On 30 March 2017, the Federal Government released the
Treasury Laws Amendment (2017 Enterprise Incentives No
1) Bill 2017. The Bill contains a number of
significant changes to the tax depreciation of intangible
For tax depreciation purposes, the general rule is that
taxpayers have the ability to determine the effective lives of
their assets (although in practice many choose the standard
effective lives provided by the Commissioner of Taxation).
The exception to this general rule is that the effective lives of
many intangible assets are fixed by the tax legislation and
therefore, cannot be determined by the taxpayer.
The amendments in the Bill give taxpayers a choice to either
self-assess the effective lives of certain intangible
depreciating assets or continue to use the statutorily
prescribed effective lives. The chosen effective life is then
used to calculate the yearly decline in value of the intangible
asset. These changes apply to intangible assets a taxpayer
starts to hold on or after 1 July 2016.
The self-assessment option will ensure that the tax treatment
of the asset is aligned with the number of years that asset is
anticipated to remain useful to a business. It also aligns the
treatment of intangible depreciable assets with tangible
It should be noted that depreciation deductions can only be
claimed where expenditure incurred in the creation or
acquisition of intangible assets is not able to be deducted
under another regime. For example, expenditure claimed
through the R&D tax incentive cannot also be separately
claimed by way of the depreciation regime.
The effective life of an asset takes into account:
- The expected use of that asset
- The estimated period of time that the asset can be
effectively used to produce assessable income
- The likelihood of the asset becoming obsolete
- The estimated time when the asset would be
scrapped or abandoned
Given the nature of intangible assets, the effective life can be
difficult for taxpayers to determine, or for the ATO to verify.
Accordingly, prior to the Bill, section 40-95(7) of the Income
Tax Assessment Act 1997 (Cth) prescribed effective lives to
certain intangible assets including patents, registered
designs, copyrights and certain licences, irrespective of how
long an entity intended to use that asset.
The prescribed effective lives of these assets include:
Given taxpayers were prevented from determining the
effective lives of their own assets, it often resulted in
inappropriate amounts being deductible each year and the
need for a substantial balancing adjustment event upon the
sale or abandonment of the intangible asset. The balancing
adjustment event would result in a deduction in the income
year in which the asset was disposed of if the statutory
effective life was too long, or the taxpayer deriving
assessable income if the effective life was too short. These
changes give taxpayers a greater ability to align the tax
deductions for depreciation with the economic decline in value of the asset and thereby prevent or minimize the
Further, taxpayers are now able to recalculate an intangible
asset’s effective life where changed circumstances result in
the original effective life no longer being accurate.
Additionally, if the cost of the assets increases by 10% or
more in a later income year the taxpayer will be required to
recalculate the asset’s effective life. Again, this is consistent
with the treatment of tangible depreciating assets.
These amendments give taxpayers greater autonomy over
the tax treatment of their intangible assets and will enable
them to more appropriately assess the year-on-year decline
in value of those assets. Practically, where appropriate, this
means that taxpayers with intangible depreciating assets will
be able to bring forward tax deductions over a shorter period.