Register card 02Effective life
Effective life, and the software itself
Effective life is broadly the period an asset can be used by anyone to produce income, and it is what the ATO uses to work out how fast the asset’s value declines for tax. For most assets a business either adopts the Commissioner’s determination or works the life out itself; software has rules of its own, set out at the end of this card.
This is general information, not tax advice. The ATO is the official place to check an asset’s effective life; its pages and the current determination are listed at the foot of this page.
Two waysThe Commissioner’s figure, or your own
Section 40-95 of the Income Tax Assessment Act 1997 puts the choice plainly: you must choose either “to use an effective life determined by the Commissioner” or “to work out the effective life of the asset yourself”. The two paths leave different things on the register.
| Question | The Commissioner’s determination | Your own estimate |
|---|---|---|
| What it rests on | A legislative instrument made under subsection 40-100(1) of the Act. | Section 40-105 of the Act. |
| If the ATO looks at it | The ATO says its determinations “will not be challenged in any audit process”. | The ATO says it “may ask you to explain how you worked it out”. |
| What else goes on the card | Nothing beyond the life used, which every card records. | Details of how the life was worked out. |
| When it applies | The ATO makes determinations only for new assets. | Where the determination does not work for your circumstances, or there is none for the asset, the ATO says you must make your own estimate. A second-hand asset whose condition justifies a shorter life can be self-assessed. |
Some assets leave no choice. For an intangible asset such as intellectual property, the ATO says the effective life is set out in the rules, and an asset acquired from an associate, such as a spouse or business partner, takes the life the associate used or the part of it yet to elapse, depending on their method.
The determinationWhere the Commissioner’s figures are now
The current figures are in the Income Tax Assessment (Effective Life of Depreciating Assets) Determination 2025, LI 2025/20, published on the ATO Legal Database. The ATO notes that effective lives used to be updated through taxation rulings, a practice that ended with the withdrawal of TR 2022/1, and that it now reviews effective lives on demand. If an asset is not listed, or the determination no longer reflects its effective life, a business can request a review with the ATO’s Effective Life Review Application Form.
The determination has two tables. An asset used in an industry named in Table A takes the life in that industry’s row; Table B, a list of asset categories, applies where Table A does not. Two words in a description matter to a register. Where it says “including”, each item listed is a separate asset with that life; where it says “incorporating”, the items are components of one asset. The determination’s own note adds that a business “may need to refer to a previous determination to work out the effective life for a depreciating asset”.
| Asset, as the determination describes it | Effective life |
|---|---|
| Desktop computers (including personal computers) | 4 years |
| Mobile/portable computers (including laptops, tablets) | 2 years |
| Computer monitors | 4 years |
| Servers | 4 years |
| Network equipment (including hubs, modems routers, switches, etc) | 5 years |
ChangesWhen the life on the card changes
A business can choose to recalculate an effective life for an income year if the way the asset is used changes and the old life is no longer accurate, whichever way the life was first set. It must recalculate if an improvement raises the asset’s cost by 10% or more in an income year.
The method field then does the arithmetic. The ATO’s prime cost formula is the asset’s cost × (days held ÷ 365) × (100% ÷ effective life). For diminishing value it is the base value × (days held ÷ 365) × (200% ÷ effective life), for assets first held from 10 May 2006. When the effective life or cost changes, the ATO says an adjusted prime cost formula must be used in some circumstances.
The softwareThree ways software reaches the books
| Kind | How the ATO treats it |
|---|---|
| A subscription | Software subscription fees are operating expenses, which are mostly claimed in the year they are incurred; the ATO’s examples include accounting and inventory management software. In its example of a salon’s month-by-month online booking service, the fees are claimed as an operating expense. |
| Off-the-shelf software whose effective life is no more than a year | Not in-house software; deductible in the year incurred. |
| In-house software | Software, or the right to use it, that a business acquires, develops or has someone else develop for its own business use, not to sell. Deductible only under the uniform capital allowances rules or the simplified depreciation rules for small business. |
In-house software: three routes
- A small business can use the simplified depreciation rules once the software is installed and ready to use. The ATO says it may be able to claim a deduction in the year of the expense if the expense was less than the instant asset write-off threshold, and can depreciate it under the small business pool rules if the expense was equal to or more than that threshold.
- Software still in development, which the business intends to use solely for income-producing purposes, can go to a software development pool. For expenditure from 1 July 2015, the ATO’s rates are nil in year 1, 30% in each of years 2, 3 and 4, and 10% in year 5. Once a business chooses a pool, all later in-house software expenses go to a pool, with a new one for each income year.
- Otherwise it is depreciated by the prime cost method: over 5 years if the business started to hold it on or after 1 July 2015, or 4 years if it started from 7:30 pm AEST on 13 May 2008 up to 30 June 2015.
For the register, the useful line runs between the first row of the table and the last: a subscription is an expense of its year, while software the business owns or had built can be an asset with a card of its own. The small business pool, worked through dates the threshold and explains the pool it refers to, and when an asset leaves the business covers software that is abandoned or replaced.