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  • Small business entities

    In this section:

    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
    • has an aggregated turnover of less than $10 million.

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

    You are a small business entity if you are not linked with any other business and your business turnover is less than $10 million.

    See also:

    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.
    • Prepaid expenditure incurred by a small business entity or an entity that would be a small business entity if the aggregated turnover threshold was $50 million 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.

        Note: This rule, known as the 12-month rule, applies to both deductible business and non-business expenditure incurred by a small business entity and an entity that would be a small business entity if the aggregated turnover threshold was $50 million 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 and entities that would be small business entities if the aggregated turnover threshold was $50 million must apportion the deduction over the eligible service period or 10 years, whichever is less.

    See also:

    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 and used it until the end of the 2006–07 income year
    • used the STS accounting method for the 2007–08 to 2019–20 income years
    • are a small business entity for 2020–21.

    If you meet these 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 have been incurred and 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 2021, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2021 and ending on 30 June 2022.

    The prepayment satisfies the 12-month rule as the eligible service period for the expenditure:

    • does not exceed 12 months
    • ends on or before the last day of the income year following the year in which the expenditure was incurred.

    The Jacobs Trust can therefore choose to claim an immediate deduction of $24,000 in 2020–21.

    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. If you are a small business entity or would be a small business entity if the aggregated turnover threshold was $50 million, you must apportion the deduction over the eligible service period or 10 years, whichever is less, using the following formula:

    A × (B ÷ C)

    Where:

    A is expenditure

    B is the number of days of eligible service period in the income year

    C is the 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 2021, it paid $15,000 for business advertising to cover the period 1 June 2021 to 30 June 2022 (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:

    2020–21 (1 June 2021 to 30 June 2021)

    $15,000 × (30 ÷ 395) = $1,139

    2021–22 (1 July 2021 to 30 June 2022)

    $15,000 × (365 ÷ 395) = $13,861

    The total deduction allowed proportionately over the income years 2020–21 and 2021–22 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 2021 – 14 July 2022 (365 days), providing payment was made by 30 June 2021. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2021.

    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 on or 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:

    2020–21

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

    2021–22 (15 July 2021 to 30 June 2022)

    $10,200 × (351 ÷ 365) = $9,809

    2022–23 (1 July 2022 to 14 July 2022)

    $10,200 × (14 ÷ 365) = $391

    The total deduction allowed proportionately over the income years 2021–22 and 2022–23 will be $10,200.

    End of example

    See also:

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    Taxpayers carrying on a business incurring deductible business expenditure

    If you are a small business entity or would be a small business entity if the aggregated turnover threshold was $50 million, see Small business entities.

    Summary of rules

    • If you are carrying on a business and are not a small business entity and your aggregated turnover is $50 million or more, 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.
       
    • If you are not an individual, a small business entity or an entity that would be a small business entity if the aggregated turnover threshold was $50 million, your deduction for prepaid non-business expenditure is apportioned over  
      • the eligible service period, or
      • 10 years, whichever is less.
       
    • 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 payment is made.
       
    • If you are an individual and the eligible service period is more than 12 months or it ends after the last day of the next income year, your deduction for prepaid non-business expenditure is apportioned over  
      • the eligible service period, or
      • 10 years, whichever is less.
       

    See also:

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      Last modified: 27 May 2021QC 64888