On 30 March 2017, the Federal Government released the Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017 (the "Bill"). The Bill contains a number of significant changes to the tax depreciation of intangible assets.
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 depreciating assets.
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; and
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:
Type of Intangible Asset Effective Life
The shorter of: 25 years; or The period until the copyright ends.
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 balancing adjustment.
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
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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.
Jock McCormack Partner - Head of Tax, Australia T +61 2 9286 8253 Jock.McCormack@dlapiper.com
Michael Yunan Senior Associate T +61 3 9274 5007 Michael.Yunan@dlapiper.com
James Newnham Partner T +61 3 9274 5346 James.Newnham@dlapiper.com
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