Act (ITAA 1997) for the depreciating assets.
The use of the depreciating assets that are, or relate to, the processing plant has turned out to be more rigorous than the Company expected.
The Group's Business Plan indicates that this more rigorous use will continue.
The depreciating assets are not mining quarrying or prospecting rights.
The Company has not lodged their 2011 income tax return.
Relevant legislative provisions
Section 40-105 of the Income Tax Assessment Act 1997.
Subsection 40-110(1) of the Income Tax Assessment Act 1997.
Subsection 40-110(4) of the Income Tax Assessment Act 1997.
Reasons for decision
Subsection 40-110(1) of the ITAA 1997 states that:
You may choose to recalculate the *effective life of a *depreciating asset from a later income year if the effective life you have been using is no longer accurate because of changed circumstances relating to the nature of the use of the asset.
Example:
Some examples of changes in circumstances that may result in your recalculating the effective life of a depreciating asset are:
· your use of the asset turns out to be more or less rigorous than you expected (or was anticipated by the Commissioner's determination);
Subsection 40-110(4) of the ITAA 1997 states:
A recalculation under this section must be done using:
(a) if paragraph (b) does not apply - section 40-105 (about self-assessing effective life); or
(b) if the *depreciating asset is a *mining, quarrying or prospecting right - subsections 40-95(10) and (11).
Subsection 40-105 of the ITAA 1997 is the provision that the Company will use in self-assessing the effective life of the depreciating assets, as those depreciating assets are not mining, quarrying or prospecting rights.
The Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (Cth) provides guidance in when a taxpayer may recalculate the effective life of a depreciating asset, as stated at paragraphs 1.128 and 1.131:
1.128 A taxpayer may choose, and in some cases is required, to recalculate the effective life of a depreciating asset. The methodology used for recalculating the effective life of a depreciating asset is based on the same principles that apply when self-assessing the original effective life of a depreciating asset: see section 40-105. [Schedule 1, item 1, subsection 40-110(4)]
1.131 A taxpayer may choose to determine a new effective life for a depreciating asset where the way the asset is used or other circumstances relating to the nature of its use have changed, and the change means the effective life the taxpayer is using is no longer accurate. [Schedule 1, item 1, subsection 40-110(1)]
The Guide to Depreciating Assets 2010-11 (NAT 1996-6.2011) (the Guide) notes at the heading "Choice of recalculating effective life" that:
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 relating to the nature of the asset's use have changed.
You can recalculate an asset's effective life each time those 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 the use of an asset are:
· your use of the asset turns out to be more or less rigorous than expected
The Guide also states at the heading "Effect of recalculating effective life" that:
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…
The Company currently uses the Commissioner's determination in relation to the effective life of the depreciating assets.
In the first year of operations, the use of the plant exceeded its design capacity. In its second year it again exceeded its design capacity. The Group's Business Plan going forward indicates that use will continue to exceed its design capacity.
The Company's use of the depreciating assets that are, or relate to, the processing plant, is more rigorous than expected by the Company when they chose to use the Commissioner's determination of effective life for those depreciating assets.
In this situation, the Commissioner would accept that the Company's change in use of the depreciating assets that are, or relate to the processing plant, would mean the effective life is no longer accurate.
The Company may choose to recalculate the effective life of the depreciating assets that are, or relate to, the processing plant pursuant to subsection 40-110(1) of the ITAA 1997 as the effective life that the Company has been using is no longer accurate, because the circumstances relating to the nature of the depreciating asset's use have changed.
The Company has not lodged its income tax return and may choose to recalculate the effective life of the depreciating assets that are, or relate to, the processing plant in their income tax return. If the Company recalculates the effective life for those depreciating assets in their present year income tax return, the new effective life will start to apply for the present income tax year.
Conclusion
The Company's use of the deprecating assets that are, or relate to, the processing plant has turned out to be more rigorous than expected. As a result, the Company may choose to recalculate the effective life of those depreciating assets that are, or relate to, the processing plant starting from the present income tax year.
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