• Chapter 8-Taxpayers, other than individuals or Simplified Tax System taxpayers, incurring deductible non-business expenditure

    Non-business expenditure

    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

    Non-business expenditure is any expenditure you incur in gaining assessable income from activities that do not amount to a business. For an entity carrying on a business, 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.

    Summary of rules

    • Prepaid non-business 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 not an individual or an STS taxpayer, your deduction for prepaid non-business expenditure is apportioned 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 may apply to allow part of the expenditure that would otherwise be deductible in a future year to be deductible in the expenditure year.

    Deducting prepaid non-business expenditure

    If you incur deductible prepaid non-business expenditure, your deduction must be claimed proportionately over each income year containing all or part of the eligible service period or 10 years, whichever is less. However, transitional rules phase in the initial impact of this measure.

    Transitional rules

    If you are not an individual or an STS taxpayer, transitional rules apply to your prepaid non-business expenditure where the eligible service period ends not more than 13 months after you incur the expenditure. Your prepaid non-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.

    The transitional rules provide a concession by enabling you to deduct, in the year in which you incur the prepaid expenditure, the sum of the current year amount plus a 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 non-business expenditure incurred in the 2002 income year to be deducted in the 2002 income year, the balance (60%) being deductible in the 2003 year
    • 20% of the later year amount for prepaid non-business expenditure incurred in the 2003 income year to be deducted in the 2003 income year, the balance (80%) being deductible in the 2004 year.

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

    Deductions for prepaid non-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.

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

    Example
    Transitional rules for a prepayment of non-business expenditure made in the 2003 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 2002, 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 2003 to 31 December 2003. 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

    x

    181
    365

    (1 January 2003 to 30 June 2003)

    =

    $4,215

    This amount is immediately deductible in the 2003 income year.

    Later year amount

    $8,500 - $4,215 = $4,285

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

    2002-03

    Current year amount

    $4,215

    20% of later year amount ($4,285 x 0.20)

       $857

    Total deduction

    $5,072

    2003-04

    80% of later year amount ($4,285 x 0.80)

    $3,428

    The total deduction allowed proportionately over the 2003 and 2004 income years is $8,500.

    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:

    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

    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 2002, 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 2003 to 31 March 2004.

    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:

    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 is $15,000.

    Last modified: 27 Jul 2004QC 27475