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Small business entities

What is small business entities, a summary of rules and calculating a deduction if the 12-month rule is satisfied.

Last updated 28 May 2025

Are you a small business entity?

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

Summary of rules

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 either:      

  • 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.

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 doesn't meet the 12-month rule, you can't 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.

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 2022–23 income years
  • are a small business entity for 2024–25.

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're 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 2025, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2025 and ending on 30 June 2026.

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

  • doesn't 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 2024–25.

End of example

Calculating your deduction if the 12-month rule isn't satisfied

If you make a prepayment that doesn't satisfy the 12-month rule, you can't claim an immediate deduction.

If you're 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 lesser of either:

  • the eligible service period
  • 10 years.

Use the following formula:

A multiplied by (B divided by 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 2025, it paid $15,000 for business advertising to cover the period 1 June 2025 to 30 June 2026 (395 days). Because the eligible service period is longer than 12 months, the prepayment doesn't satisfy the 12-month rule. Tom Pty Ltd can't claim an immediate deduction for the prepayment. Instead, the deduction for the expenditure must be apportioned over the eligible service period as follows:

2024–25 (1 June 2025 to 30 June 2025)

$15,000 × (30 ÷ 395) = $1,139

2025–26 (1 July 2025 to 30 June 2026)

$15,000 × (365 ÷ 395) = $13,861

The total deduction allowed proportionately over the income years 2024–25 and 2025–26 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 2025 to 14 July 2026 (365 days), providing payment was made by 30 June 2025. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2025.

Although the eligible service period is for a period of 12 months or less, the 12-month rule hasn't been satisfied. This is because the eligible service period doesn't 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:

2024–25

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

2025–26 (15 July 2025 to 30 June 2026)

$10,200 × (351 ÷ 365) = $9,809

2026–27 (1 July 2026 to 14 July 2026)

$10,200 × (14 ÷ 365) = $391

The total deduction allowed proportionately over the income years 2025–26 and 2026–27 will be $10,200.

End of example

For more information, see:

Carrying on a business while incurring deductible business expenditure

If you're 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're carrying on a business and aren't a small business entity and your aggregated turnover is $50 million or more, you must apportion your deduction for prepaid business expenditure over the lesser of either:     
    • the eligible service period
    • 10 years.
  • Prepaid expenditure that is subject to the tax shelter rules is apportioned over the lesser of either:
    • the eligible service period
    • 10 years.
  • If you're 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 lesser of either:
    • the eligible service period
    • 10 years.
  • If you're 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're 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 either the lesser of either:
    • the eligible service period
    • 10 years.

Return to: Deductible non-business expenditure

 

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