What are the prepayment rules?



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Generally, a prepaid expense is deductible over the eligible service period, or 10 years if that is less, rather than being immediately deductible.

However, if you are an STS taxpayer, or an individual incurring deductible non-business expenditure, you can claim an immediate deduction under the 12-month rule for prepaid expenditure where the payment is incurred for an eligible service period not exceeding 12 months and the eligible service period ends in the next income year.

For more information on STS taxpayers, see chapter 5 and on deductible non-business expenditure incurred by individuals, see chapter 4.

If you are not an STS taxpayer and you

  • incur prepaid expenditure in carrying on a business, or
  • incur prepaid non-business expenditure and you are not an individual,

transitional arrangements may apply to the expenditure where the eligible service period ends not more than 13 months after you incur the expenditure.

The transitional treatment isolates the 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 a limit (cap) on the amount that is subject to transitional treatment unless you are:

  • a small business taxpayer and are not an STS taxpayer, or
  • a non-individual taxpayer incurring deductible non-business expenditure.

For more information on the transitional rules that apply to small business taxpayers who are not in the STS, see chapter 6 and on the rules that apply to other taxpayers, see chapter 7 and chapter 8.

Prepaid expenditure incurred under certain managed investments (' tax shelter' arrangements) is not eligible for the 12-month rule or transitional treatment. For more information about tax shelter arrangements, see chapter 2.

Certain prepaid expenditure incurred under an investment in a plantation forestry managed agreement is eligible for the 12-month rule. For more information see chapter 3.

If the 12-month rule or the transitional provisions do not apply, your deduction for prepaid expenditure is apportioned over the eligible service period or 10 years, whichever is less.

Last modified: 18 Jun 2002QC 27429