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Calculating your deduction for prepaid non-business expenditure where the transitional rules apply

Last updated 9 December 2019

Example: Transitional rules for a prepayment of non-business expenditure made in the 2002 income year

HIJ Ltd operates a business within the transport industry. It also owns a negatively geared rental property which is purely a passive investment-this activity does not constitute the carrying on of a business. HIJ Ltd's income year ends on 30 June.

On 31 December 2001, HIJ Ltd made an interest-only payment of $8,500 in relation to a loan used to finance the acquisition of the property. This payment covers interest incurred during the period 1 January 2002 to 31 December 2002. As HIJ Ltd has incurred prepaid non-business expenditure in an income year which commences after 30 June 2001 it will no longer be entitled to an immediate deduction for the expenditure incurred.

HIJ Ltd's current year amount and later year amount are calculated as follows:

Current year amount

$8,500 × (181 ÷ 365) (1 January 2002 to 30 June 2002) = $4,215

This amount is immediately deductible in the 2002 income year.

Later year amount

$8,500 − $4,215 = $4,285

Applying the transitional rules, HIJ Ltd 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. HIJ Ltd is entitled to the following deductions:

2001-02

Current year amount

$4,215

40% of later year amount ($4,285 × 0.40)

$1,714

Total deduction

$5,929

2002-03

60% of later year amount ($4,285 × 0.60)

$2,571

The total deduction allowed proportionately over the 2002 and 2003 income years is $8,500.

End of example

Eligible service period ending more than 13 months later

Your deduction for prepaid non-business expenditure is apportioned over the eligible service period or 10 years, whichever is less, where it ends more than 13 months after the expenditure has been incurred. Transitional rules do not apply to any later year amount 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 income 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

MNO Ltd operates a business within the finance industry. It also owns a negatively geared rental property which is purely a passive investment-this activity does not constitute the carrying on of a business. MNO Ltd's income year ends on 30 June.

On 31 December 2001, MNO Ltd made an interest-only payment of $15,000 in relation to a loan used to finance the acquisition of the property. This payment covers interest incurred during the period 1 January 2002 to 31 March 2003.

Because the eligible service period is longer than 13 months, MNO Ltd 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. MNO Ltd 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 is $15,000.

End of example

QC27429