Individual taxpayers incurring deductible non-business expenditure
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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What is non-business expenditure?
Non-business expenditure is any expenditure you incur in gaining assessable income from activities that do not relate to carrying on a business. The most common forms of non-business expenditure are amounts incurred by individual taxpayers in gaining their assessable salary and wage income. Other examples include certain expenditure made for a rental property or shares held purely as a passive investment.
Example: Non-business expenditure
Ian is employed as a bank manager and the primary source of his income is the salary received from his employer. Ian also owns a rental property from which he receives assessable income. Ian’s rental property activities do not constitute the carrying on of a business. Ian may prepay expenses for the rental property or for work-related expenses. This will be subject to the prepayment rules that apply to deductible non-business expenditure incurred by an individual.
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Summary of rules including the 12-month rule
- Prepaid expenditure that is subject to the tax shelter rules is apportioned over the eligible service period or 10 years, whichever is less.
- If you are an individual, your prepaid non-business expenditure is immediately deductible under the 12-month rule if
- the eligible service period for the expenditure is 12 months or less
- the period ends no later than the last day of the income year following the year in which the expenditure was incurred.
- When the eligible service period is more than 12 months or it ends after the last day of the next income year, you apportion your deduction for prepaid non-business expenditure over
- the eligible service period, or
- 10 years, whichever is less.
Calculating your deduction if the 12-month rule is satisfied
You are entitled to deduct that expenditure in the income year it was incurred if all of the following apply:
- you incur prepaid non-business expenditure
- its eligible service period is 12 months or less
- the eligible service period ends on or before the last day of the next income year.
Example: Deduction for non-business expenditure with an eligible service period of 12 months or less
On 1 June 2020 Jasmin, an employed solicitor, paid $1,750 for a subscription for a monthly professional journal for 1 June 2020 – 31 May 2021. The provision of the journal is the 'thing to be done under the agreement'. The period of subscription is wholly within a 12-month period ending before the last day of the next income year. So, Jasmin is entitled to a deduction for the expenditure in 2019–20.
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Calculating your deduction if the 12-month rule is not satisfied
If you incur prepaid non-business expenditure and the eligible service period is more than 12 months or it ends after the last day of the next income year, you must use the following formula to work out your deduction:
A × (B ÷ C)
A is expenditure
B is the number of days of the eligible service period in the income year
C is the total number of days of the eligible service period
Example: Deduction for non-business expenditure with an eligible service period of more than 12 months
On 1 January 2020, Martin, a senior clerk employed by a legal firm, paid $1,250 for a subscription for a monthly professional journal. The subscription is for 1 January 2020 – 31 January 2021 (39 days). As the eligible service period is more than 12 months, Martin must apportion his deduction over the 2019–20 and 2020–21 income years. Martin’s deductions are:
2019–20 (1 January 2020 to 30 June 2020)
$1,250 × (182 ÷ 397) = $573
2020–21 (1 July 2020 to 31 January 2021)
$1,250 × (215 ÷ 397) = $677
For the 2019–20 and 2020–21 income years, Martin gets a total deduction of $1,250.
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