Chapter 4 - Individual taxpayers incurring deductible non-business expenditure
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What is non-business expenditure?
Non-business expenditure is any expenditure you incur in gaining assessable income from activities that do not relate to the carrying on of a business. The most common forms of non-business expenditure are amounts incurred by individual taxpayers in gaining their assessable salary and wage income. Other examples include certain expenditure made in respect of a rental property or shares held purely as a passive investment.
Example: Non-business expenditure
Ian is employed as a bank manager and the primary source of his income is the salary received from his employer. Ian also owns a rental property from which he receives assessable income. Ian's rental property activities do not constitute the carrying on of a business.
Prepaid expenditure incurred by Ian in respect of the rental property or for work related expenses will be subject to the prepayment rules that apply to deductible non-business expenditure incurred by an individual.
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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.
- If you are an individual, your prepaid non-business expenditure 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 expenditure was incurred.
- If you are an individual, your deduction for prepaid non-business expenditure 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 next income year.
Calculating your deduction where the 12-month rule is satisfied
If you incur prepaid non-business expenditure and its eligible service period is 12 months or less, and it ends on or before the last day of the next income year, you are entitled to deduct that expenditure in the income year it was incurred.
Example: Deduction for non-business expenditure with an eligible service period of 12 months or less
On 1 June 2003, Jasmin, an employed solicitor, paid $1,500 subscription for the provision of a monthly professional journal for the period 1 June 2003 to 31 May 2004.
Because the thing to be done under the agreement is wholly provided within a 12-month period ending before the last day of the next income year, Jasmin is entitled to a deduction for the expenditure in 2002-03.
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Calculating your deduction where the 12-month rule is not satisfied
Where you incur non-business expenditure and the eligible service period is more than 12 months or it ends after the last day of the next income year, you must use the following formula to work out your deduction:
Expenditure × (number of days of eligible service period in the income year ÷ total number of days of eligible service period)
Last modified: 27 Jul 2004QC 27475
Example: Deduction for non-business expenditure with an eligible service period of more than 12 months
On 1 January 2003, Martin, a senior clerk employed by a legal firm, paid $1,250 subscription for the monthly provision of a professional journal to cover the period 1 January 2003 to 31 January 2004. As the eligible service period is more than 12 months, Martin must apportion his deduction over the 2003 and 2004 income years. Martin's deductions are:
$1,250 × (181 ÷ 396) (1 January 2003 to 30 June 2003) = $571
$1,250 × (215 ÷ 396) (1 July 2003 to 31 January 2004) = $679
Over the 2003 and 2004 income years, Martin will get a total deduction of $1,250.
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