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Deducting pre paid business expenditure

Last updated 9 December 2019

If you are a small business taxpayer and you do not enter the STS, you must apportion your deduction for prepaid business expenditure over the eligible service period or 10 years, whichever is less. However, transitional rules phase in the initial impact of this measure for certain prepaid expenditure incurred in the 2002 and 2003 income years.

Transitional rules

If you are a small business taxpayer and you do not enter the STS, transitional rules apply to prepaid business expenditure where the eligible service period ends not more than 13 months after you incur the expenditure. Your prepaid business expenditure is divided into 2 parts:

  • the current year amount
  • the later year amount.

Current year amount

The current year amount is that part of your prepayment that relates to the thing to be done within the income year in which you incur the expenditure (the expenditure year). This amount is calculated as follows:

A × (B ÷ C)

Where:

A is expenditure

B is number of days of eligible service period in the expenditure year

C is total number of days of eligible service period

The current year amount is immediately deductible in the income year in which the prepayment is incurred.

Later year amount

The later year amount is that part of your prepayment that relates to the thing to be done in future income years. This amount is the difference between the total amount of prepaid expenditure incurred and the current year amount.

If you are a small business taxpayer and do not enter the STS, the transitional rules provide a concession by enabling you to deduct, in the year in which you incur the prepaid business expenditure, the sum of the current year amount plus part of the later year amount. The balance of the later year amount is deductible in the income year after the expenditure year.

The concessional treatment applies to the later year amount for prepaid expenditure incurred in the 2002 and 2003 income years. These rules allow:

  • 40 per cent of the later year amount for prepaid business expenditure incurred in the 2002 income year to be deducted in the 2002 income year, the balance (60 per cent) will be deductible in the 2003 income year
  • 20 per cent of the later year amount for prepaid business expenditure incurred in the 2003 income year can to be deducted in the 2003 income year, the balance (80 per cent) will be deductible in the 2004 income year.

The transitional rules will cease to apply to prepaid business expenditure incurred after the 2003 income year.

Deductions for prepaid business expenditure, where the eligible service period ends more than 13 months after you incur the expenditure, continue to be apportioned over the eligible service period or 10 years, whichever is less. Transitional treatment does not apply to prepaid expenditure of this nature.

Start of example

Example: Transitional rules for a prepayment made in the 2002 income year

Bill is a small business taxpayer who does not enter the STS. On 31 December 2001, Bill prepaid rent of $5,000 for the use of his business premises for the 12-month period covering 1 January 2002 to 31 December 2002. As Bill incurred prepaid business expenditure in an income year which commenced after 30 June 2001 he is not entitled to an immediate deduction for the expenditure incurred.

Bill's current year amount and the later year amount are calculated as follows:

Current year amount

$5,000 × (181 ÷ 365) (1 January 2002 to 30 June 2002) = $2,479

This amount is immediately deductible in the 2002 income year.

Later year amount

$5,000-$2,479 = $2,521

Applying the transitional rules, Bill is entitled to deduct 40 per cent of this later year amount in the 2002 income year. The balance (60 per cent) will be deductible in the 2003 income year. Bill is entitled to the following deductions:

2001-02

Current year amount

$2,479

40% of later year amount ($2,521 X 0.40)

$1,008

Total deduction

$3,487

2002-03

60% of later year amount ($2,521 X 0.60)

$1,513

The total deduction allowed proportionately over the 2002 and 2003 income years will be $5,000.

End of example

Eligible service period ending more than 13 months later

If you are a small business taxpayer and you are not participating in the STS, your deduction for prepaid business expenditure (and prepaid non-business expenditure if you are not an individual) is apportioned over the eligible service period where the eligible service period ends more than 13 months after the expenditure has been incurred. Transitional rules do not apply in these situations. For each year of income containing the eligible service period, the deduction must be worked out using the following formula:

A × (B ÷ C)

Where:

A is expenditure

B is number of days of eligible service period in the expenditure year

C is total number of days of eligible service period

Start of example

Example: Deduction for expenditure where the eligible service period is more than 13 months

Roger is a small business taxpayer who does not enter the STS. On 31 December 2002, Roger pays $15,000 rental for the use of business premises covering the period 1 January 2002 to 31 March 2003.

Because the eligible service period is longer than 13 months, Roger cannot claim an immediate deduction for the prepayment nor do the transitional rules apply. Instead, the deduction must be apportioned over the eligible service period. Roger is entitled to the following deductions:

2001-02

$15,000 × (181 ÷ 455) (1 January 2002 to 30 June 2002) = $5,967

2002-03

$15,000 × (274 ÷ 455) (1 July 2002 to 31 March 2003) = $9,033

The total deduction allowed proportionately over the 2002 and 2003 income years will be $15,000.

End of example

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