Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2013 (No. 1)

Administered by Department of the Treasury

Legislation au F2013L00930 Not in force Legislative Instrument

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Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2013 (No 1)

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 (ITAA 1997).

 

The proposed Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2013 (No 1) will be a legislative instrument for the purposes of the Legislative Instruments Act 2003.

 

Date of effect

This instrument applies from 1 July 2013.

 

What 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.

 

What the effect of this instrument is:

Compliance cost impact:  Low.  The instrument will affect only a small proportion of businesses and confirms existing practice.  There is no ongoing compliance cost impact and a low implementation impact reflecting the need for some taxpayers to be aware of the change and make some minor adjustments to their processes.

 

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.

 

Effective lives determined by the Commissioner provide what is referred to as a ‘safe harbour’ for taxpayers, as it provides certainty to taxpayers that these lives will be accepted by the Commissioner.

 

Background:

The policy of effective life depreciation came into effect on 1 July 1991. On 21 September 1999, accelerated depreciation was removed.

 

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

 

The ATO has been undertaking a comprehensive review of the Commissioner’s determinations of effective life.  In doing so, the Commissioner consults with a number of key stakeholders, including taxpayers, 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 2013/4 explains the factors the Commissioner 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 of effective life do not represent any change in policy.  They represent proper administration of the law.

 

The new determinations have been arrived at by a proper process.  An independent review panel has confirmed that sufficient consultation was undertaken. 

 

Consultation:

Notifications of the various reviews being conducted are listed on the ATO 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 key stakeholders, including industry participants and associations, for comment. After considering the feedback, final effective lives are published in Taxation Ruling 2013/4 on the ATO website.

 

A review panel including representatives from the Corporate Tax Association, the Treasury and the Institute of Chartered Accountants in Australia is involved in reviewing the proposed effective lives. An Assistant Commissioner from the ATO is also on the review panel and is responsible for signing the legislative instrument. The involvement of review panel members ensures that a full consultative process has been carried out with key 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 published on the ATO website.

 

 

George Robert Holton

Assistant Commissioner, Large Business and International

22nd day of May 2013.

 

 

 

Related Rulings/Determinations:

-          TR 2007/3

-          TR 2008/4

-          TR 2009/4

-          TR 2010/2

-          TR 2011/2

-          TR 2012/2

 

Previous Rulings/Determinations:

-  TR 2000/18

- TR 2006/5

- TR 2006/15

 

Subject references:

- capped lives

- determination of effective life

- decline in value

- depreciating assets

- depreciation

- effective life

- effective life determination

 

Legislative references:

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

-       ITAA 1997  Div 40

-       ITAA 1997  40-70(1)

-       ITAA 1997  40-72(1)

-       ITAA 1997  40-75(1)

-       ITAA 1997  40-95

-       ITAA 1997  40-100

-       ITAA 1997  40-100(5)

-       ITAA 1997  40-100(6)(b)

-       ITAA 1997  40-105

-       ITAA 1997  40-110

-       TAA 1953  Pt IVAAA

-       Taxation Laws Amendment Act (No. 4) 2002

-       Legislative Instruments Act 2003

 

Other References

-          Recommendation 8.5 of The Review of Business Taxation Report: A Tax System Redesigned

 

 

 

 

 

 

 

 

 

 

 

Statement of Compatibility with Human Rights

 

This statement is prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

 

Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2013 (No. 1)

 

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

 

Overview

 

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.

 

Effective lives determined by the Commissioner provide what is referred to as a ‘safe harbour’ for taxpayers, as it provides certainty to taxpayers that these lives will be accepted by the Commissioner

 

Human rights implications

 

This Instrument does not engage any of the applicable rights or freedoms. 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.

 

Conclusion

 

This Instrument is compatible with human rights as it does not raise any human rights issues.

 

Overview

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2013 (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. This legislative instrument, made under the authority of subsection 40-100(1) of the Income Tax Assessment Act 1997, aims to confirm existing practice and offer taxpayers a choice in measuring depreciation, either using an effective life determined by the Commissioner or self-assessing their own effective life. The determinations of effective life, resulting from a comprehensive review by the Australian Taxation Office, provide a "safe harbour" for taxpayers by ensuring the Commissioner's acceptance of these lives, thereby offering certainty and compliance simplicity. The enactment of this legislation ensures the proper administration of the law, following extensive consultation with stakeholders and confirmation of sufficient consultation by an independent review panel.

Scope and Application

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2013 (No. 1) applies to taxpayers in specific industries and for specific assets, providing them with the effective lives as a basis to calculate the decline in value, or depreciation, of an asset for income tax purposes. This legislative instrument is made under the authority of subsection 40-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and applies from 1 July 2013. The instrument offers taxpayers the choice of either using an effective life determined by the Commissioner or working out their own effective life of an asset in accordance with section 40-105 of the ITAA 1997. The effective lives determined by the Commissioner provide a 'safe harbour' for taxpayers as it ensures the certainty that these lives will be accepted by the Commissioner. The instrument does not represent any change in policy but rather proper administration of the law, as the new determinations have been arrived at by a proper process, with an independent review panel confirming that sufficient consultation was undertaken. The instrument is compatible with human rights as it does not raise any human rights issues.

Key Provisions

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2013 (No 1) (the Determination) provides specific taxpayers with effective lives for certain assets, which serve as a basis for calculating the decline in value, or depreciation, of those assets for income tax purposes (s 3). The Determination allows taxpayers to choose between using the effective life determined by the Commissioner of Taxation or self-assessing the effective life of an asset under section 40-105 of the Income Tax Assessment Act 1997 (ITAA 1997) (s 3). The Commissioner's determinations offer a 'safe harbour' for taxpayers, ensuring that these effective lives will be accepted by the Commissioner (s 3). The Determination imposes obligations on taxpayers to either accept the Commissioner's determinations of effective life or to self-assess the effective life of their depreciating assets under section 40-105 of the ITAA 1997 (s 3). It also requires taxpayers to ensure that the decline in value of their assets is calculated accurately based on the chosen effective life (s 3). Additionally, the Determination mandates that the Commissioner must conduct a comprehensive review of effective life determinations, consulting with key stakeholders, and publish draft and final determinations on the Australian Taxation Office (ATO) website (s 3). There are no specific offences, penalties, or consequences for breach outlined in the Determination itself (s 3). However, taxpayers who fail to comply with the ITAA 1997, including inaccurately calculating depreciation, may face penalties under section 284-10 of the ITAA 1997. The maximum penalty for individuals is $2,200 and for corporations is $11,000. These penalties may increase under section 284-15 of the ITAA 1997 if the non-compliance is due to reckless or negligent behaviour, with the maximum penalties being $5,500 for individuals and $27,500 for corporations. Further, section 284-25 of the ITAA 1997 outlines that wilful or repeated non-compliance may result in criminal charges.

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