Chapter 5: Small business entities

From the 2007–08 income year changes to the law have made it easier for small businesses to access a range of existing concessions. Eligible small businesses are now called small business entities and they may choose to use the concessions which best suit their business needs.

Are you a small business entity?

You are a small business entity if you are an individual, partnership, company or trust that:

• is carrying on a business, and
• has an aggregated turnover of less than $2 million.

Aggregated turnover is your annual turnover plus the annual turnovers of any businesses you are connected with or have influence over. The aggregation rules determine when you need to include the annual turnover of another business when calculating your aggregated turnover.

For more information, see Small business entity concessions and Aggregation.

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 prepaid expenditure is incurred on or after 2 October 2001 and on or before 30 June 2008
    
  • 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 a small business entity 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. Small business entities must apportion the deduction over the eligible service period or 10 years, whichever is less.

Former Simplified Tax System (STS) taxpayers still using the STS accounting method

Although the STS has now ceased, a transitional provision allows for the continued use of the STS accounting method in certain circumstances.

You may continue using the STS accounting method if you:

• were in the STS in the 2006–07 income year
• were using the STS accounting method continuously since before 1 July 2005, and
• are a small business entity from the 2007–08 income year.

If you meet these three requirements, you can continue using the STS accounting method until you choose not to, or are no longer a small business entity.

If you are a small business entity using the STS accounting method, the expense must not only have been incurred, it must also have been paid before a deduction can be claimed.

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) 

 

For more information, see our publications:

• Business and professional items 2008 (NAT 2543)
• Partnership and trust tax returns instructions 2008 (NAT 2297)
• Company tax return instructions 2008 (NAT 0669).

Chapter 6: Taxpayers carrying on a business incurring deductible business expenditure

If you are an small business entity, see chapter 5.

Summary of rules

• If you are carrying on a business and are not a small business entity, you must apportion your deduction for prepaid business expenditure over the eligible service period or 10 years, whichever is less.
  
• 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 prepaid expenditure is incurred on or after 2 October 2001 and on or before 30 June 2008
    
  • 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 not an individual or a small business entity, your deduction for prepaid non-business expenditure is apportioned over the eligible service period or 10 years, whichever is less.

For more information, see chapter 7.

• If you are an individual, your prepaid non-business expenditure 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 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, if 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.