Simplified Tax System (STS): effective life of a depreciating asset

Should a taxpayer allocate a long life asset, which they owned prior to becoming an STS taxpayer, to their long life pool for the purposes of section 328-185 of the Income Tax Assessment Act 1997 (ITAA 1997) where that asset has a remaining effective life of less than 25 years?

Yes. The asset should be allocated to the long life pool for the purposes of section 328-185 of the ITAA 1997.

A taxpayer purchased a depreciating asset which was either used immediately or installed ready for use in producing assessable income for the taxpayer.

The taxpayer claimed depreciation deductions for the asset.

At the time of purchase, the asset had an effective life of over 25 years.

Some years after purchasing the asset, the taxpayer entered the Simplified Tax System (STS).

The depreciating asset was purchased after 1 July 2001.

An STS taxpayer must deduct amounts for their depreciating assets through a pool. Subsection 328-185(2) of the ITAA 1997 states that there are two kinds of pools: (a) a general STS pool to which depreciating assets having effective lives of less than 25 years are allocated; and (b) a long life STS pool to which depreciating assets having effective lives of 25 years or more are allocated.

Subsection 328-185(3) of the ITAA 1997 automatically allocates a depreciating asset which (a) is held by an STS taxpayer just before and at the start of the first income year for which the taxpayer became an STS taxpayer; and (b) has deductions calculated under this Subdivision instead of Division 40; and (c) has not been allocated previously to either of the above two pools; and (d) is used or installed ready for use for a taxable purpose;

to the respective pools according to the asset's effective life.

The definition of 'effective life' in section 995-1 of the ITAA 1997 states that 'the effective life of a depreciating asset is worked out under sections 40-95, 40-100, 40-102, 40-105 and 40-110 (all of the ITAA 1997)'.

Subsection 40-95(1) of the ITAA 1997 states that you can either use the effective life determined by the Commissioner under section 40-100, or work out the effective life yourself under section 40-105.

Subsection 40-95(3) of the ITAA 1997 states that 'you must make the choice for the income year in which the asset's start time occurs'. 'Start time' is defined in subsection 40-60(2) as: 'The start time of a depreciating asset is when you first use it, or have it installed ready for use, for any purpose'.

Subsection 40-110(1) of the ITAA 1997 allows a taxpayer to recalculate the effective life where the 'effective life you have been using is no longer accurate because of changed circumstances relating to the nature of the use of the asset.' Examples of such changed circumstances, which concentrate on the asset becoming either redundant or less rigorously used, are listed after the subsection. The taxpayer's entry into the simplified tax system does not fit into this category of changed use of the asset. Accordingly, section 40-110 would not allow the taxpayer to recalculate the effective life of their long life depreciating asset when they become an STS taxpayer.

The effective life of the asset is therefore the one the taxpayer determined in the year that they first used it or had it installed ready for use for any purpose. As the effective life of the asset when they first used it was greater than 25 years then, when the taxpayer elects to enter the STS, the asset will retain that effective life of greater than 25 years. The taxpayer will therefore allocate the asset into the long life pool when they join the STS.