Broadly speaking, depreciation of these assets allows for some of the cost of acquisition and use to be recouped over the life of the assets in the form of tax deductions.
Currently, the effective life of most intangible depreciating assets is prescribed in s. 40.95(7) of the Income Tax Assessment Act 1997. An extract from the relevant table is below:
|Item||Asset||Effective life in years|
|5||Copyright (except copyright in a film)||The shorter of 25 years from when you acquire it or 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 25 years from when you become the licensee or the period until the licence ends|
At the end of last year, the Government announced a package of measures designed to incentivise and reward innovation (part of the National Innovation and Science Agenda).
One of the measures proposed will allow taxpayers to either self‑assess the effective life of certain intangible depreciating assets or use the statutory effective life (see above), and an Exposure Draft to this effect was released last week (1 April 2016).
The changes are proposed to apply to intangible depreciating assets that an entity commences to hold on or after 1 July 2016.
That is, the current law still applies to intangible depreciating assets held by entities before 1 July 2016. This also includes copyright where, for example, software expenditure may have previously been caught.
The measure applies to all businesses that use/develop intangible depreciating assets, rather than only to small business, and Grant Thornton welcomes this move. If adopted, mid-size business will be able to self-assess the effective life of their intangible depreciating assets.
Additionally, measuring the effective life will become easier and more accurate, and, by extension so will the ability to recoup some of the assets’ costs.
To determine the effective life*of your intangible assets consider:
- the physical life of the asset
- engineering information
- the manufacturer’s specifications
- your own past experience with similar assets
- the past experience of other users of similar assets
- the level of repairs and maintenance commonly adopted by users of the asset
- retention periods
- scrapping or abandonment practices.
* The effective life of the asset is measured from the time the asset begins to be used for a taxable purpose or to produce exempt income or non-assessable, non-exempt income.