• Chapter 6-Small business taxpayers who do not enter the Simplified Tax System

    Are you a small business taxpayer?

    Attention

    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

    You are a small business taxpayer if you carry on a business during the income year and your average turnover for that year is less than $1 million. Your average turnover for an income year is the average of your group turnovers for that year and the previous two years, if any.

    However, you can only average the years in which you carried on a business. For example, if you carried on a business for the current and previous year only, you would average only the sum of the group turnovers for those two years.

    You are taken to be carrying on a business in an income year if you are winding up a business you formerly carried on and you were a small business taxpayer at the time that you stopped carrying on the business.

    In working out group turnover for an income year, you must group your turnover with the turnover of each entity you control or are controlled by.

    Summary of rules

    • 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.
    • However, 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.

    • If you are a small business taxpayer and are not participating in the STS, your deduction for prepaid business expenditure is spread over the eligible service period or 10 years, whichever is less. However, where the eligible service period ends not more than 13 months after you incur the expenditure, transitional rules apply to allow part of the expenditure that would otherwise be deductible in a future year to be deductible in the expenditure year.
    • If you are not an individual and are a small business taxpayer not participating in the STS, your deduction for prepaid non-business expenditure is treated in the same way as your prepaid business expenditure.
    • 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 payment is made.
       

    For more information, see chapter 4.

    • 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. For more information, see chapter 4.

    Deducting prepaid business expenditure

    If you are a small business taxpayer and you do not enter the STS, you must apportion your deduction for prepaid business expenditure over the eligible service period or 10 years, whichever is less. However, transitional rules phase in the initial impact of this measure for certain prepaid expenditure incurred in the 2002 and 2003 income years.

    Transitional rules

    If you are a small business taxpayer and you do not enter the STS, transitional rules apply to prepaid business expenditure where the eligible service period ends not more than 13 months after you incur the expenditure.

    Your prepaid business expenditure is divided into two parts:

    • the current year amount, and
    • 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:

    Expenditure

    x

    number of days of eligible service period in the income year
    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.

    If you are a small business taxpayer and do not enter the STS, the transitional rules provide a concession by enabling you to deduct, in the year in which you incur the prepaid business expenditure, the sum of the current year amount plus 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% of the later year amount for prepaid business expenditure incurred in the 2002 income year to be deducted in the 2002 income year, the balance (60%) will be deductible in the 2003 income year
    • 20% of the later year amount for prepaid business expenditure incurred in the 2003 income year to be deducted in the 2003 income year, the balance (80%) will be deductible in the 2004 income year.

    The transitional rules will cease to apply to prepaid business expenditure incurred after the 2003 income year.

    Deductions for prepaid 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.

    Example
    Transitional rules for a prepayment made in the 2003 income year

    Bill is a small business taxpayer who does not enter the STS. On 31 December 2002, Bill prepaid rent of $5,000 for the use of his business premises for the 12-month period covering 1 January 2003 to 31 December 2003. As Bill incurred prepaid business expenditure in an income year which commenced after 30 June 2001 he is not entitled to an immediate deduction for the expenditure incurred.

    Bill's current year amount and the later year amount are calculated as follows:

    Current year amount

    $5,000

    x

    181
    365

    (1 January 2003 to 30 June 2003)

    =

    $2,479

    This amount is immediately deductible in the 2003 income year.

    Later year amount

    $5,000 - $2,479 = $2,521

    Applying the transitional rules, Bill is entitled to deduct 20% of this later year amount in the 2003 income year. The balance (80%) will be deductible in the 2004 income year. Bill is entitled to the following deductions:

    2002-03

    Current year amount

    $2,479

    20% of later year amount ($2,521 x 0.20)

       $504

    Total deduction

    $2,983

    2003-04

    80% of later year amount ($2,521 x 0.80)

    $2,017

    The total deduction allowed proportionately over the 2003 and 2004 income years will be $5,000.

    Eligible service period ending more than 13 months later

    If you are a small business taxpayer and you are not participating in the STS, your deduction for prepaid business expenditure (and prepaid non-business expenditure if you are not an individual) is apportioned over the eligible service period where the eligible service period ends more than 13 months after the expenditure has been incurred. Transitional rules do not apply in these situations. For each year of income containing the eligible service period, the deduction must be worked out using the following formula:

    Expenditure

    x

    number of days of eligible service period in the income year
    total number of days of eligible service period

    Example
    Deduction for expenditure where the eligible service period is more than 13 months

    Roger is a small business taxpayer who does not enter the STS. On 31 December 2002, Roger pays $15,000 rental for the use of business premises covering the period 1 January 2003 to 31 March 2004.

    Because the eligible service period is longer than 13 months, Roger 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. Roger is entitled to the following deductions:

    2002-03

    $15,000

    x

    181
    456

    (1 January 2003 to 30 June 2003)

    =

    $5,954

    2003-04

    $15,000

    x

    275
    456

    (1 July 2003 to 31 March 2004)

    =

    $9,046

    The total deduction allowed proportionately over the 2003 and 2004 income years will be $15,000.

    Non-business expenditure

    Non-business expenditure is any expenditure you incur in respect of activities that do not amount to a business activity. For a small business taxpayer, circumstances can arise where you may incur deductible non-business expenditure. A common example is expenditure made in respect of a rental property held as a passive investment.

    Prepaid non-business expenditure

    The prepayment rules for non-business expenditure differ depending on whether you are an individual taxpayer or a non-individual taxpayer such as a company or trust.

    If you are not an individual-for example, a company, superannuation fund or a trust-calculate the deduction for prepaid non-business expenditure in the same manner as your deduction for prepaid business expenditure as explained in chapter 6.

    However, if you are an individual, you are entitled to an immediate deduction for prepaid non-business expenditure where the payment is incurred for a period of service not exceeding 12 months and the eligible service period ends on or before the last day of the next year of income. Where the eligible service period is more than 12 months or ends after the next year of income, your deduction for the expenditure must be apportioned over the eligible service period or 10 years, whichever is less.

    Transitional rules do not apply in these circumstances.

    For more information, see chapter 4.

    Last modified: 27 Jul 2004QC 27475