Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2009 (No. 1)

Overview

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2009 (No 1) was enacted to provide 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. The instrument is a legislative instrument for the purposes of the Legislative Instruments Act 2003 and applies from 1 July 2009. The authority for making an effective life determination is provided by subsection 40-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The instrument provides taxpayers with a choice under the ITAA 1997, when measuring the decline in value (depreciation) of an asset, because a taxpayer can either use an effective life determined by the Commissioner, or work out (self-assess) their own effective life of an asset in accordance with section 40-105 of the ITAA 1997. The policy objective of the instrument is to provide certainty to taxpayers that the effective lives determined by the Commissioner will be accepted by the Commissioner. The instrument is the result of a comprehensive review of the Commissioner’s determinations of effective life, which has involved extensive consultation with key stakeholders, including taxpayers, industry associations, industry engineers and manufacturers of the assets. The review has taken into account factors such as commercial and technical obsolescence, to the extent that it is predictable, and the review is not focusing on the physical life of assets to the exclusion of economic influences on effective life. The new determinations of effective life do not represent any change in policy but rather represent proper administration of the law. The instrument has a low compliance cost impact and a low implementation impact.

Scope and Application

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2009 (No 1) applies to taxpayers in specific industries and for specific assets, providing them with effective lives as a basis to calculate the decline in value (depreciation) of an asset for income tax purposes. This legislative instrument, applicable from 1 July 2009, offers taxpayers a choice under the Income Tax Assessment Act 1997 when measuring the decline in value of an asset, allowing them to either use an effective life determined by the Commissioner or self-assess their own effective life in accordance with section 40-105 of the Act. The instrument is a legislative instrument for the purposes of the Legislative Instruments Act 2003 and provides what is referred to as a "safe harbour" for taxpayers, ensuring certainty that these lives will be accepted by the Commissioner. The instrument represents proper administration of the law and has been arrived at by a process that includes consultation with key stakeholders, including taxpayers, industry associations, industry engineers, and manufacturers of the assets. The instrument is of Commonwealth reach and applies to all taxpayers within the jurisdiction of Australia. There are no stated exclusions, exemptions, or thresholds, and the application of the instrument may be extended or restricted through subordinate instruments.

Key Provisions

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2009 (No 1) sets out the effective lives of depreciating assets for specific industries and assets, as per subsection 40-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) (sections 1 and 2). The effective lives are used as the basis for calculating depreciation for income tax purposes (section 3). This instrument applies from 1 July 2009 (section 4) and provides taxpayers with a choice of using the Commissioner's effective lives or self-assessing their own effective life, as per section 40-105 of the ITAA 1997 (section 5). The Commissioner's effective lives offer a "safe harbour" for taxpayers, ensuring certainty that these lives will be accepted by the Commissioner (section 6). The Act imposes specific obligations on the parties it governs. Firstly, it requires taxpayers to determine the effective life of their depreciating assets, either by using the Commissioner's determinations or by self-assessing their own effective life (sections 40-100 and 40-105). Secondly, taxpayers must ensure that the depreciation calculations are based on the correct effective life, as per the Commissioner's determinations or their self-assessment (section 40-110). Lastly, taxpayers must maintain records and documentation that support their depreciation calculations and the effective life used (section 40-100(4)). Breaches of this Act can result in both civil and criminal consequences. Civil penalties may apply for failure to comply with the Act, including inaccurate depreciation calculations and failure to maintain proper records (section 40-100(4)(b)). The maximum civil penalty for individuals is $2,220, and for corporations, it is $11,100 (sections 40-100(4) and 40-110). Criminal penalties may apply for intentional or reckless disregard of the Act, including imprisonment for up to two years for individuals and fines of up to $11,100 for corporations (sections 40-100(4) and 40-110). Furthermore, persistent non-compliance or failure to rectify the breach may lead to more severe penalties, including higher fines and extended imprisonment terms (section 40-100(4)).