Are you in the simplified tax system (STS)?
Participation in the STS is optional. Broadly speaking, you are eligible to enter the STS for an income year if:
- you carry on business in that year
- the STS average turnover of your business and related businesses for that year is less than $1 million, and
- your business and related businesses have depreciating assets with a total adjustable value of less than $3 million at the end of that year.
If you are eligible to enter the STS and wish to do so, you should make an election to that effect on your 2005 income tax return.
For more information, see
- Business and professional items instructions 2005 (NAT 2543-6.2005),
- Partnership and trust tax returns instructions 2005 (NAT 2297-6.2005) or
- Company tax return instructions 2005 (NAT 0669-6.2005) and the publication
- The simplified tax system: a guide for tax agents and small businesses (NAT 6459).
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 tax shelter arrangements.
- Certain prepaid expenditure incurred under a plantation forestry managed agreement is deductible under the 12-month rule if:
- 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 an STS taxpayer 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 was made.
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. STS taxpayers must apportion the deduction over the eligible service period or 10 years, whichever is less.
Note: For an STS taxpayer, you must have paid the expenditure before you can claim a deduction.
Calculating your deduction if the 12-month rule is satisfied
Example: Prepaid expense that is immediately deductible
The ABC Trust is an STS taxpayer. On 1 June 2005, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2005 and ending on 30 June 2006.
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 ABC Trust can therefore claim an immediate deduction of $24,000 in the 2004-05 income year.
End of exampleCalculating 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)
Example: Prepaid expense where eligible service period is greater than 12 months
Tom Pty Ltd is an STS taxpayer. On 31 May 2005, it paid $15,000 for business advertising to cover the period 1 June 2005 to 30 June 2006 (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:
2004-05 (1 June 2005 to 30 June 2005)
$15,000 × (30 ÷ 395) = $1,139
2005-06 (1 July 2005 to 30 June 2006)
$15,000 × (365 ÷ 395) = $13,861
The total deduction allowed proportionately over the 2005 and 2006 income years will be $15,000.
End of exampleExample: 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, an STS taxpayer, was offered a 15% discount on advertising to cover the period 15 July 2005 to 14 July 2006 providing payment was made by 30 June 2005. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2005.
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:
2004-05
Nil. No part of the eligible service period occurred in this income year.
2005-06 (15 July 2005 to 30 June 2006)
$10,200 × (351 ÷ 365) = $9,809
2006-07 (1 July 2006 to 14 July 2006)
$10,200 × (14 ÷ 365) = $391
The total deduction allowed proportionately over the 2006 and 2007 income years will be $10,200.
End of example