Edited version of your written advice

Authorisation Number: 1012940927215

Date of advice: 22 January 2016

Ruling

Subject: Self-assessment of depreciable assets

Question 1

Can the taxpayer self-assess the useful life of the depreciating asset purchased as part of its shop fit-out under section 40-95 of the Income Tax Assessment Act 1997 to be 10 years?

Answer

Yes

This ruling applies for the following periods:

1 July 2008 - 30 June 2009

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

1 July 2013 - 30 June 2014

The scheme commences on:

1 July 2008

Relevant facts and circumstances

• The taxpayer operates less than 5 retail shops

• They lease premises within shopping centres

• As a condition of the leases the taxpayer is required to undertake shop fit-out including building cabinets and display cases, installation of carpet, lighting, installation and painting of internal partition walls and installation of signage

• The lease requires the shop front be maintained in a modern format, requiring the tenants to undertake a new fit-out of the leased premises within the lease period or 10 years

• When a new fit-out is undertaken, the old fit-out is generally removed and scrapped

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 40-B

Reasons for decision

Issue 1

Question 1

Summary

Under section 40-95 of the Income Tax Assessment Act 1997 (ITAA 1997) you may choose to work out the effective life of depreciable assets yourself under section 40-105 of the ITAA 1997.

Detailed reasoning

You operate retail shops and lease premises within shopping centres. As a requirement of leases you are required to undertake shop fit-outs including building cabinets and display cases, installation of carpet, lighting, installation and painting of internal partition walls and installation of signage.

The lease requires the shop front be maintained in a modern format, requiring you to undertake a new fit-out of the leased premises within the lease period or 10 years. When a new fit-out is undertaken the old fit-out is generally removed and scrapped.

A depreciating asset is defined in section 40-30 of the ITAA 1997.

A depreciating asset is an asset that has:

• a limited effective life; and

• can reasonably be expected to decline in value over the time it is used.

Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.

In:

• Taxation Ruling TR 2014/4 Income tax: effective life of depreciating assets (applicable from 1 July 2014) (TR 2014/4)

• Taxation Ruling TR 2013/4 Income tax: effective life of depreciating assets (applicable from 1 July 2013) (TR 2013/4)

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

• Taxation Ruling TR 2011/2 Income tax: effective life of depreciating assets (applicable from 1 July 2011) (TR 2011/2)

• Taxation Ruling TR 2010/2 Income tax: effective life of depreciating assets (applicable from 1 July 2010) (TR 2010/2), and

• Taxation Ruling TR 2009/4 Income tax: effective life of depreciating assets (applicable from 1 July 2009) (TR 2009/4)

the Commissioner discusses the methodology of determining effective life. Section 40-95 of the ITAA 1997 states that you may choose to use the Commissioner's determination of the effective life or you may make your own estimate.

Under section 40-105 of the ITAA 1997 you work out the effective life of a depreciating yourself by estimating the period in years that it can be used by any entity for a taxable purpose or for producing exempt income or non-assessable non-exempt income and, if relevant for the asset:

• having regard to the wear and tear you reasonably expect from your expected circumstances of use; and

• assuming that it will be maintained in reasonably good order and condition.

Effective life

Generally, 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 or non-assessable non-exempt income:

• having regard to the wear and tear you reasonably expect from your expected circumstances of use

• assuming that 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 value or abandoned.

Effective life is expressed in years, including fractions of years. It is not rounded to the nearest whole year.

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 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

• there is a downturn in the demand for the goods or services that the asset is used to produce that will result in the asset being scrapped

• legislation prevents the asset's continued use

• changes in technology make the asset redundant.

Requirement to recalculate effective life

In some circumstances, you must recalculate the effective life of a depreciating asset.

You must recalculate the effective life of a depreciating asset if its cost is increased by 10% 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 (or a capped 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 remains the same.

You may also be required to recalculate the effective life of a depreciating asset:

• which you acquired from an associate who claimed or could have claimed deductions for the asset's decline in value; or

• for which you became the holder, 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.

How to recalculate effective life

You work out the recalculated effective life from the depreciating asset's start time. You use the same principles to recalculate the effective life of a depreciating asset that you would to work out the original effective life yourself.

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, you use the new estimate of effective life in the formula as the asset's effective life. Under the prime cost method, you must use the adjusted prime cost formula from the year for which you recalculate the asset's effective life.

In TR 2014/4 the Commissioner provides a list of assets relevant to Retail Trade and the Commissioner's determination of the effective life of those depreciable assets; the list is attached for your information.

Conclusion

You provided a list of assets you consider are necessary to comply with your retail shop leases. Under section 40-95 of the ITAA 1997 you may choose to work out the effective life of depreciable assets yourself under section 40-105 of the ITAA 1997.