Effective Life Determination of Effective life of Depreciating Assets
Legislative Instrument
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 2006 (No 3) would be a legislative instrument for the purposes of the Legislative Instruments Act 2003.
Date of effect
This Instrument applies from 1 July 2006.
What is 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 as determined by the Commissioner for the purpose of section 40-95 of the Income Tax Assessment Act 1997
What is the effect of this instrument?
It provides taxpayers with a choice under the Income Tax Assessment Act 1997 for the purpose of measuring a decline in value (depreciation) as a taxpayer can use either an effective life determined by the Commissioner or work out (self-assess) their own effective life.
By using the effective life determined by the Commissioner it 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.
Background:
The policy of effective life depreciation 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.
The new determinations in this edition of Taxation Ruling TR 2000/18 do not represent any change in policy. They represent proper administration of the law.
The Government has been assured that the new determinations have been arrived at by a proper process. An independent Review Panel has confirmed that sufficient consultation was undertaken. Any comments on the new determinations should be directed to the Commissioner of Taxation.
Consultation:
Notifications of the various reviews being conducted are listed on the Tax Office 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 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, OCTC who eventually signs the legislative instrument ensures that a full consultative process has been carried out with all 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 also published on the ATO website.
Commissioner of Taxation
19 June 2006
Related Rulings/Determinations:
- TR 2000/18C9
Previous Rulings/Determinations:
- Income tax (Effective life of Depreciating Assets) Determination 2001
- TR 2000/18C10
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
- Taxation Laws Amendment Act (No. 4) 2002
ATO references
Overview
The Income Tax (Effective life of Depreciating Assets) Amendment Determination 2006 (No 3) was enacted to provide taxpayers with effective lives of depreciating assets for calculating depreciation under the Income Tax Assessment Act 1997. This legislative instrument, made under the authority of subsection 40-100(1) of the Income Tax Assessment Act 1997, applies from 1 July 2006. The policy objective of this amendment is to offer certainty to taxpayers by providing a "safe harbour" effective life determined by the Commissioner, allowing taxpayers the option to use these lives or self-assess their own. This legislative instrument is a response to the removal of accelerated depreciation and the endorsement of a comprehensive review of effective life schedules, ensuring the Commissioner's determinations are made through proper consultation with various stakeholders, including taxpayers, valuers, industry associations, and engineers.
Scope and Application
The Income Tax (Effective life of Depreciating Assets) Amendment Determination 2006 (No 3) applies to taxpayers in specific industries and to specific assets, allowing them to determine the effective life of depreciating assets as a basis for calculating depreciation for income tax purposes. This legislative instrument is a choice provided under the Income Tax Assessment Act 1997, whereby taxpayers can use either an effective life determined by the Commissioner or self-assess their own effective life. By using the Commissioner’s determination, taxpayers are provided with a “safe harbour” life, offering certainty that these lives will be accepted by the Commissioner. The instrument extends from 1 July 2006, and the Commissioner’s determinations are made following a comprehensive review process, taking advice from various stakeholders including taxpayers, valuers, industry associations, industry engineers and manufacturers of the assets. Feedback on draft determinations is invited and considered, with final effective lives published on the ATO website and sent to all taxpayers who participated in the review. This instrument does not introduce any changes in policy but represents the proper administration of the law.
Key Provisions
The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2006 (No 3) (the Determination) 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 (subsection 40-95(1) of the Income Tax Assessment Act 1997). The Commissioner of Taxation has determined effective lives for a range of assets, and these determinations are published in Taxation Ruling TR 2000/18. By using the Commissioner’s determinations, taxpayers can be assured of a safe harbour life for depreciation, providing certainty that their depreciation calculations will be accepted by the Commissioner.
The Determination imposes obligations on taxpayers to either use the Commissioner's determinations or calculate their own effective life for depreciation purposes. The taxpayer must ensure that their depreciation calculations align with the effective life chosen, whether it be the Commissioner's determination or a self-assessed figure. The Determination also requires taxpayers to maintain records and documentation that support their depreciation calculations, ensuring compliance with the Income Tax Assessment Act 1997.
The Determination does not explicitly outline specific offences or penalties for breaches. However, under the Income Tax Assessment Act 1997, any incorrect calculation of depreciation that results in underpayment of tax may be subject to penalties. These penalties can include interest on the unpaid tax, general interest charges, and administrative penalties. Additionally, if the underpayment of tax is deemed to be due to negligence or fraud, further criminal penalties may apply.
The Commissioner of Taxation is responsible for administering the Determination and ensuring compliance by taxpayers. The Tax Office undertakes a comprehensive review of the Commissioner’s determinations, taking advice from various stakeholders to ensure the determinations are fair and reasonable. Any comments or concerns regarding the determinations should be directed to the Commissioner of Taxation. The final determinations are published on the ATO website and sent to all taxpayers that participated in the review, ensuring transparency and accessibility.
The Determination represents the ongoing revision of the effective life schedule as recommended by the Review of Business Taxation, with a focus on factors such as commercial and technical obsolescence. The comprehensive review process ensures that the Commissioner’s determinations are based on a proper process and sufficient consultation with stakeholders. By providing a safe harbour life for depreciation, the Determination aims to offer certainty and compliance for taxpayers in calculating depreciation for income tax purposes.