Under the transitional rules there is a cap on the later year amount that is eligible for concessional treatment. The cap is the amount shown at B item P10 on your schedule. If the amount at B is nil, no part of the amount at C is eligible for concessional treatment.
If the later year amount at C is equal to or less than the amount at B item P10 on your schedule
The transitional rules allow you to deduct 60% of the later year amount (shown at C) in the 2000-01 income year. The remaining 40% is deductible in the 2001-02 income year. Ensure that you have made the correct expense reconciliation adjustment at H item P8 on your schedule if the prepayment shown as an expense at item P8 differs from the deductible amount for 2000-01.
If the later year amount at C is more than the amount at B item P10 on your schedule
The transitional rules restrict the portion of the later year amount you can deduct in the 2000-01 income year. Your deduction in the 2000-01 income year for the later year amount is limited to 60% of the amount of the cap shown at B. The remaining 40% of the cap amount is deductible in 2001-02.
A deduction is not allowable in the 2000-01 income year for the excess of the later year amount shown at C over the amount of the cap at B. Instead the excess is deductible in 2001-02 (and 2002-03 if the eligible service period continues into that income year) to the extent of:
Excess × (number of days of eligible service period in the income year ÷ total number of days of eligible service period)
Ensure that you have made the correct expense reconciliation adjustment at H item P8 on your schedule if the prepayment shown as an expense at item P8 differs from the deductible amount for 2000-01.
Example 1 of transitional rule
Sue is a non-small business taxpayer who has a 1 July-30 June income year. She did not incur any prepaid expenses in the 1999-2000 income year which related to things to be done in the following year.
Sue enters into a contract on 1 February 2001 to purchase carpet cleaning services over the next 12 months and for these services pays $100,000. Under this contract, services are to be provided over the next 365 days, 150 of which relate to the 2000-01 income year and 215 of which relate to the 2001-02 income year.
Sue is entitled to immediately deduct the part of this expenditure that relates to the current income year. This is calculated as follows:
$100,000 × (150 ÷ 365) = $41,096
and as the services purchased in this example relates to contractor expenses, this amount should be included at F Contractor, sub-contractor and commission expenses, item P8.
The remaining amount of the expenditure which relates to the following income year is calculated as follows:
$100,000 − $41,096 = $58,904
This is the later year amount and must be written at C item P10. As Sue did not incur any prepaid expenses in the previous income year she has a cap of 0 and would need to write 0 at B item P10 and must not claim any of the later year amount as a deduction in the current year under the transitional rules. This amount is deductible in the following year.
End of exampleExample 2 of transitional rule
Ron is a non-small business taxpayer who has a 1 July-30 June income year. He incurred prepaid expenses of $15,000 in the 1999-2000 year. The amount of $5,000 of this related to services to be provided in the 2000-01 income year and therefore sets the cap at $5,000 under the transitional rules.
Ron enters into a contract on 31 March 2001 to rent business premises for the next 5 months and pays $50,000 as rent for this period in advance. Under the contract, the business premises is to be used for the next 153 days, 92 of which relate to the 2000-01 income year and 61 of which relate to the 2001-02 income year.
Ron is entitled to immediately deduct the amount of the expenditure which relates to the current income year. This is the current year amount and is calculated as follows:
$50,000 × (92 ÷ 365) = $30,065
and as the services purchased relate to rent expenses, this amount would need to be added to K Rent expenses, item P8.
The remaining amount of the expenditure which relates to the following income year is calculated as follows:
$50,000 − $30,065 = $19,935
This is the later year amount and must be written at C item P10. Ron is entitled to deduct a total of 60% of the lesser of his cap amount $5,000 and his later year amount ($19,935). This is equal to
$5,000 × 60% = $3,000
which needs to be added to K Rent expenses, item P8, making the total amount of rent expenditure claimed in the current year in this example equal to $33,065 ($30,065 + $3,000). The remaining rent expenditure of $16,935 must not be claimed in the current year and should be added to any rent deductions in the following year.
End of example