What you need to know
The rules that allowed immediate deductibility for expenditure incurred in respect of things to be done within 13 months of the expenditure being incurred have changed. For many businesses, the deduction for most prepaid expenditure incurred after 11.45am (by legal time in the ACT) on 21 September 1999 must be apportioned over the period the prepayment covers. This is consistent with the treatment of prepayments for periods exceeding 13 months.
Transitional rules apply to reduce the initial impact of this measure. (Note: these transitional rules do not apply to prepaid expenditure apportionable under tax shelter arrangements.)
The information to be shown at A, B and C relate to prepayments that are affected by the transitional rules. You will need to work out whether the tax shelter rules affect you before you can complete item P10.
Prepaid expenses and tax shelter arrangements
The tax shelter rules apply to certain prepayments made after 1.00pm (by legal time in the ACT) on 11 November 1999. A tax shelter arrangement covers all related activities including those that give rise to deductions or assessable income. You will be in a tax shelter arrangement if:
- your allowable deductions attributable to the arrangement for the 2000-01 income year exceed your assessable income attributable to the arrangement for that year
- you do not have day-to-day control over the operation of the arrangement, and
- at least one of the following is met:
- more than one taxpayer participates as an investor in the arrangement, or
- the manager, arranger or promoter of the arrangement or an associate carries out similar activities for other taxpayers.
Exclusions from the tax shelter rules
The following prepaid expenditure is excluded from the application of the tax shelter rules:
- premiums for building insurance, contents insurance or rent protection insurance, or
- interest on money borrowed to acquire:
- real property or an interest in real property
- shares listed on an approved stock exchange, or
- units in a widely held unit which has at least 300 beneficiaries
provided the arrangement is conducted at arm's length and that you have or can reasonably expect to obtain rent, dividends or trust income. Additionally, you must not have obtained and will not obtain any other kind of assessable income (except a capital gain or insurance receipt) from the arrangement.
Also specifically excluded from the application of the tax shelter rules are:
- certain expenditure that is an allowable deduction under the infrastructure borrowing rules
- expenditure incurred under a contract (requiring prepayment for something to be done under the agreement) entered into before 1.00pm (by legal time in the ACT) on 11 November 1999 (that you cannot avoid by your own actions)
- expenditure under an arrangement which, before 1.00pm (by legal time in the ACT) on 11 November 1999, had obtained or had applied for and later obtained, a favourable ATO product ruling and any prepaid expenditure which is 'excluded expenditure'-that is, an amount below $1,000, an amount required to be incurred by a law or a court order, or an amount of salary or wages.
Apportionment of deduction
The deduction for prepaid expenses affected by the tax shelter rules is spread over the period the prepayment covers and is calculated as follows:
Expenditure × (number of days of eligible service period in the year of income ÷ total number of days of eligible service period)
(The eligible service period is the period during which the thing is to be done under the agreement.)
Ensure that at item P8 or question 12 in TaxPack 2001 supplement you have claimed only the deductible portion of any prepaid expense affected by the tax shelter rules.
Label A-Do the new prepayment provisions apply to you?
Did you make a prepayment of an expense in the 1999-2000 or 2000-01 income years where all of the following applied:
- the prepayment was made after 11.45am (by legal time in the ACT) on 21 September 1999-and was not made under a contract entered into before that time (that you cannot avoid by your own actions)
- the prepayment was for things to be done within 13 months of the expenditure being incurred and would not be wholly done in the income year in which the amount was incurred (the expenditure year)
- the prepayment was $1,000 or more and was not an amount of salary or wages or an amount required to be incurred by a law or a court order
- the prepayment was made in carrying on a business
- the prepayment was not affected by the tax shelter rules, and
- you were not a small business taxpayer.
If the answer is:
No
Write N at A. You do not need to complete B and C. However your deduction may still be affected by the tax shelter rules.
Yes
Write Y at A. You must complete B and C. You need to read the publication Deductions for prepaid expenses (NAT 4170-5.2001) before you can complete B and C.
For further explanation of the new prepayments and tax shelter measures, refer to Deductions for prepaid expenses (NAT 4170-5.2001).