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  • Transitional rules

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The transitional rules provide a concession by isolating that part of the payment that relates to a later year and allows a specified percentage to be immediately deductible instead of being apportioned over the eligible service period. There is an upper limit (cap) on the amount that is subject to this concessional treatment under the transitional rules.

    The concession provided for under the transitional rules will not apply if:

    • the eligible service period for the prepaid expenditure you have incurred ends more than 13 months later, or
    • your limit on the amount subject to transitional treatment is nil because you did not incur any prepaid expenditure between 11.45am (by legal time in the ACT) on 21 September 1999 and the end of the income year that included that date (30 June 2000 for most taxpayers).

    Under the transitional rules your prepaid business expenditure is divided into 2 parts:

    • the current year amount
    • the later year amount.

    Current year amount

    The current year amount is that part of your prepayment that relates to the thing to be done within the income year in which the prepayment was incurred (the expenditure year). This amount is calculated as follows:

    A × (B ÷ C)

    Where:

    A is expenditure

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

    C is total number of days of eligible service period

    The current year amount is immediately deductible in the income year in which the prepayment is incurred.

    Later year amount

    The later year amount is that part of your prepayment that relates to the thing(s) to be done in future income years. It is the difference between the total prepaid expenditure incurred and the current year amount.

    The later year amount may be eligible for concessional treatment under the transitional rules. The treatment is determined by reference to the table below.

    Note: There is a limit or cap on the amount subject to the transitional rules. See explanation of the cap in later paragraphs.

    Proportion of your later year amount you are able to deduct

    Transitional
    year

    Expenditure
    year

    Amount included in deduction for the expenditure year

    Amount of deduction for the year of income straight after the expenditure year

    1st

    Year of income including 21.9.99

    80% of the later year amount

    20% of the later year amount

    2nd

    Year of income following the 1st year

    60% of the later year amount

    40% of the later year amount

    3rd

    Year of income following the 2nd year

    40% of the later year amount

    60% of the later year amount

    4th

    Year of income following the 3rd year

    20% of the later year amount

    80% of the later year amount

    Cap or limit on the amount subject to the transitional rules

    There is a limit on the amount eligible for transitional treatment. This limit is referred to as the cap. The cap is the total of all your later year amounts subject to the transitional rules in the year of income including 21 September 1999. Any prepayments you made which were subject to the tax shelter rules are not included in determining the amount of the cap.

    If your later year amount for prepaid expenditure incurred in the 2002 income year exceeds your cap, the later year amount subject to the transitional rules in that year will be limited to the amount of that cap. The amount by which your 2002 later year amount exceeds this cap is allowed as a deduction proportionately over the eligible service period that occurs after the expenditure year.

    Last modified: 10 Dec 2019QC 27429