Private ruling: Self-assessment of effective life of depreciating asset
Date of advice: 16 April 2024
Published: 27 May 2024
Ruling period: Year ending 30 June 2024 | Year ending 30 June 2025 | Year ending 30 June 2026 | Year ending 30 June 2027 | Year ending 30 June 2028
Date scheme commenced: 1 July 2023

Ruling: Q1: Can you self-assess the effective life of your research and development yacht asset under section 40-105 of the Income Tax Assessment Act 1997 (ITAA 1997) as 12 months? | A1: Yes.

Relevant facts and circumstances: The director of the company has a professional background in developing advanced technologies for over XX years. Your current work is in a sector where the development of safe technology is preventing a transition away from fossil fuel. You are involved in developing standards relating to these technologies with Australian and overseas agencies. In order to undertake these technological developments, you will acquire an asset, that will be modified as a prototype in order to develop, test and trial the technologies. This work will provide a solution that can be integrated into new designs. Once the asset has been modified, it remains fully operational and safe, but it will be unable to be sold and will retain little to no commercial value once the R&D activities are complete. You have experience with similar activities involving other types of assets, and once the R&D activities have completed the prototype assets are scrapped. The goal of the research is to experiment with globally unique and novel designs with the view to incorporating these designs into the manufacture of new assets. You plan to self-assess the effective life of the asset that will be modified as a prototype to align with the R&D research timeline of 12 months.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-95 | Income Tax Assessment Act 1997 section 40-105

Reasons for decision: Summary: Subsection 40-95(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states: You must choose either: (a) to use an effective life determined by the Commissioner for a depreciating asset under section (b) 40-100 of the ITAA 1997; or (c) to work out the effective life of the asset yourself under section 40-105 of the ITAA 1997. Section 40-95 of the ITAA 1997 lists several exemptions, however none of those exemptions apply to you. Section 40-105 of the ITAA 1997 provides details on self-assessing the effective life of a depreciating asset: (1) You work out the effective life of a depreciating asset yourself in accordance with this section. (1A) Firstly, estimate the period (in years, including fractions of years) the asset can be used by any entity for one or more of the following purposes: (a) a taxable purpose; (b) the purpose of producing exempt income or non-assessable non-exempt income; (c) the purpose of conducting R&D activities, assuming that this is reasonably likely. (1B) Secondly, if relevant for the asset: (a) have regard to the wear and tear you reasonably expect from your expected circumstances of use; and (b) assume that the asset will be maintained in reasonably good order and condition. (2) If, in working out that period, you decide that the asset would be likely to be: (a) scrapped; or (b) sold for no more than scrap value or abandoned; before the end of that period, its effective life ends at the earlier time. However, when making your decision, disregard reasons attributable to the technical risk in conducting R&D activities if it is reasonably likely that the asset will be used for such activities. (3) You work out the period mentioned in subsection (1A) or (2) beginning at the start time of the depreciating asset. You will be using the asset for the purpose of conducting R&D activities that will take approximately 12 months. After your R&D activities cease the asset will not be able to be used by any other entity and will be scrapped, sold for no more than scrap value or abandoned. You take this into account when working out the effective life of the asset, which in this case will be 12 months. When working out the effective life you will disregard any technical risks to the asset that may be caused by the R&D activities.