|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Business & Investment Entities
ATO Resources |
Preamble
What this Ruling is about
1. This Ruling discusses the methodology used by the Commissioner of Taxation in making determinations of the effective life of depreciating assets under section 40-100 of the Income Tax Assessment Act 1997 (ITAA 1997).F1 2. The effective life of a depreciating asset is used to work out the asset's decline in value. To the extent the asset is used for a taxable purpose, a deduction may be available, under Division 40, for its decline in value. However some depreciating assets, depending on the circumstances of use, may qualify for capital works deductions under Division 43. 3. Determinations of the effective life of depreciating assets made by the Commissioner are reproduced in Tables A and B of the attached schedule. These determinations are not appropriate to calculate capital works deductions for depreciating assets that qualify for Division 43. Depreciating assets that qualify for capital works deductions under Division 43 may only have deductions worked out by the method specified in that Division. 4. You may choose to use the Commissioner's determination of the effective life of a depreciating asset or you may make your own estimate (see section 40-95). The explanation in this Ruling of the methodology used by the Commissioner in making determinations of effective life may assist taxpayers who choose to make their own estimate of effective life for a depreciating asset. Previous Rulings
5. This Ruling replaces Taxation Ruling TR 2008/4, which is withdrawn on and from 1 July 2009. To the extent that the Tax Office views in that Ruling still apply, they have been incorporated into this Ruling. Ruling
6. The Commissioner's determination of the effective life of depreciating assets has been amended with effect from 1 July 2009. For ease of reference, the Tax Office has prepared a consolidated version of the amended determination which is set out in the Schedule to this Ruling. If, for a particular asset, you were using an effective life from the determination as in force before the latest amendment (for example, as contained in the Schedule to TR 2008/4), you should continue to use that life for that asset. 7. The date a determination comes into force is set out in column four of Tables A and B of the attached schedule. Acquisitions of plant pre 21 September 1999 8. For plant:
before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999, you may use the effective life for the plant set out in the former Taxation Ruling IT 2685 Income tax: depreciation regardless of when you first use it or have it installed ready for use. Acquisitions of plant/depreciating assets post 21 September 1999 9. If you start to use other plant or a depreciating asset or have it installed ready for use within five years of the time (the relevant time):
then the determination of effective life that will apply is the one that was in force at the relevant time (see section 40-95). 10. If you do not start to use the plant or depreciating asset or have it installed ready for use within the required five year period as set out in paragraph 9 of this Ruling, then the determination that will apply is the one that is in force at the date you first use it or have it installed ready for use for any purpose (see section 40-95). Definitions - rental properties 11. The terms 'Freestanding' and 'Fixed' are used to describe certain residential rental property assets listed in Table A of the attached schedule. For the purposes of the determination of effective life for such assets they have the following meanings:
Definitions - agriculture and services to agriculture 12. The terms 'Environmental control structure' and 'Protective structure' are used to describe certain agricultural assets listed in Table A of the attached schedule. For the purposes of the determination of effective life for such assets they have the following meanings:
Replacements 13. It had been a longstanding practice to permit taxpayers to treat the initial purchase of certain assets as not depreciable but to claim an immediate deduction for the cost of their replacement. The practice principally related to low cost items that had very long or indeterminate lives, were difficult to keep track of, and were subject to frequent replacement through loss or breakage (for example, crockery). 14. For some taxpayers, the $300 immediate write-off provisions were replaced with a new system which applied from 1 July 2000 (see Subdivision 42-M). Division 40 introduced a similar system from 1 July 2001 for depreciating assets. It allows certain taxpayers to pool assets costing less than $1,000 each and to write off the assets under the diminishing value method using an effective life of four years (see Subdivision 40-E). 15. Commencing with the 2007/08 income year, small business entities can choose to calculate depreciating assets deductions under Division 328-D. Under these provisions, small business entities have access to an immediate write off for depreciating assets costing less than $1000 and a simple pooling facility for other depreciating assets. 16. The $300 immediate write-off provision was retained for assets used by taxpayers predominantly in deriving non-business income. 17. For these reasons, the replacement basis for deductions is not available for assets you first use (or have installed ready for use) for relevant purposes after 30 June 2000. Horticultural plants 18. Horticultural plants are depreciating assets. The deduction for a horticultural plant is also based on its effective life and is available under Subdivision 40-F. 19. The methodology used to establish the effective life of a horticultural plant involves a consideration of the factors set out in paragraph 39 of this Ruling to the extent that they are relevant. Issues such as the varieties and location of plants grown, the age planted out, the years required to come into production and the number of years production was anticipated, have been canvassed. Consumer demand for new varieties may cause commercial obsolescence and, therefore, is a major factor in determining the effective life of horticultural plants. 20. Crop management techniques, such as regeneration and topworking/reworking, where trees are cut back to the stump, have also been taken into account in determining the effective life of horticultural plants. Where topworking/reworking involves grafting a new variety onto the old root system, with the result that a new plant has been established, deductions will be based on the effective life of the new plant. How to use this schedule 21. The entries for the effective life of assets listed under a particular industry in Table A must only be used by members of that industry. If an asset is listed in Table A under a particular industry heading and also in Table B , then you must use the industry table if you are a member of that industry. Taxpayers not in that industry must use Table B . 22. If an asset used by an industry member is not listed under its industry heading, either specifically or under the general functional group/class, then the member should use the effective life of the asset listed in Table B . 23. If an asset is not listed in either Table A or B then the Commissioner has not made a determination of its effective life and you will need to work out its effective life yourself. Date of effect
24. This Ruling applies on and from 1 July 2009 - see section 40-95. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling. Commissioner of Taxation24 June 2009 Appendix 1 - Explanation
Background 25. This Ruling is being issued because of:
26. There are periodic consolidations of Tables A and B of the schedule of effective life determination to reflect changes in the Commissioner's determinations. 27. The Commissioner has made new determinations that commence on 1 July 2009 pursuant to section 40-100, determining the effective life of assets covered by the following descriptions:
28. These new determinations as well as the removal of some previous determinations, that formerly appeared in the schedules attached to TR 2008/4 are now incorporated in the attached consolidated Tables A and B which are contained in the new '1 July 2009 Schedule'. Context of Commissioner's review 29. The Commissioner advised the Review of Business Taxation, chaired by John Ralph AO, that the Tax Office would progressively update and expand the effective life schedule attached to the former IT 2685 to ensure it is as representative as possible. The first tranche of the review was contained in TR 2000/18 which first issued on 21 December 2000. 30. The review is continuing and will take some time to complete. 31. The review is based on extensive enquires made by the Tax Office and, in some instances, on reports prepared by independent consultants. Basic principles of depreciation 32. From an economic point of view, business income arises from two sources:
33. Subject to tax timing rules for income recognition, increases in the market value of assets and decreases in the market value of liabilities add to business income. Decreases in the market value of assets and increases in the market value of liabilities reduce business income. 34. The current taxation system, through the application of the capital allowances rules in Division 40, for example, already recognises the change in market value of depreciating assets in working out taxable income. In particular, recognising that the loss of market value in most depreciating assets cannot be directly measured, it allows the write off of those assets to be based on an estimate of effective life. 35. The deductions based on effective life are intended to reflect an appropriate allowance for the diminution of economic value of an asset over its period of use. 36. Where the estimate is incorrect, the balancing adjustment provisions ensure, in those cases where the depreciating asset has stopped being held or used, that the actual loss in value over the period of use is allowed as a deduction. How does the Commissioner determine the effective life of a depreciating asset? 37. The Commissioner makes a determination of the effective life of a depreciating asset by estimating the period (in years, including fractions of years) it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non exempt income and, if relevant for the asset:
38. In making a determination, the Commissioner considers the factors listed in paragraph 39 of this Ruling (which are not intended to be exhaustive). Where appropriate, each factor is considered on the basis of historical information and future expectations. No one factor is necessarily conclusive and the relative importance of each will vary depending on the nature of the asset. In considering these factors, the Commissioner only takes account of normal industry practices. 39. The factors the Commissioner considers in making a determination include:
Physical life 40. As set out in paragraph 37 of this Ruling, subsection 40-100(4) requires an estimate of the period a depreciating asset can be used by any entity for the relevant purposes. It is arguable that an asset can be used for these purposes while it continues to have a physical existence, that is, until it is physically exhausted. 41. Physical life, therefore, can be seen as the outer limit of an asset's effective life and is a useful starting point for an analysis of all the factors set out in paragraph 39 of this Ruling. Historical physical life is best determined by empirical evidence. Engineering information/manufacturer's specifications 42. An estimate of the physical life of a new asset, however, cannot be based solely on what has occurred in the past. An analysis of engineering information and manufacturer's specifications is important when estimating future physical lives. There are various reasons why the expected life of a new asset may differ from that achieved in the past. These reasons include advances in technology, different construction materials, intensity of use and the levels of repairs and maintenance. Physical life/effective life 43. It is important to note that the Commissioner does not consider that the physical life of an asset is necessarily its effective life because, as previously mentioned, all the factors must be considered before an estimate of effective life is made. A consideration of these factors may often indicate that an asset's effective life is a period shorter than its physical life. The way in which an asset is used by an industry/the past experience of users of the asset 44. How intensively an industry uses an asset may impact directly on the asset's effective life. To establish what the industry norm is, industry is consulted wherever possible. 45. Often assets are not used for the relevant purposes for the whole of their life. For example, assets may be retired from use for the relevant purposes but be retained as a source of spare parts. In this instance, their effective life may end at the time they are retired. Repairs and maintenance 46. It might be suggested that the life of an asset can be extended indefinitely if there is unlimited expenditure on repairs and maintenance. However, paragraph 40-100(4)(b) requires the Commissioner to assume that an asset will be maintained only in reasonably good order and condition. Accordingly, the effective life of an asset may end when it is no longer economic to maintain it, even though it may still be possible to do so. To establish that point in time the industry norm is considered. Renewals 47. Another reason why the level of repairs and maintenance is considered is to see if it is possible to ascertain a point in time when an asset has been wholly or substantially physically replaced. If an asset has been wholly or substantially physically replaced then it is considered its effective life has ended as it is, in fact, a new asset. Industry standards 48. There may be industry standards/regulations which set the level of repairs and maintenance that must be carried out. In addition, these standards/regulations may dictate the time at which a particular asset must be retired from use by an industry. These factors are considered when building up a complete picture of the effective life of an asset. Use of the asset by different industries 49. The use of an asset by different industries is another important factor. The use may be parallel or consecutive. An example of parallel use is the use of a car as a taxi compared to the use of a car for relevant purposes generally. In these circumstances, the Commissioner has determined that the effective lives are different. This reflects the increased wear and tear experienced by a car used as a taxi. 50. The consecutive use of an asset arises where it is used by different taxpayers for different purposes during its physical life. In determining the effective life of some assets, the period for which a particular asset can be used by any taxpayer for its intended purpose has been estimated, without regard to the possible subsequent use of the asset by another taxpayer for an entirely different purpose. However, that approach has only been taken where the subsequent change in use is significant and the proceeds received on disposal are small relative to the asset's original cost. An example of this is a shipping container which, at the end of its effective life as a shipping container, may be used for a variety of other purposes, including as a storage shed. In that situation, the container would, nevertheless, have an effective life in the hands of the purchaser when it commences to be used as a storage shed. Retention period 51. The retention period is the period any one taxpayer generally holds an asset. Subject to paragraph 50 of this Ruling, the effective life of an asset is the total period it can be used by any entity for the relevant purposes. That may not necessarily be the period a particular taxpayer expects to hold it before replacing it. For example, it is common practice for some businesses to dispose of a car after it has done a pre-determined number of kilometres. The effective life of the car does not end at that time if it can still be effectively used as a car for the relevant purposes. Obsolescence 52. The Commissioner considers obsolescence when determining the effective life of an asset. 53. An asset may become obsolete for both commercial and technological reasons. 54. Commercial obsolescence may occur if, for instance, market demand for the goods produced by the asset ceases through consumer preference or Government regulation. It may also occur if the raw material the asset processes becomes unavailable. 55. Technology may advance so that another asset is better suited for the relevant purpose for which an existing asset is used. The point to note about technological advances, however, is that an asset's effective life does not necessarily end with each technological advance. A taxpayer can still use an asset for the relevant purposes even though a newer model has come on to the market. 56. Obsolescence is only considered when it prevents the continued use of the asset for the relevant purposes. This is best evidenced by scrapping practices. 57. There are two types of obsolescence - that which can be predicted at the time the asset is first used (predictable) and that which emerges later (unpredictable). Clearly, unpredictable obsolescence cannot be taken into account when making an estimate of effective life. The Commissioner would only take obsolescence into account if it can be predicted with a high level of certainty across a majority of users. 58. Taxpayers faced with predictable obsolescence that impacts only on their business may choose to work out the effective lives of the assets themselves rather than adopt the effective lives determined by the Commissioner. 59. In addition, taxpayers can work out a new effective life under section 40-110 where facts emerge (for example, unpredictable obsolescence) during the life of the asset that means it must be scrapped before its originally estimated effective life has ended. Scrapping or abandonment practices 60. Once a taxpayer has scrapped or abandoned an asset, there is a presumption it can no longer be used by anyone for the relevant purposes. The scrapping of an asset demonstrates that the asset is either physically exhausted or obsolete. A taxpayer may abandon an asset if it is too difficult or costly to remove from its place of operation. 61. This factor is only relevant to the Commissioner's determination of the effective life of an asset if a general scrapping or abandonment practice can be established across users of the asset. Evidence that one group of users traditionally scraps an asset while others do not will not be sufficient to establish the asset as one that is generally scrapped for the purpose of the Commissioner's determination. However, taxpayers within the group that scrapped the asset could choose to work out the asset's effective life themselves. Lease periods 62. Because effective life is, among other things, the period a depreciating asset can be used for the relevant purposes, it is unlikely that an asset would be leased for a period greater than its effective life. Consideration of this factor will, in many instances, suggest that the effective life of an asset is no shorter than the period it is leased. Financial analysis 63. As with lease periods, economic or financial analysis indicating the period over which an asset is intended for use gives guidance that the effective life is no shorter than that period. In many instances, the analysis may only reflect the capital cost recovery period or the term of a contract when in fact the asset may be used for the relevant purposes by any entity for a much longer time. Market value 64. The defining character of a depreciating asset is that its market value actually falls, or is expected to fall, over time. An analysis of the decline of market values of an asset class, therefore, is an important factor together with those set out above to ensure that a determination of effective life provides appropriate deductions. Working out your own effective life 65. The non-exhaustive factors outlined in paragraphs 38 to 64 of this Ruling are essentially the same factors the Commissioner considers you would use if you worked out the effective life of an asset yourself. There is, however, one critical difference. 66. As mentioned in paragraph 38 of this Ruling, the Commissioner only takes account of normal industry practices when estimating effective life. However, taxpayers who choose to self-assess can take account of their own particular circumstances of use (see subsection 40-105(1)). 67. The Commissioner only makes determinations of the effective life of new assets. The purchaser of a second-hand asset, who decides its second-hand condition justifies a shorter life than that determined by the Commissioner, can self-assess. A taxpayer who self-assesses the effective life of plant or a depreciating asset acquired after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 is no longer required to assume that it is new. Rates 68. Tables A and B in the schedule attached to this Ruling contain only effective lives. Rates have not been included. Working out a rate is not a separate step in the process, but has been incorporated into the calculation formulas: see subsections 40-70(1) and 40-72(1) (diminishing value) and 40-75(1) (prime cost). Structure 69. Table A of the attached schedule is an industry table which contains assets under industry headings that have, where possible, been drawn from the ANZSIC subject categories. The table lists, under each industry heading, specific assets that are peculiar to that industry or for which a special effective life is justified because of the use to which those assets are put by the industry. Under some industry headings, the list of assets also contains a general grouping or class of assets that is identified by reference to the specific industry function or process for which the assets are employed. 70. Table B is an asset table that contains generic assets which may be used by more than one industry. 71. Whilst some assets are included in both tables with the same effective life, this is the exception rather than the norm. Generally, an asset would be included in an industry list only if the Commissioner determined a different effective life for use in that industry. New and reviewed items 72. New and reviewed items have been marked with an asterisk (*) in column 3 of Tables A and B . Consultation 73. Industry bodies and interested taxpayers have been consulted during the course of the effective life reviews undertaken since 1999. An independent review panel has also checked each review process to confirm the level of industry consultation was appropriate. That panel presently comprises a representative from the Corporate Tax Association, The Institute of Chartered Accountants in Australia, The Treasury, the Australian Valuation Office and the Australian Taxation Office. Statutory caps 74. Statutory caps on the Commissioner's determined effective lives apply to certain assets. Where the Commissioner has determined effective lives for assets in excess of the statutory caps or proposed caps for those assets, they have been marked with a hash (#) in column 3 of Tables A and B . Water assets 75. Effective lives have been determined for various assets that are used in relation to water. These lives may be used where the assets qualify for a decline in value deduction under Subdivision 40-B. The application of Subdivision 40-B to some of these assets may depend on the prior application of Subdivision 40-F (water facility) or Subdivision 40-G (landcare operation). Appendix 2 - Detailed contents list
76. Below is a detailed table of contents for this Ruling:
1 July 2009 Schedule
Effective lives (Industry Categories)
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
