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 attention

Are 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 a 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 or continue in the STS and wish to do so, you should make an election to that effect on your 2006 income tax return.

For more information see:

Business and professional items instructions 2006 (NAT 2543-6.2006), Partnership and trust tax returns instructions 2006 (NAT 2297-6.2006) or Company income tax return instructions 2006 (NAT 0669-6.2006) 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 if:
  
  • 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 if:
  
  • 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 rule, known as the 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.

• If a prepayment does not meet the 12-month rule, you cannot claim an immediate deduction. STS taxpayers must apportion the deduction over the eligible service period or 10 years, whichever is less.

Note

When the STS began on 1 July 2001 an STS taxpayer was only required to account for most business income when it was received, and most business expenses when they were paid. This is referred to as the STS accounting method. From the first income year starting on or after 1 July 2005, an STS taxpayer is no longer required to use the STS accounting method.

However, where a business was an STS taxpayer in the income year that started immediately before 1 July 2005 then, while they continue to be an STS taxpayer, they can continue to use the STS accounting method. In this case, the business must have paid the expenditure before they can claim a deduction for the prepayment.

For more information, see our fact sheet Prepaid expenses - taxpayers in the simplified tax system (NAT 7545).

Calculating your deduction if the 12-month rule is satisfied

Calculating your deduction if the 12-month rule is not satisfied

If you make a prepayment that does not satisfy the 12-month rule, you cannot claim an immediate deduction. 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)