Broadly speaking, an asset’s effective life is the period that it is how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income:
- considering the wear and tear you reasonably expect to occur from your use of the asset
- assuming that it will be maintained in reasonably good order and condition, and
- considering the period within which it is likely to be scrapped or abandoned or sold for no more than scrap value.
The effective life is used to work out the asset’s decline in value for which an income tax deduction can be claimed.
For most depreciating assets, you can use the ATO determinations of effective life of an asset, published in taxation rulings (updated annually). The ATO Depreciation and capital allowances tool also lets you look for capital assets to determine their effective life.
Alternatively, you can choose to work out the asset’s effective life yourself, by determining how many years it will reasonably be expected to produce income given the specific way it's likely to be used.
If you choose to do this, you must do so by the time you lodge your tax return in the year you start to use the asset.
