Tips on how to assess the useful life of an asset, by assessing the duration it can generate income.

On this article:

What constitutes the effective life of a depreciating asset?

The effective life of a depreciating asset denotes the timeframe during which any entity can utilise it for generating assessable income, provided that:

  • It experiences wear and tear at a reasonable rate
  • It is kept in reasonably good order and condition
  • The period is taken into account within which it is likely to be discarded, sold for no more than scrap value, or abandoned

The effective life of a depreciating asset is employed to calculate the asset’s decline in value, enabling eligibility for an income tax deduction.

For additional details, refer to the ATO’s Depreciation and capital allowances tool.

Determining the effective life of an asset

You have the option to either independently assess the effective life of a depreciating asset, or rely on the ATO’s established determination of its effective life. Information on effective life determination is available under Capital allowances: effective life – rulings, law and objections.

Should the ATO not have made an effective life determination for an asset you are utilising, you are required to conduct a self-assessment of its effective life. If you require assistance in doing this, or have questions, please contact us.

It’s important to note that the ATO’s effective life determinations are considered ‘safe harbour lives’ and will not be contested during any audit processes.

While you are not obligated to use effective life determinations, there are situations where you may not have a choice. For instance, if you acquire the asset from an associate (such as your spouse or business partner), you must adopt the same effective life they used (if they employed the diminishing value method) or the effective life that is yet to elapse (if they used the prime cost method).

Certain intangible depreciating assets, including intellectual property, mandate the use of the effective life outlined in the uniform capital allowance rules.

For specific categories such as transport and agricultural machinery and gas production and distribution plant, the ATO’s determination of effective life is legally constrained.

If you opt to self-assess the effective life of a depreciating asset, we may request an explanation for your choice, especially if our determination has not been deemed appropriate for your circumstances.

Refer to section 40-105 of the ITAA 1997 for information on self-assessing the effective life of a depreciating asset.

If you believe that a determination of the effective life for assets used in your industry is necessary, you can contact the ATO at publicguidance@ato.gov.au. For additional insights into the ATO’s approach to developing and managing public advice and guidance, see How the ATO develops public advice and guidance.

Reassessing the Effective Life

You have the option to reassess the effective life of an asset in cases where circumstances change, and the previously employed effective life is no longer accurate. Recalculation may become necessary if you enhance an asset, resulting in a cost increase of 10% or more in a given year.

For recalculating the effective life of a depreciating asset, you can utilise the uniform capital allowance system.