Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2016 (No 1)

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Legislation au F2016L01019 Not in force Legislative Instrument

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Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2016 (No 1)

 

Explanatory Statement

 

General outline of Instrument

  1. The authority for making an effective life determination is provided by subsection 40-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

 

2.      Under subsection 33(3) of the Acts Interpretation Act 1901, where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws), the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.

 

3.      The proposed Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2016 (No 1) will be a legislative instrument for the purposes of the Legislation Act 2003.

 

Date of effect

4.      This instrument applies from 1 July 2016.

 

What this instrument is about

5.      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

6.      Compliance cost impact:  Minor.  The instrument will affect only a small proportion of businesses and confirms existing practice. There is no ongoing compliance cost impacts and minimal implementation impacts. However, affected taxpayers will nonetheless need to be aware of and learn about the changes.

 

7.      The instrument provides taxpayers with a choice under the ITAA 1997, when measuring the decline in value (depreciation) of an asset.  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.

 

8.      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

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

 

10.  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).

 

11.  As a result, 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 users of the assets, industry associations, manufacturers and suppliers of the assets and, when necessary, industry consultants.

 

12.  This review is the most comprehensive ever undertaken in terms of the information gathered and the consideration given to different factors.

 

13.  Taxation Ruling 2016/1 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.

 

14.  Ultimately, the Commissioner’s determinations must satisfy the question of how long the depreciating asset can be used by any entity for a specified purpose, which includes, among others, a taxable purpose.

 

15.  The new determinations of effective life do not represent any change in policy. They represent proper administration of the law.

 

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

 

Consultation

17.  Notifications of the various reviews being conducted are listed on the ATO website with an invitation to participate in the reviews.

 

18.  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 2016/1 on the ATO website.

 

19.  A review panel including representatives from the Corporate Tax Association and Chartered Accountants Australia and New Zealand 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.

 

20.  The final effective lives are also sent to all taxpayers that participated in the review, and the determination is published on the ATO website.

 

 

Previous Rulings/Determinations:

-  TR 2000/18

- TR 2006/5

- TR 2006/15

- TR 2007/3

- TR 2008/4

- TR 2009/4

- TR 2010/2

- TR 2011/2

- TR 2012/2

- TR 2013/4

- TR 2014/4

- TR 2015/2

 

 

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  subsection 40-70(1)

-       ITAA 1997  subsection 40-72(1)

-       ITAA 1997  subsection 40-75(1)

-       ITAA 1997  section 40-95

-       ITAA 1997  section 40-100

-       ITAA 1997  subsection 40-100(5)

-       ITAA 1997  paragraph 40-100(6)(b)

-       ITAA 1997  section 40-105

-       ITAA 1997  section 40-110

-       Taxation Administration Act 1953  Div 358 to Schedule 1

-       Taxation Laws Amendment Act (No. 4) 2002

-       Legislation 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 2016 (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 of the Legislative Instrument

 

The Legislative 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 Legislative 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 Legislative 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 2016 (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, which applies from 1 July 2016, was made under the authority of the Income Tax Assessment Act 1997 and the Acts Interpretation Act 1901. The policy objective of this instrument is to offer taxpayers a choice when measuring the decline in value of an asset, allowing them to either use an effective life determined by the Commissioner or work out their own effective life of an asset in accordance with section 40-105 of the ITAA 1997. The instrument aims to provide certainty to taxpayers by offering a 'safe harbour' through the Commissioner’s determinations, which are based on a comprehensive review process involving consultations with industry stakeholders.

Scope and Application

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2016 (No 1) applies to taxpayers who need to calculate the decline in value, or depreciation, of certain depreciating assets for income tax purposes. The determination affects specific industries and assets by providing effective life options for depreciation calculations, thereby giving taxpayers a choice between using an effective life determined by the Commissioner or calculating their own effective life in accordance with section 40-105 of the Income Tax Assessment Act 1997. The instrument applies from 1 July 2016 and is designed to provide certainty to taxpayers, offering a 'safe harbour' through Commissioner-determined effective lives. This legislative instrument is subject to the broader legislative framework provided by the Income Tax Assessment Act 1997 and related Acts, and it does not introduce new policy but ensures proper administration of existing law. It also complies with human rights as it does not engage any of the applicable rights or freedoms.

Key Provisions

The Income Tax (Effective Life of Depreciating Assets) Amendment Determination 2016 (No 1) (the Determination) provides a legislative framework for the calculation of depreciation of depreciating assets for income tax purposes, specifically by determining the effective life of certain assets. According to section 40-100 of the Income Tax Assessment Act 1997 (ITAA 1997), the Commissioner of Taxation has the authority to determine the effective life of depreciating assets (section 4). The Determination allows taxpayers to either use the effective life determined by the Commissioner or to self-assess their own effective life in accordance with section 40-105 of the ITAA 1997 (section 7). This provides taxpayers with a choice and a ‘safe harbour’ for the acceptance of effective life by the Commissioner (section 8). Under this Determination, the Commissioner has a duty to revise and review the effective life of depreciating assets, considering various factors such as commercial and technical obsolescence (section 13). The Determination also emphasises the importance of stakeholder consultation in the review process, involving industry participants, industry associations, and other relevant parties (sections 17-20). The Determination applies from 1 July 2016 and represents an administration of the law rather than a change in policy (section 15). The Determination does not impose any new obligations on taxpayers beyond what is already outlined in the ITAA 1997. There are no specific offences, penalties, or consequences outlined in the Determination itself. However, non-compliance with the ITAA 1997, including the incorrect calculation of depreciation, may result in penalties under sections 284 and 285 of the ITAA 1997. These penalties can include fines and interest charges on unpaid tax. It is important for taxpayers to adhere to the effective life determinations provided by the Commissioner or to accurately self-assess their own effective life to avoid potential penalties. The maximum penalties for serious non-compliance can include fines of up to $22,200 for individuals and $111,000 for entities, as well as interest and other charges.

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