• 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?

    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 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.

    Further Information

    For more information, see the electronic publications Am I eligible for the small business entity concessions? and What are the aggregation rules? available on our website.

    End of further information

    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.
    Danger

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

    End of danger

    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

    Example: Prepaid expense that is immediately deductible

    The Jacobs Trust is an small business entity. On 1 June 2008, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2008 and ending on 30 June 2009.

    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 Jacobs Trust can therefore claim an immediate deduction of $24,000 in the 2007-08 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 small business entity. On 31 May 2008, it paid $15,000 for business advertising to cover the period 1 June 2008 to 30 June 2009 (395 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:

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

    $15,000

    x

    30
    395

    =

    $1,139

    2008-09 (1 July 2007 to 30 June 2008)

    $15,000

    x

    366
    395

    =

    $13,861

    The total deduction allowed proportionately over the 2008 and 2009 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, a small business entity, was offered a 15% discount on advertising to cover the period 15 July 2008 to 14 July 2009 providing payment was made by 30 June 2008. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2008.

    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:

    2007-08

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

    2008-09 (15 July 2008 to 30 June 2009)

    $10,200

    x

    351
    365

    =

    $9,809

    2009-10 (1 July 2009 to 14 July 2009)

    $10,200

    x

    14
    365

    =

    $391

    The total deduction allowed proportionately over the 2009 and 2010 income years will be $10,200.

    Further Information

    For more information, see our publications:

    End of further information
    Last modified: 30 Jun 2009QC 27920