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

    Attention

    Warning:

    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

     

    End of example
    Last modified: 10 Dec 2019QC 27429