Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2005 (No. 3)

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.

The proposed Income Tax (Effective life of Depreciating Assets) Amendment Determination 2005 (No 3) is a legislative instrument for the purposes of the Legislative Instruments Act 2003.

Date of effect

This Instrument applies from 1 July 2004.

What is this instrument about:

The instrument provides taxpayers with the Commissioner’s determination of effective live as a basis to work out the decline in value (depreciation) of a depreciating asset for income tax purposes where they have chosen, under section 40-95 of the Income Tax Assessment Act 1997, to use the Commissioner’s determination.

What is the effect of this instrument:

It only applies to copyright in a feature film (including an exclusive licence relating to the copyright in a feature film) acquired on or after 1 July 2004.

Using the effective life determined by the Commissioner provides what is referred to as a “safe harbour “life for taxpayers as it provides certainty to the taxpayer that these lives will be accepted by the Commissioner. A taxpayer may, alternatively, work out the effective life themselves.

Background:

The Government announced in the Federal Budget 2005-6 that deductions for copyright in films would be subject to the effective life regime to apply on and from 1 July 2004.

The Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005, which implemented this proposal, received Royal Assent on 14 December 2005.

The policy of effective life write-off came into effect on 21 September 1999, when accelerated depreciation was removed. 

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

The Tax Office is undertaking a comprehensive review of the Commissioner’s determinations of effective life.  In doing so, it is taking advice from taxpayers, valuers, 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 TR 2000/18 explains the factors the Tax Office 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.

Consultation:

An independent review panel was advised of the review process and a presentation on the decision making process was made to this panel.

All major taxpayers affected by this determination were consulted and invited to make comments.

Draft effective live along with requests for feedback were sent to industry participants, associations etc for comment.  After considering any feedback final effective lives are published in TR2000/18 on the Tax Office website.

A panel consisting of external representatives from the CPA Australia, the Corporate Taxpayers Association, as well as the Treasury, the Australian Valuations Office, and the First Assistant Commissioner of the Tax Office’s Office of Chief Tax Counsel who eventually signs the instrument ensures that a full consultative process has been carried out with all stakeholders when conducting effective life reviews.

Related Rulings/Determinations:

- TR 2000/18C9

Previous Rulings/Determinations:

- Income tax (Effective life of Depreciating Assets) Determination 2001

- TR 2000/18C8

Subject references:

- depreciation

- depreciation rates

- determination

- effective life

Legislative references:

-       ITAA 1997  Div 40

-       ITAA 1997  Subdiv 40-E

-       ITAA 1997  Subdiv 40-F

-       ITAA 1997  40-70(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  Div 42

-       ITAA 1997  Subdiv 42-M

-       TAA 1953  Pt IVAAA

-       Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005

ATO references