• ### Calculating your deduction for prepaid business expenditure where the transitional rules apply- later year amount less than cap

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

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Example: Prepayment made in 2002 where the later year amount is less than the cap

On 15 December 1999, Black Ltd entered into a 4-year contract for maintenance services to be provided over the period 1 January 2000 to 31 December 2003. On that day, Black Ltd made a payment of \$120,000 for the first year's service. The amount of the prepayment that relates to services to be provided over the period 1 January 2000 to 30 June 2000, a period of 182 days in a total eligible service period of 366 days, was \$59,672-the current year amount. Black Ltd's later year amount was therefore \$60,328 (\$120,000 - \$59,672)-this amount represents Black Ltd's cap.

On 15 December 2000, Black Ltd paid \$110,000 for services to be provided in the 2001 calendar year. Under the transitional rules, this resulted in Black Ltd carrying forward to 2002 an amount of \$22,181 being 40 per cent of the later year amount for which a deduction could not be claimed in 2001.

Black Ltd made a further payment of \$110,000 on 15 December 2001 to cover services to be provided over the period 1 January 2002 to 31 December 2002. Black Ltd's current year amount and later year amount are calculated as follows:

Current year amount

\$110,000 × (181 ÷ 365) (1 January 2002 to 30 June 2002) = \$54,548

Later year amount

\$110,000 − \$54,548 = \$55,452

As the later year amount is less than the amount of the cap established in the 2000 income year (that is, \$60,328), Black Ltd will be entitled to immediately deduct 40 per cent of the later year amount in the 2002 income year. This is equal to:

\$55,452 × 40% = \$22,181

The balance of \$33,271 (\$55,452 − \$22,181) will be available as a deduction to Black Ltd in the 2003 income year.

Black Ltd is also entitled to deduct the amount of \$22,181 being that part of the previous year's later year amount which was not deductible in that year. Black Ltd's total deduction for prepaid expenditure is therefore:

2001-02

 Current year amount \$54,548 40% of later year amount (\$55,452 × 0.40) \$22,181 40% of previous year's later year amount carried forward \$22,181 Total deduction \$98,910

The total deduction allowed for the 2002 prepaid expenditure apportioned between the 2002 and 2003 income years is \$110 000 made up as follows:

2001-02

 Current year amount \$54,548 40% of 2002 later year amount \$22,181 ÷ \$76,729

2002-03

 60% of 2002 later year amount \$33,271 Total \$110,000

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