Edited version of your written advice

Authorisation Number: 1012942292419

Ruling

Subject: Effective life of an electric bicycle

Question 1

What is the effective life of an electric bicycle ("e-bike") for the purpose of depreciation?

Answer

Five years

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 January 2016

Relevant facts and circumstances

Relevant facts

A recent class ruling discussed the fringe benefits tax implications of an employer providing an e-bike to an employee solely or primarily for private use.

The taxable value of the fringe benefit was considered to be the notional value, being the amount that the person, the employee, could reasonably be expected to have been required to pay to obtain the benefit of the e-bike from the provider, the employer, under an arm's length transaction.

In view of high private use of the e-bikes, the operating cost method is the appropriate method for calculating the taxable value of the benefit. The e-bike is not owned by the employer but is leased from the owner. The operating cost method includes leasing charges, but not deemed depreciation. The effective life of an e-bike, and deemed depreciation, are not required in calculating the taxable value of the benefit of an e-bike.

The owner of the e-bike will receive leasing payments from employers, which will be assessable income of the owner, from which deductions, including depreciation, can be claimed.

The effective life of an e-bike, from which the depreciation rate can be calculated, needs to be determined by the owner of an e-bike in order to calculate the depreciation rate.

The effective life of an e-bike is determined by technology advances in relation to distances travelled on a single battery charge, and replacing or overhauling the battery and the engine is required after about four years.

Evidence from overseas suggests that after three years, e-bikes will generally sell for about 25-35% of their original price when sold privately.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 40-72(1)

Income Tax Assessment Act 1997 Subsection 40-75(1)

Income Tax Assessment Act 1997 Subsection 40-100(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

What is the effective life of an e-bike for the purpose of depreciation?

The decline in value of a depreciating asset is calculated on the basis of the effective life of the asset. The Commissioner produces an annual determination of the effective life of a range of assets in accordance with subsection 40-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997):

The Commissioner may make a written determination specifying the effective life of depreciating assets. The determination may specify conditions for particular depreciating assets.

The most recent such determination is Taxation Ruling TR 2015/2 - Income tax: effective life of depreciating assets (applicable from 1 July 2015) (TR 2015/2). An e-bike is not specifically listed in TR 2015/2.

An e-bike consists of a bicycle-like frame fitted with an electric motor. The engine provides support when the rider is actively pedalling. The motor is powered by a light lithium-based battery through an electronic speed controller.

The two closest assets listed in TR 2015/2 to an e-bike are considered to be a self-drive powered ride (vehicle) (effective life 5 years) or an exercise bicycle (effective life 4 years).

'Motor vehicle' is defined in subsection 995-1(1) of the ITAA 1997 to mean:

any motor-powered road vehicle (including a 4 wheel drive vehicle).

An e-bike can be used on a road and is powered by a motor. An e-bike is therefore a motor vehicle. An e-bike is considered to be closer to a self-drive powered ride (vehicle) than an exercise bicycle which is stationary and used indoors. The appropriate effective life is therefore five years.

Evidence from overseas suggests that after three years, e-bikes will generally sell for about 25-35% of their original price when sold privately. Taxation Determination TD 93/142 Income tax: in calculating the residual value of a leased item, may a lower residual value than those outlined in IT 28 be adopted in light of the more generous depreciation rates? (TD 93/142) displays a table showing an asset with a minimum residual value of 30% after three years applying to a term of a lease of five years. This supports the claim that if e-bikes will generally sell for about 25-35% of their original price when sold privately, their effective life is approximately five years.

The effective life of an e-bike is considered to be five years. The rate of depreciation is determined by the effective life. Under the prime cost method calculated in accordance with subsection 40-75(1) of the ITAA 1997, the decline in value of a depreciating asset is determined by the formula:

Asset's cost x Days held x 100%

365 Asset's effective life

The depreciation rate under the prime cost method is therefore 100%/5 = 20%.

Under the diminishing value method calculated in accordance with subsection 40-72(1) of the ITAA 1997, the decline in value of a depreciating asset is determined by the formula:

Base value x Days held x 200%

365 Asset's effective life

The depreciation rate under the diminishing value method is therefore 200%/5 = 40%.