ATO reviews dental equipment lifespan

The Australian Taxation Office (ATO) is in the final stages of a review of the estimated “effective lives” of dental equipment that are utilised when determining the number of years over which an asset can be depreciated.

The new recommendations, which are set to be adopted on July 1, 2003, include much more specific references to new technologies such as hard tissue and soft tissue lasers; soft tissue and whitening lasers; CAD/CAM milling units; CAD/CAM imaging units; digital x-ray systems; and intraoral cameras, as well as more traditional dental equipment.

As the recommendation stands at time of going to press, dental air compressors, which were previously on a medical equipment schedule, will reduce from a 20-year effective life to 10 years, which sensibly considers the evolution of compressors to oil-free models; and terms such as electric motors, currently depreciated over 20 years, will disappear, replaced by more specific references to current products.

Intense lobbying is currently underway from dental industry representatives and other interested parties, however, over the planned effective lives of new technology products.

Digital x-ray systems will have an effective life of seven years under current recommendations, however the industry argues that this should be split into the software and hardware components of the system and depreciated accordingly.

CAD/CAM systems are split into image acquisition and restoration milling components, but both are set to be at seven years. The image acquisition units of these devices are largely a personal computer and the industry argues that as such, should be depreciated over three years.

According to the ATO, the review is being undertaken as part of an ongoing review of the Health and Community Services sector which has in recent years looked at hospital assets, radiologists' diagnostic imaging assets and pathologists' assets.

The effective life review of dentists' assets has involved consultation with both the Australian Dental Association (ADA) and the Australian Dental Industry Association (ADIA). Both these bodies have made submissions to the review. As well, interviews and inspections have been conducted with practising dentists as nominated by the ADA. Interviews have also been conducted with various suppliers of dentists' assets.

The methodology used in determining the effective life of depreciating assets involves applying the factors outlined in paragraph 21 of Taxation Ruling TR 2000/18C4 (the ruling can be found at https://www.ato.gov.au/law/view/document?docid=TXR/TR200018/NAT/ATO/00001&PiT=20020626000001). In applying these factors, the ATO Commissioner adopts a consultative approach with industry groups and participants, as previously outlined. One of the factors considered is industry standards or regulations including the effects of regulations relating to the sterilising of hand-held dentists' instruments and handpieces.

New effective lives for dentists' assets are expected to be published in an addendum to TR 2000/18 with these rates applying from 1 July 2003.

Self assessment

It is important to remember, however, that taxpayers have the choice of using the published ATO effective lives or working out their own effective life by taking into account their own particular circumstances of use (Subsection 40-105(1) of the Income Tax Assessment Act 1997).

If self-assessment is chosen, the ATO Commissioner considers the taxpayers will take the same factors into account as the Commissioner does when working out the effective life of an asset. These factors are listed in paragraph 21 of TR 2000/18. The one difference is that the taxpayer takes into account their own particular circumstances of use of the asset(s) whereas the ATO Commissioner considers normal practices when estimating the effective life.

In other words, a statement like "...I think it will last 10 years and therefore I will depreciate accordingly..." should be arrived at after considering:

1. The total estimated period the asset can be used by any entity for the purpose of producing income;
2. The factors outlined in paragraph 21 of the Ruling (TR 2000/18); and
3. The taxpayer's own particular circumstances of use of the asset.

Leasing

The popular practice of leasing capital dental equipment assets will mean that the new effective life recommendations will only be an issue for dentists at the end of the lease period, assuming the residual value of the asset is paid to the leasing company and the dentist takes possession of the asset (during a lease, the leasing company owns the assets and the dentist effectively rents it. The lease payments are full tax deductible. Alternatively, in a Hire Purchase agreement, the dentist owns the equipment and depreciates it as well as claiming the interest component of the repayments as a deduction).

Once the dentist "owns" the asset, which is valued at the residual amount paid, they can then either use the effective life determined by the ATO Commissioner or genuinely work out the effective life of the asset having regard to their particular circumstances and with consideration to the points detailed above.

The effective life calculated by the taxpayer could be shorter or longer than the effective life determined by the ATO Commissioner for that type of asset.

In addition, the previously leased asset can also be considered to have been acquired second-hand. Where a depreciating asset is acquired second-hand after 11.45am EST on 21 September 1999, its second-hand condition may be taken into account when estimating its effective life.

The author acknowledges the assistance of Mr Paul Newsome of the ATO's Effective Life and Capital Allowances Centre of Expertise in the preparation of this article.

This article is for information purposes only and does not constitute legal, taxation or financial advice. You should consult your account, lawyer or finance services professional for specific advice. References to proposed effective lives will not necessarily be the actual effective lives published which at present are still being drafted.