• Calculating your deduction where the 12-month rule is not satisfied

Warning:

This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

End of attention

If you make a prepayment which does not satisfy the 12-month rule an immediate deduction is not available. As an STS taxpayer, you must apportion the deduction over the eligible service period or 10 years, whichever is less, 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

Example: Prepaid expense where eligible service period is greater than 12 months

Tom Pty Ltd is an STS taxpayer. On 31 May 2002, it paid \$15,000 for business advertising to cover the period 1 June 2002 to 30 June 2003 (395 days). Because the eligible service period is longer than 12 months, the prepayment does not satisfy the 12-month rule. Tom Pty Ltd cannot claim an immediate deduction for the prepayment. Instead, the deduction for the expenditure must be apportioned over the eligible service period as follows:

2001-02

\$15,000 × (30 ÷ 395) (1 June 2002 to 30 June 2002) = \$1,139

2002-03

\$15,000 × (365 ÷ 395) (1 July 2002 to 31 June 2003) = \$13,861

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

End of example

Example: Prepaid expense where the eligible service period is 12 months or less but ends after the last day of the next income year

Noel Pty Ltd, an STS taxpayer, was offered a 15 per cent discount on advertising to cover the period 15 July 2002 to 14 July 2003 providing payment was made by 30 June 2002. Noel Pty Ltd accepted these conditions and paid \$10,200 for these services on 30 June 2002.

Although the eligible service period is for a period of 12 months or less, the 12-month rule has not been satisfied. This is because the eligible service period does not end before the last day of the income year following the one in which the expenditure was incurred. The deduction for the expenditure must be apportioned over the eligible service period as follows:

2001-02

Nil. No part of the eligible service period occurred in this income year.

2002-03

\$10,200 × (351 ÷ 365) (15 July 2002 to 30 June 2003) = \$9,809

2003-04

\$10,200 × (14 ÷ 395) (1 July 2003 to 14 July 2003) = \$391

The total deduction allowed proportionately over the 2003 and 2004 income years will be \$10,200.

End of example