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

    Attention

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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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    Where the later year amount of your prepaid business expenditure incurred in the 2002 income year exceeds the cap established in the income year including 21 September 1999, the percentage of the later year amount you can claim as a deduction in the 2002 income year is limited to 40 per cent of that cap.

    Example

    Prepayment made in 2002 where the later year amount exceeds the cap

    To vary the previous example, assume that on 15 December 2001, Black Ltd's payment under the contract was $130,000.

    Black Ltd's current year amount and later year amount are calculated as follows:

    Current year amount

    $130,000

    X

    181
    365

    (1 January 2002 to 30 June 2002)

    = $64,466

    Later year amount

    $130,000 - $64,466 = $65,534

    As the later year amount exceeds the amount of the cap established in the year including 21 September 1999 (that is $60,328), Black Ltd will only be entitled to deduct 40 per cent of that capped amount in the 2002 income year. The amount by which the later year amount exceeds the cap (that is $5,206) will be deductible in the 2003 income year. This is because the eligible service period occurring after the year in which it was incurred falls wholly within the 2003 income year.

    In addition to these amounts, Black Ltd is also entitled to deduct the balance (that is 40 per cent) of the later year amount established in the 2001 year. Black Ltd's total deduction for prepaid expenditure is therefore:

    2001-02

    Current year amount

    64,466

    40% of later year amount-limited to cap ($60,328 X 0.40)

    24,131

    40% of previous year's later year amount carried forward

     22,181

    Total deduction

    $110,778

    The total deduction allowed for the 2002 prepaid expenditure apportioned between the 2002 and 2003 income years is $130 000 made up as follows:

    2001-02

    Current year amount

    64,466

     

    40% of 2002 later year amount-limited to cap

    24,131

    88,597

    2002-03

    60% of 2002 later year amount-limited to cap

    36,197

     

    Excess of 2002 later year amount over cap

      5,206

      41,403

    Total

     

    $130,000

    Last modified: 18 Jun 2002QC 27429