The current law mandates the effective life to be used for certain intangible depreciating assets in calculating their decline in value, which may not necessarily reflect the period of time that the assets provide economic benefits to the taxpayer. [Intangible assets per s40-95(7) below]
On 7 December 2015, the Government announced a package of measures designed to incentivise and reward innovation as part of its National Innovation and Science Agenda. One of those measures is to allow taxpayers to self-assess the effective life of these intangible depreciating assets.
This measure will better align the taxation treatment of those assets with the actual period of time that the assets provide economic benefits. It also aligns the treatment of intangible depreciating assets with that of tangible assets.
These amendments implement the measure to allow self-assessment of the effective life of certain intangible depreciating assets [s40-95(7) intangibles].
[Extract from draft EM – Context of amendments]
1.12 The amendments provide a taxpayer with the option to self-assess the effective life of certain intangible depreciating assets they hold, or apply the existing statutory effective life from the table in subsection 40-95(7) [of the Income Tax Assessment Act 1997 or ‘ ITAA 1997′]. The chosen effective life is then used in calculating the decline in value of the intangible depreciating asset. [Bill: Schedule #, items 4 and 6, (insert new operating introductory words into) subsection 40-95(7) and (delete) paragraph 40-105(4)(a)]
1.13 In self-assessing the effective life of the asset, the taxpayer must work out the effective life in accordance with section 40-105, which includes taking into account:
- how they expect to use the asset;
- the estimated period of time that the asset can be used by any entity to derive income at its start time (for taxable purpose, for producing exempt income and non-assessable non-exempt income or for the purpose of conducting research and development activities);
- the rate of wear and tear reasonably expected from the intended use assuming the asset will be maintained in reasonably good order and condition;
- the likelihood of the asset becoming obsolete; and
- the estimated time when the asset is scrapped or abandoned.
1.14 A depreciating asset starts to decline in value from its ‘start time’, which is generally when the taxpayer first uses the asset or has installed the asset ready for use for any purpose.
1.15 The taxpayer must make the choice of whether to self-assess the intangible depreciating asset’s effective life or use the statutory effective life for the income year in which the asset’s start time occurs. [Draft Bill: Schedule #, item 5, (insert new) subsection 40-95(7A)]
1.16 The choice must be made by the day the taxpayer lodges its income tax return for the income year, unless a later time is allowed by the Commissioner of Taxation.
1.17 The choice applies to that income year and all later income years, except where a choice is made to recalculate the effective life under subsection 40-110(1) due to its circumstances of use having changed (see paragraph 1.21).
Associate and same user rules
1.18 Subsections 40-95(4) and (5) continue to oblige a taxpayer to use an effective life equal to effective life of the former holder that is yet to elapse at the time the new holder starts to hold the asset, if a depreciating asset:
- is acquired from an associate, who has deducted or could have deducted the decline in value of the asset;
- continues to be used by the same user; or
- has a new user who is an associate of the former user.
1.19 For intangible assets, this means that the new holder of the asset does not have the choice to self-assess the effective life of the asset or use
the statutory effective life in the table in subsection 40-95(7). [Draft Bill:: Schedule #, item 5, (insert new) subsection 40-95(7B)]
1.20 A new holder must use the effective life applicable to the asset in the table in subsection 40-95(7), where the asset continues to be used by the former user or has a new user who is an associate of the former user and:
• the new holder does not know and cannot readily find out which effective life the former holder was using; or
• the former holder did not use an effective life. [Draft Bill: Schedule #, item 3, (inserting new ss) 40-95(6A)]
Recalculation of effective life
1.21 Where there are changes, in a later income year, to the circumstances relating to the nature of the use of an intangible asset that is in the table in subsection 40-95(7) that the taxpayer start to hold after 1 July 2016, the effective life of the asset may be recalculated. This is only available where the change in use makes the effective life that is being used inaccurate. [Schedule #, item 9, (inserting post-1 July 2016 wording into) subsection 40-110(5)]
1.22 If the cost of the asset increases by at least 10 per cent in a later income year the taxpayer must recalculate the asset’s effective life. [Draft Bill: Schedule #, items 7 to 9, (amending and inserting, respectively) subparagraphs 40-110(2)(a)(iii) and (iv) and (inserting post-1 July 2016 wording into) subsection 40-110(5)]
1.23 The taxpayer must also recalculate the effective life of the asset for the income year that the taxpayer started to hold it, if:
- the taxpayer is using an effective life because of the associate or same user rule in subsection 40-95(4) or (5); and
- the asset’s cost is increased after the taxpayer started to hold it in that year by at least 10 per cent. [Draft Bill: Schedule #, item 9, (inserting post-1 July 2016 wording into) subsection 40-110(5)]
1.24 This treatment is consistent with the treatment of tangible depreciating assets.
1.25 A recalculation of the effective life of an intangible depreciating asset must be done using self-assessment under section 40-105 (see paragraph 1.13).
Adjustment to the prime cost method formula
1.26 If a holder of an intangible depreciating asset is not the first holder of the asset, subsections 40-75(5) and (6) provide that the new holder needs to adjust the prime cost method formula to take into account the number of years that all former holders have held the asset. This adjustment does not apply to copyright, a licence relating to copyright or in-house software.
1.27 That is, instead of using the statutory effective life in the table in subsection 40-95(7), a new holder uses the number of years remaining in that effective life as at the start of the income year in which the holder acquires the asset.
1.28 Subsection 40-75(5) is being amended to ensure that it only applies in situations where a holder chooses to use the statutory effective life in the table in subsection 40-95(7) rather than self-assessing the effective life of the asset. [Draft Bill: Schedule #, items 1 and 2, paragraphs 40-75(5)(b)
Tax cost setting under the consolidation regime
1.29 When an entity joins or leaves a consolidated group, its assets become or cease to be the assets of the group. The tax cost of the asset of the head company or leaving entity is set at the asset’s tax cost setting amount.
1.30 The meaning of tax cost is set in section 701-55 is being amended so that it continues to apply appropriately to intangible depreciating assets listed in the table in subsection 40-95(7). [Draft Bill: Schedule #, items 10 to 12, paragraph 701-55(2)(d)]
Application and transitional provisions
1.31 The new law applies to intangible depreciating assets, listed in the table in subsection 40-95(7), that an entity starts to hold on or after
1 July 2016. That is, the current law continues to apply to these intangible depreciating assets that an entity holds before 1 July 2016. [Draft Bill: Schedule #, item 13]
Extract from Draft Bill
4 Subsection 40‑95(7)
Omit all the words before the table, substitute:
Exception: intangible depreciating assets
(7) For an intangible *depreciating asset of a kind mentioned in this table, you must choose either:
(a) to use the effective life applicable to that asset under the table; or
(b) to work out the effective life of the asset yourself under section 40‑105.
Extract from s40-95 of the Income Tax Assessment Act 1997 (ITAA 1997)
s40-95(7) Exception: Intangible Depreciating Assets
The effective life of an intangible *depreciating asset mentioned in this table is the period applicable to that asset under the table.
|Effective life of certain intangible depreciating assets|
|Item||For this asset:||The effective life is:|
|1||Standard patent||20 years|
|2||Innovation patent||8 years|
|3||Petty patent||6 years|
|4||Registered design||15 years|
|5||Copyright (except copyright in a *film)||The shorter of:
(a) 25 years from when you acquire the copyright; or
(b) the period until the copyright ends
|6||A licence (except one relating to a copyright or *in-house software)||The term of the licence|
|7||A licence relating to a copyright (except copyright in a *film)||The shorter of:
(a) 25 years from when you become the licensee; or
(b) the period until the licence ends
|8||*In-house software||5 years|
|9||*Spectrum licence||The term of the licence|
|10||*Datacasting transmitter licence||15 years|
|11||(Repealed by No 78 of 2007)|
|12||(Repealed by No 78 of 2007)|
|13||(Repealed by No 78 of 2007)|
|14||*Telecommunications site access right||The term of the right|
John Morgan (www.FJMtax.com)