To find out if you are a small business taxpayer, see chapter 6. If you are an STS taxpayer, see chapter 5.
If you are carrying on a business and are not a small business taxpayer or an STS taxpayer, the following rules apply to your prepaid expenditure.
Summary of rules
- Prepaid expenditure that is subject to the tax shelter rules is apportioned over the eligible service period or 10 years, whichever is less. For more information, see chapter 2.
- However, certain prepaid expenditure incurred under a plantation forestry managed agreement is deductible under the 12-month rule where:
- the eligible service period for the expenditure is 12 months or less, and
- the period ends on or before the last day of the income year following the year in which the expenditure was incurred.
For more information, see chapter 3.
- If you are carrying on a business and are not a small business taxpayer or an STS taxpayer, you must apportion your deduction for prepaid business expenditure over the eligible service period or 10 years, whichever is less. However, where the eligible service period ends not more than 13 months after you incur the expenditure, transitional rules may apply to allow part of the expenditure that would otherwise be deductible in a future year to be deductible in the expenditure year. There is an upper limit (or cap) on the amount that is subject to this concessional treatment under the transitional rules.
- If you are not an individual or an STS taxpayer, your deduction for prepaid non-business expenditure is apportioned over the eligible service period or 10 years, whichever is less. However, where the eligible service period ends not more than 13 months after you incur the expenditure, transitional rules may apply to allow part of the expenditure that would otherwise be deductible in a future year to be deductible in the expenditure year. There is no upper limit (cap) on the amount that is subject to this concessional treatment under the transitional rules.
For more information, see chapter 8. - If you are an individual, your prepaid non-business expenditure is immediately deductible under the 12-month rule where:
- the eligible service period for the expenditure is 12 months or less, and
- the period ends no later than the last day of the income year following the year in which the payment is made.
For more information, see chapter 4.
- If you are an individual, your deduction for prepaid non-business expenditure is apportioned over the eligible service period or 10 years, whichever is less, where the eligible service period is more than 12 months or it ends after the last day of the next income year. For more information, see chapter 4.
Calculating your deduction for prepaid business expenditure
If you are carrying on a business and are not a small business taxpayer or an STS taxpayer, you must apportion your deduction for prepaid business expenditure over the eligible service period or 10 years, whichever is less. However, where the eligible service period ends not more than 13 months after you incur the expenditure, transitional rules may apply.
Transitional rules
The transitional rules provide a concession by isolating that 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 an upper limit (or cap) on the amount that is subject to this concessional treatment under the transitional rules.
The concession provided for under the transitional rules will not apply if:
- the eligible service period for the prepaid expenditure you have incurred ends more than 13 months later or
- your limit on the amount subject to transitional treatment is nil because you did not incur any prepaid expenditure between 11.45am (by legal time in the ACT) on 21 September 1999 and the end of the income year that included that date (30 June 2000 for most taxpayers).
Under the transitional rules your prepaid business expenditure is divided into two parts:
- the current year amount, and
- the later year amount.
Current year amount
The current year amount is that part of your prepayment that relates to the thing to be done within the income year in which the expenditure was incurred (the expenditure year). This amount is calculated as follows:
Expenditure × (number of days of eligible service period in the income year ÷ total number of days of eligible service period)
The current year amount is immediately deductible in the income year in which the prepayment is incurred.
Later year amount
The later year amount is that part of your prepayment that relates to the thing(s) to be done in future income years. It is the difference between the total prepaid expenditure incurred and the current year amount.
The later year amount may be eligible for concessional treatment under the transitional rules. The treatment is determined by reference to the table below.
Note: There is a limit or cap on the amount subject to the transitional rules. See explanation of the cap in later paragraphs.
Transitional year |
Expenditure year |
Amount included in deduction for the expenditure year |
Amount of year deduction for the year of income straight after the expenditure year |
|---|---|---|---|
First |
Year of income including 21.9.99 |
80% of the later year amount |
20% of the later year amount |
Second |
Year of income following the first year |
60% of the later year amount 40% of the later year amount |
- |
Third |
Year of income following the second year |
40% of the later year amount 60% of the later year amount |
- |
Fourth |
Year of income following the third year |
20% of the later year amount 80% of the later year amount |
- |
Cap or limit on the amount subject to the transitional rules
There is a limit on the amount eligible for transitional treatment. This limit is referred to as the cap. The cap is the total of all your later year amounts subject to the transitional rules in the year of income including 21 September 1999. Any prepayments you made which were subject to the tax shelter rules are not included in determining the amount of the cap.
If your later year amount for prepaid expenditure incurred in the 2003 income year exceeds your cap, the later year amount subject to the transitional rules in that year will be limited to the amount of that cap. The amount by which your 2003 later year amount exceeds this cap is allowed as a deduction proportionately over the eligible service period that occurs after the expenditure year.
Calculating your deduction for prepaid business expenditure where the transitional rules apply-later year amount less than cap
Example: Prepayment made in 2003 where the later year amount is less than the cap
On 15 December 1999, Black Ltd entered into a four 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% of the later year amount for which a deduction could not be claimed in 2001. The amount of $22,181 was claimed in the 2002 year.
On 15 December 2001, Black Ltd made a further payment of $110,000 for services to be provided in the 2002 calendar year. Under the transitional rules, this resulted in Black Ltd carrying forward to 2003 an amount of $33,271 being 60% of the later year amount for which a deduction could not be claimed in 2002.
Black Ltd made a further payment of $110,000 on 15 December 2002 to cover services to be provided over the period 1 January 2003 to 31 December 2003. Black Ltd's current year amount and later year amount are calculated as follows:
Current year amount
$110,000 × (181 ÷ 365) (1 January 2003 to 30 June 2003 = $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 20% of the later year amount in the 2003 income year. This is equal to:
$55,452 × 20% = $11,090
The balance of $44,362 ($55,452 − $11,090) will be available as a deduction to Black Ltd in the 2004 income year.
Black Ltd is also entitled to deduct the amount of $33,271 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:
Current year amount |
$54,548 |
20% of later year amount ($55,452 x 0.20) |
$11,090 |
60% of previous year's later year amount carried forward |
$33,271 |
Total deduction |
$98,909 |
The total deduction allowed for the 2003 prepaid expenditure apportioned between the 2003 and 2004 income years is $110,000 made up as follows:
Current year amount |
$54,548 |
20% of 2003 later year amount |
$11,090 |
Total |
$65,638 |
80% of 2003 later year amount |
$44,362 |
Total |
$110,000 |
End of example
Calculating your deduction for prepaid business expenditure where the transitional rules apply-later year amount exceeds cap
Where the later year amount of your prepaid business expenditure incurred in the 2003 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 2003 income year is limited to 20% of that cap.
Example: Prepayment made in 2003 where the later year amount exceeds the cap
To vary the previous example, assume that on 15 December 2002, 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 × (181 ÷ 365) (1 January 2003 to 30 June 2003) = $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 20% of that capped amount in the 2003 income year.
The amount by which the later year amount exceeds the cap (that is $5,206) will be deductible in the 2004 income year. This is because the eligible service period occurring after the year in which it was incurred falls wholly within the 2004 income year.
In addition to these amounts, Black Ltd is also entitled to deduct the balance (that is 60%) of the later year amount established in the 2002 year. Black Ltd's total deduction for prepaid expenditure is therefore:
Current year amount |
$64,466 |
20% of later year amount-limited to cap ($60,328 × 0.20) |
$12,066 |
60% of previous year's later year amount carried forward |
$33,271 |
Total deduction |
$109,803 |
The total deduction allowed for the 2003 prepaid expenditure apportioned between the 2003 and 2004 income years is $130,000 made up as follows:
Current year amount |
$64,466 |
20% of 2003 later year amount-limited to cap |
$12,066 |
Total |
$76,532 |
80% of 2003 later year amount-limited to cap |
$48,262 |
Excess of 2003 later year amount over cap |
$5,206 |
Total |
$53,468 |
Total (2002-03 and 2003-04) |
$130,000 |
End of example
Calculating your deduction for prepaid expenditure where the transitional rules do not apply
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 11.45am (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 × (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 2003 income year.
Example: Prepayment made in the 2003 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 2002, Green Ltd entered into a contract for the supply of maintenance services for the period 1 January 2003 to 31 December 2003. Green Ltd paid $120,000 for these services on 31 December 2002.
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:
2002-03
$120,000 × (181 ÷ 365) (1 January 2003 to 30 June 2003) = $59,507
2003-04
$120,000 × (184 ÷ 365) (1 July 2003 to 31 December 2003) = $60,493
The total deduction allowed proportionately over the 2003 and 2004 income years is $120,000.
End of example