The simplified tax system - a guide for tax agents and small businesses

Treatment of prepaid expenses under the STS

Generally, a prepaid expense is immediately deductible to an STS taxpayer if:

• the payment is made for a period of service of 12 months or less, and
• the period of service ends in the next income year.

This rule, known as the 12-month rule, applies to both deductible business and deductible non-business expenditure made by an STS taxpayer.

Where a prepayment does not meet the 12-month rule an immediate deduction cannot be claimed. As an STS taxpayer, you must apportion the deduction over the period of service (to a maximum of 10 years).

The examples in this section use GST-exclusive figures.

Example: Prepaid expense that is immediately deductible The Wichin Trust is an STS taxpayer. On 1 September 2003 it makes a payment of $24,000. This payment covers rent on its business premises for a 10-month period from 1 December 2003 to 30 September 2004. The $24,000 prepayment satisfies the 12-month rule because it is for a period of service of less than 12 months that ends in the next year. The Wichin Trust can therefore claim an immediate deduction of $24,000 in the 2003-04 income year.

Example: Prepaid expense that is not immediately deductible Tom is an STS taxpayer. On 15 December 2002 he pays $15,000 for business advertising over an 18-month period (546 days), starting on 1 January 2003. The prepayment does not satisfy the 12-month rule because the period of service is longer than 12 months. Tom cannot claim an immediate deduction for the prepayment. Instead, he must apportion his deduction over the period of service as follows:
2002-03 income year: $15,000 x 181 days                    546 days	(1 January 2003 to 30 June 2003)	= $4,973
2003-04 income year: $15,000 x 365 days                    546 days	(1 July 2003 to 30 June 2004)	= $10,027
	Total deduction	= $15,000

Sections within Prepaid expenses

• About prepaid expenses
• Treatment of prepaid expenses under the STS
• Exclusions
• Prepaid expenses made under tax shelter arrangements