The eligible service period is the period during which the thing is to be done under the agreement in return for the expenditure. The eligible service period begins on the day the thing under the agreement commences to be done or on the day the expenditure is incurred, whichever is later. The eligible service period continues until the end of the last day the thing under the agreement ceases to be done or 10 years, whichever is earlier.
Example: Eligible service period
Mike runs a delicatessen from leased premises. On 1 December 2001, Mike made a lease payment to cover the period 1 December 2001 to 30 November 2002. The eligible service period for this expenditure therefore commenced on 1 December 2001 and will end on 30 November 2002, a period of 365 days.
Mike's income year ends on 30 June of each year. As the thing to be done under the agreement (the provision of premises by the lessor) is not wholly done within the expenditure year the prepayment rules will apply.
End of exampleExpenditure must be deductible under the general deduction provisions or the research and development provisions
The prepayment rules only apply to expenditure which would otherwise qualify for immediate deduction under the general deduction provisions of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or, for eligible companies, under the research and development provisions in sections 73B, 73BA, 73BH or 73Y of the Income Tax Assessment Act 1936 (ITAA 1936).
The general deduction provisions generally allow you to deduct from your assessable income any loss or outgoing to the extent that it is either incurred in gaining or producing your assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Expenditure of a capital, private or domestic nature, or expenditure incurred in gaining exempt income, is specifically excluded from being deductible under these provisions. The prepayment rules do not apply if the expenditure is deductible under a specific deduction provision of the tax law other than those for research and development referred to in the previous paragraph.
Note: Unless specifically stated otherwise, the terms 'expense' and 'expenditure' used throughout this guide refer to expenditure that is only allowable as a deduction under the general deduction provisions of section 8-1 of ITAA 1997 or, for eligible companies, under the research and development provisions in section 73B 73BA, 73BH or 73Y of ITAA 1936.