Plant and Equipment

8.75. Practically all units of property classified in financial accounting as fixed assets and in respect of which depreciation is at present allowed fall under the broad heading of plant and equipment.

8.76. The annual percentage rate of depreciation allowable in respect of each unit of property is determined by the Commissioner on the basis of the estimated effective life of the asset, assuming it is maintained in reasonably good order and condition, and an annual percentage allowance is fixed accordingly. Standard rates of depreciation are determined by the Commissioner in respect of various types of assets. The standard rates make no allowance for obsolescence. Although the Commissioner may allow a variation from the standard rates where special circumstances or conditions relating to a particular unit of property justify such a variation, his determination, it seems, must be made on the physical life of the asset. Australia is one of the few countries which does not have regard for obsolescence in determining rates of depreciation.

8.77. The Hulme Committee considered whether it was practicable and desirable, in determining annual rates of depreciation, to take obsolesence into account and reached the view that it should be recognised as a relevant and material factor. It added, however, that the method of making an allowance for obsolescence and the degree of the allowance had given it some difficulty and concluded that the only feasible approach was to introduce a degree of flexibility by allowing the taxpayer choice of a rate of depreciation within a band of rates.

8.78. The need to make due allowance for the factor of obsolescence has again been pressed in many submissions to the present Committee, including a number from particular industries in which, owing to the speed of technological advances, the matter is of major concern. Where the period of the estimated effective life of any equipment proves, in practice, to have been excessive, a deduction for the cost not covered by allowances in prior years is available when the equipment is scrapped or abandoned. However, this defers a deduction and does not give an even spread of the recoupment of the capital cost over the effective life of the equipment.

8.79. Complaints about the inflexibility of the standard rates continue, though it may well be that a proportion of these are not soundly based. The Commissioner and his officers permit variation from the standard rates where a taxpayer produces satisfactory evidence that, in his particular case, the specified standard rate is inadequate.

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Submissions rarely record whether an application has in fact been made for permission to adopt higher than standard rates.

8.80. The essential feature of rates of depreciation is that they are estimates of effective working lives. The allowances flowing from them are in reality estimates also and not precise figures of the portion of an asset's cost relating to a year of income. Considerable clerical recording and effort are frequently involved in computing depreciation allowances, particularly in manufacturing industries, due to the differing rates to be applied to the separate units of property. The clerical effort in checking or reviewing the computations by Departmental officers is also heavy. One method of reducing this would be the adoption of a composite rate to be applied to all depreciable fixed assets of a business, other than motor vehicles and buildings. This method recognises the futility of incurring clerical costs in performing precise calculations of allowances for various categories of property attracting different rates, when approximately the same total allowance can be determined by simple and less expensive procedures and the result under either approach is in any event only an estimate.

8.81. The Committee recommends that the schedules of standard rates of depreciation incorporate composite depreciation rates for specified industries which may be adopted, in lieu of standard rates, for all depreciable assets other than those excluded in fixing the composite rate. It further recommends that, in fixing the composite rate for a particular industry, a loading be added to take account of obsolescence.