Effective Life Reviews - info sheet

Australian Taxation Office
Information sheet on
Effective Life Reviews
What is effective life?
Effective life is a term used in the Income Tax Assessment Act 1997 and is the
period of time that a depreciating asset can be used by any entity to produce
assessable income:
(a) assuming it will be subject to wear and tear at a reasonable rate;
(b) assuming it will be maintained in reasonably good order and condition; and
(c) having regard to the period within which it is likely to be scrapped, sold for no
more than scrap value or abandoned.
Why do we have an effective life?
This is the period over which depreciation is calculated and determines what
deduction is allowable each year.
How does the ATO conduct effective life reviews?
We will consult with all industry participants, industry associations, manufacturers
and any other interested parties. Before any decisions are made by the ATO in respect
to effective lives, all parties will be provided with draft lives for comment.
What does the ATO consider when determining an effective life?
The methodology used by the ATO in determining an asset’s effective life is set out in
Taxation Ruling TR 2015/2. This ruling can be viewed on the ATO website at
www.ato.gov.au.
The ATO will normally consider where relevant the following factors:
! the physical life of the asset;
! engineering information;
! the manufacturer’s specifications;
! the way in which the asset is used by an industry;
! the past experience of users of the asset;
! the level of repairs and maintenance adopted by users of the asset;
! industry standards;
! the use of the asset by different industries;
! retention periods;
! obsolescence (both commercial and technological);
! scrapping or abandonment practices;
! if the asset is leased, the period of the lease;
! economic or financial analysis indicating the period over which that asset is
intended for use; and
! where the asset is actively traded in a secondary market, conditions in that market.

What are the advantages of the ATO determining effective lives?
The ATO effective lives provide certainty to taxpayers on what will automatically be
considered acceptable to the ATO if the taxpayer’s affairs are reviewed. The ATO
effective lives, currently listed in TR 2015/2, are generally described as ‘safe harbour
lives’ due to the fact that they will not be challenged. Taxpayers are also saved the
cost and time in working out their own effective lives.
Is it compulsory to use the ATO effective life?
No. A taxpayer can choose to self-assess the effective life of a depreciating asset if it
considers the ATO life is not appropriate in its specific circumstances. In selfassessing
the effective life, the taxpayer will be required to determine the period of
time that the depreciating asset can be used to produce assessable income by any
entity:
(a) having regard to the wear and tear it reasonably expects from its particular
circumstances; and
(b) assuming that it will be maintained in reasonably good order and condition.
Is it compulsory to take part in the effective life review?
No. It is a completely voluntary process. Obviously, the greater the participation by
industry members, the more closely the resulting ATO determination on effective
lives will reflect industry practice. This in turn should assist taxpayers to lessen
compliance costs, by reducing the number needing to self-assess the effective life of
assets.
Is the effective life review an audit of my work practices?
No. As mentioned above, it is a completely voluntary process. Any information that
is supplied to the ATO will be subject to the secrecy provisions as well as classified as
commercial in confidence and will only be used by the relevant team responsible for
recommending effective lives to the Commissioner of Taxation.