• Chapter 5: Taxpayers in the simplified tax system

    Are you in the simplified tax system (STS)?

    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

    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 2007 income tax return.

    Further Information

    Business and professional items instructions 2007 (NAT 2543-6.2007), Partnership and trust tax returns instructions 2007 (NAT 2297-6.2007) or Company tax return instructions 2007 (NAT 0669-6.2007) and the publication The simplified tax system: a guide for tax agents and small businesses (NAT 6459).

    End of further information

    Proposed changes to the STS

    In the 2006-07 Federal Budget the government announced further changes to the STS which will apply from the start of the 2007-08 income year.

    These proposed changes will increase the STS average turnover threshold to $2 million and remove the $3 million depreciating asset test from the STS eligibility requirements.

    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 expenditure was incurred.
       

    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.
    Attention

    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. An STS taxpayer is now able to calculate their taxable income using either the accruals (earnings) method or the cash (receipts) method - whichever is the most appropriate method of accounting for the circumstances.

    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. An STS taxpayer using the cash (receipts) method of accounting, that is, recognising general deductions when they are paid, must also 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.

    End of attention

    Calculating your deduction if the 12-month rule is satisfied

    Example: Prepaid expense that is immediately deductible

    The ABC Trust is an STS taxpayer. On 1 June 2007, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2007 and ending on 30 June 2008.

    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 2006-07 income year.

    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

    x

    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 2007, it paid $15,000 for business advertising to cover the period 1 June 2007 to 30 June 2008 (396 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:

    2006-07 (1 June 2007 to 30 June 2007)

    $15,000

    x

    30
    396

    =

    $1,136

    2007-08 (1 July 2007 to 30 June 2008)

    $15,000

    x

    366
    396

    =

    $13,864

    The total deduction allowed proportionately over the 2007 and 2008 income years will be $15,000.

    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 2007 to 14 July 2008 providing payment was made by 30 June 2007. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2007.

    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:

    2006-07

    Nil. No part of the eligible service period occurred in this income year.

    2007-08 (15 July 2007 to 30 June 2008)

    $10,200

    x

    352
    366

    =

    $9,809

    2008-09 (1 July 2008 to 14 July 2008)

    $10,200

    x

    14
    366

    =

    $391

    The total deduction allowed proportionately over the 2008 and 2009 income years will be $10,200.

    Last modified: 31 Aug 2010QC 19465