The decline in value of a depreciating asset is frequently based on its effective life; that is, how long it can be used to create income, taking into account:
- whether it’s subject to wear and tear at a reasonable rate
- whether it’s maintained in almost good order and condition
- the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.
The effective life is used to work out the asset’s decline in value (or depreciation) for which an income tax deduction can be claimed.
For most depreciating assets, you can use the ATO’s determinations of successful life, published in taxation rulings (updated annually). For some types of transport and agricultural technology and gas production and distribution plant, the ATO’s determination of effective life is capped by statute.
For most depreciating assets, you can work out the asset’s efficient life yourself, by shaping how many years the asset will reasonably be likely to produce income according to its definite likely use.
On the other hand, you can use our estimates. We have estimated successful lives for most types of assets.
For certain assets, you don’t have a choice – you must use our estimation of the asset’s effective life. These are restructured annually and particular in taxation ruling Income tax: effective life of depreciating assets