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Self Assessment of Depreciation Rates

Choosing to self-assess effective life

When you choose to self-assess the effective life of your depreciable assets instead of the Commissioner’s Effective Life, or perhaps you are considering the advantages, how do you go about it?

What factors are taken into account?

The Tax Office provides some detailed guidance which is included as additional information with the Commissioner’s Effective Life schedules. The substance of that advice is to follow the same methodology the Tax Office itself uses when determining the effective life of an asset or asset class.

The Tax Office assesses effective life according to what may be considered as “normal” patterns of use in typical circumstances. If the circumstances of your industry or asset usage are not typical, a self-assessment method of determining effective life which takes into account factors specific to your situation, may produce a different (possibly preferred) result.

Specific factors in your unique situation may imply a shorter asset life than normal, which in turn would accelerate depreciation claims. Depending on circumstances, there could be a disadvantage to accelerating tax depreciation deductions, which is something that can be weighed up by comparing the income and deductions of adjacent tax years.

Usage of a self-assessed effective life for depreciation claims is a choice – so having a professional tax advisor review the tax arithmetic is recommended.

The Tax Office details the effective life assessment methodology in their Effective Life tables publications.

Relevant Factors Determining Effective Life

The effective life assessment methodology outlined by the Tax Office is worth studying in full, if you are considering going down that road. The following is an extracted non-exhaustive list of relevant factors to consider when making an effective life determination. They include:

  • 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;
  • 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.

The Commissioner only makes determinations in respect of new assets. If you buy a second-hand asset whose condition indicates a shorter life, then you can choose to take that into account by means of a self assessment.

See also: Effective life of an asset

To convert effective life to a depreciation percentage rate and see the comparison between prime cost and diminishing value calculation methods, see this spreadsheet calculator.

This page was last modified on 2022-05-30