• Calculating your deduction for prepaid expenditure where the transitional rules do not apply

    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

    If the eligible service period for your prepaid business expenditure ends more than 13 months later or your cap is nil because you did not make a prepayment between 11.45 am (by legal time in the ACT) on 21 September 1999 and the end of your income year including that date (30 June 2000 for most taxpayers), the transitional rules will not apply. Instead, your deduction must be claimed proportionately over each income year containing all or part of the eligible service period. This deduction is calculated using the following formula:

    Expenditure

    X

    number of days of eligible service period in the income year
    total number of days of eligible service period

    No part of the amount of expenditure relating to the later year can be claimed as a deduction in the 2002 income year.

    Example

    Prepayment made in the 2002 year only

    Green Ltd is not a small business taxpayer and its income year ends on 30 June. During the year ended 30 June 2000 (that is, the income year including 21 September 1999), Green Ltd did not incur any prepaid expenditure that was affected by the prepayment rules.

    On 31 December 2001, Green Ltd entered into a contract for the supply of maintenance services for the period 1 January 2002 to 31 December 2002. Green Ltd paid $120,000 for these services on 31 December 2001.

    Because Green Ltd did not incur any prepaid business expenditure in the 2000 income year the transitional rules do not apply. Green Ltd's deduction must be claimed proportionately over each year that contains all or part of the eligible service period. Green Ltd's total deductions for prepaid expenditure are therefore:

    2001-02

    $120,000

    X

    181
    365

    (1 January 2002 to 30 June 2002) = $59,507

    2002-03

    $120,000

    X

    184
    365

    (1 July to 31 December 2002) = $60,493

    The total deduction allowed proportionately over the 2002 and 2003 income years is $120,000.

    Last modified: 18 Jun 2002QC 27429