If you incur deductible prepaid non-business expenditure, your deduction must be claimed proportionately over each income year containing all or part of the eligible service period or 10 years, whichever is less. However, transitional rules phase in the initial impact of this measure.
Transitional rules
If you are not an individual or an STS taxpayer, transitional rules apply to your prepaid non-business expenditure where the eligible service period ends not more than 13 months after you incur the expenditure. Your prepaid non-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 the expenditure was incurred (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 income 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.
The transitional rules provide a concession by enabling you to deduct, in the year in which you incur the prepaid expenditure, the sum of the current year amount plus a 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 non-business expenditure incurred in the 2002 income year to be deducted in the 2002 income year, the balance (60 per cent) being deductible in the 2003 year
- 20 per cent of the later year amount for prepaid non-business expenditure incurred in the 2003 income year to be deducted in the 2003 income year, the balance (80 per cent) being deductible in the 2004 year.
The transitional rules cease to apply to prepaid non-business expenditure incurred after the 2003 income year.
Deductions for prepaid non-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.