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  • Chapter 4: Small business entities

    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

    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.

    If you are not linked with any other business and your business turnover is less than $2 million, you are a small business entity.

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

    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.
       
    • 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 expenditure and deductible non-business expenditure incurred by a small business entity that chooses to use this concession.

    • 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.

    Small business entities still using the simplified tax system (sts) accounting method

    You may continue using the STS accounting method if you:

    • were an STS taxpayer continuously from the 2004-05 income year or earlier and until the end of the 2006-07 income year
    • used the STS accounting method for the 2005-06 to 2009-10 income years, and
    • are a small business entity for the 2010-11 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 a small business entity. On 1 June 2011, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2011 and ending on 30 June 2012.

    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 choose to claim an immediate deduction of $24,000 in the 2010-11 income year.

    End of example

    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 a small business entity, 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 a small business entity. On 31 May 2011, it paid $15,000 for business advertising to cover the period 1 June 2011 to 30 June 2012 (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:

    2011 (1 June 2011 to 30 June 2011)

    $15,000

    x

    30
    396

    =

    $1,136

    2011-12 (1 July 2011 to 30 June 2012)

    $15,000

    x

    366
    396

    =

    $13,864

    The total deduction allowed proportionately over the 2011 and 2012 income years will be $15,000.

    End of example

     

    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 2011 to 14 July 2012 (366 days) providing payment was made by 30 June 2011. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2011.

    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:

    2010-11

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

    2011-12 (15 July 2011 to 30 June 2012)

    $10,200

    x

    352
    366

    =

    $9,810

    2012-13 (1 July 2012 to 14 July 2012)

    $10,200

    x

    14
    366

    =

    $390

    The total deduction allowed proportionately over the 2012 and 2013 income years will be $10,200.

    End of example

    For more information, see our publications:

    Last modified: 04 Mar 2016QC 27275