Chapter 5 - Taxpayers in the simplified tax system
Warning:
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attentionAre you in the simplified tax system (STS)?
Participation in the STS is optional. Broadly speaking, you are eligible to enter the STS for an income year if:
- you carry on business in that year
- the STS average turnover of your business and related businesses for that year is less than $1 million, and
- your business and related businesses have depreciating assets with a total adjustable value of less than $3 million at the end of that year.
If you are eligible to enter the STS and wish to do so, you should make an election to that effect on your 2004 income tax return. For more information, see Business and professional items, Partnership and trust tax returns instructions or Company tax return instructions and the publication The simplified tax system: A guide for tax agents and small businesses (NAT 6459).
Summary of rules including the 12-month rule
- Prepaid expenditure that is subject to the tax shelter rules is apportioned over the eligible service period or 10 years, whichever is less. For more information, see chapter 2.
- Certain prepaid expenditure incurred under a plantation forestry managed agreement is deductible under the 12-month rule where
- the eligible service period for the expenditure is 12 months or less, and
- the period ends on or before the last day of the income year following the year in which the expenditure was incurred.
For more information, see chapter 3.
- Prepaid expenditure incurred by an STS taxpayer is immediately deductible under the 12-month rule where
- the eligible service period for the expenditure is 12 months or less, and
- the period ends no later than the last day of the income year following the year in which the payment was made.
This 12-month rule applies to both deductible business and deductible non-business expenditure made by an STS taxpayer. It applies to years of income commencing after 30 June 2001.
- A deduction for prepaid expenditure incurred by an STS taxpayer, whether incurred in carrying on a business or not, is apportioned over the eligible service period or 10 years, whichever is less, where the eligible service period is more than 12 months or it ends after the last day of the income year following the year in which the payment was made.
Note: For an STS taxpayer, the expenditure must have been paid before a deduction can be claimed.
Calculating your deduction where the 12-month rule is satisfied
Example: Prepaid expense that is immediately deductible
The ABC Trust is an STS taxpayer. On 1 June 2004, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2004 and ending on 30 June 2005.
As the eligible service period for the expenditure does not exceed 12 months and ends on or before the last day of the income year following the year in which the payment was made the prepayment satisfies the 12-month rule. The ABC Trust can therefore claim an immediate deduction of $24,000 in the 2003-04 income year.
End of exampleCalculating your deduction where the 12-month rule is not satisfied
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:
Expenditure × (number of days of eligible service period in the income year ÷ 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 2004, it paid $15,000 for business advertising to cover the period 1 June 2004 to 30 June 2005 (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:
2003-04
$15,000 × (30 ÷ 395) (1 June 2004 to 30 June 2004) = $1,139
2004-05
$15,000 × (365 ÷ 395) (1 July 2004 to 30 June 2005) = $13,861
The total deduction allowed proportionately over the 2004 and 2005 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% discount on advertising to cover the period 15 July 2004 to 14 July 2005 providing payment was made by 30 June 2004. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2004.
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:
2003-04
Nil. No part of the eligible service period occurred in this income year.
2004-05
$10,200 × (351 ÷ 365) (15 July 2004 to 30 June 2005) = $9,809
2005-06
$10,200 × (14 ÷ 365) (1 July 2005 to 15 July 2005) = $391
The total deduction allowed proportionately over the 2005 and 2006 income years will be $10,200.
End of example