• Individual taxpayers incurring deductible non-business expenditure

    What is non-business expenditure?

    Non-business expenditure is any expenditure you incur in gaining assessable income from activities that do not relate to carrying on a business. The most common forms of non-business expenditure are amounts incurred by individual taxpayers in gaining their assessable salary and wage income. Other examples include certain expenditure made for a rental property or shares held purely as a passive investment.

    Example: Non-business expenditure

    Ian is employed as a bank manager and the primary source of his income is the salary received from his employer. Ian also owns a rental property from which he receives assessable income. Ian’s rental property activities do not constitute the carrying on of a business. Prepaid expenditure incurred by Ian for the rental property or for work-related expenses will be subject to the prepayment rules that apply to deductible non-business expenditure incurred by an individual.

    End of example

    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 Investments in tax shelter arrangements.
    • 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
      • the period ends no later than the last day of the income year following the year in which the expenditure was incurred.
       
    • If you are an individual, you apportion your deduction for prepaid non-business expenditure 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.

    Calculating your deduction if the 12-month rule is satisfied

    If you incur prepaid non-business expenditure and its eligible service period is 12 months or less, and it ends on or before the last day of the next income year, you are entitled to deduct that expenditure in the income year it was incurred.

    Example: Deduction for non-business expenditure with an eligible service period of 12 months or less

    On 1 June 2016, Jasmin, an employed solicitor, paid $1,750 for a subscription for the provision of a monthly professional journal for the period 1 June 2016 to 31 May 2017. The provision of the journal is the 'thing to be done under the agreement'. Because the period of subscription is wholly within a 12-month period ending before the last day of the next income year, Jasmin is entitled to a deduction for the expenditure in 2015–16.

    End of example

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

    If you incur prepaid non-business expenditure and the eligible service period is more than 12 months or it ends after the last day of the next income year, you must use the following formula to work out your deduction:

    expenditure

    X

    number of days of eligible service period in the income year
    total number of days of eligible service period

    Example: Deduction for non-business expenditure with an eligible service period of more than 12 months

    On 1 January 2016, Martin, a senior clerk employed by a legal firm, paid $1,250 for a subscription for the monthly provision of a professional journal to cover the period 1 January 2016 to 31 January 2017 (397 days). As the eligible service period is more than 12 months, Martin must apportion his deduction over the 2015-16 and 2016-17 income years. Martin’s deductions are:

    2015–16 (1 January 2016 to 30 June 2016)

    $1,250

    x

    182
    397

    =

    $573

    2016–17 (1 July 2016 to 31 January 2017)

    $1,250

    x

    215
    397

    =

    $677

    For the 2015-16 and 2016-17 income years, Martin gets a total deduction of $1,250.

    End of example
    Last modified: 26 May 2016QC 48083