Immediate deductions for prepaid expenses

You must use the prepayment rules to work out how much you can claim in an income year for certain prepaid expenses. You may choose how to treat certain prepaid expenses if they meet certain requirements.

This information explains the general prepayment rules and the special rules for small businesses for the 2007-08 and later income years.

When we say 'business' we mean the individual, partnership, company or trust that carries on the business activity. When we say 'small business' we mean 'small business entity', which is an individual, partnership, trust or company with aggregated turnover less than $2 million. The examples in this document use GST-exclusive figures.

Applying the prepayment rules

You apply the prepayment rules when you incur an expense for goods or services that will not be fully provided within the same income year that the expense is incurred.

For example, if you pay for an advertisement in the local paper to be run fortnightly for six months:

• the prepayment rules apply if you pay in March for advertising to appear from 1 April until 30 September in the following income year
• the prepayment rules do not apply if you pay in July for advertising from 1 August until 31 January of the same income year because the services are provided in full in the same income year that you incurred the expense.

How to treat prepaid expenses

Generally, the prepayment rules mean that you must apportion deductions for certain prepaid expenses of $1,000 or more over the income years that the goods or services are provided.

However, if you are a small business and you satisfy the 12-month rule, you can choose to deduct those prepaid expenses immediately.

You must apportion the deduction over the income years that the goods or services are provided if:

• the prepaid expense does not meet the 12-month rule, or
• you choose not to claim an immediate deduction.

There are some prepaid expenses that the prepayment rules do not apply to. You do not have to apportion them and you can deduct them immediately, even if:

• the expense does not meet the 12-month rule, or
• you are not a small business.

If you are using the simplified tax system (STS) accounting method, before you can claim a deduction you must: incur the expense, and pay it.

Sections within Applying the prepayment rules

• The 12-month rule
• Prepaid expenses you do not apportion
• Prepaid expenses that must meet the 12-month rule
• The service period
• If you don't satisfy the 12-month rule
• Prepaid expenses you make under tax shelter arrangements