Edited version of private ruling

Authorisation Number: 1011861334140

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Ruling

Subject: Prepayments

Question

Are you entitled to a deduction for the purchase of an Index Trading Subscription Service apportioned over the period the service will be provided?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016

The scheme commenced on

30 June 2011

Relevant facts and circumstances

You purchased an Index Trading Subscription Service.

You receive daily alerts five days a week for the next five years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1936 Section 82KZM
Income Tax Assessment Act 1936 Section 82KZMD

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purposes of gaining or producing such income, except where the outgoings are of a capital, private or domestic nature, or relate to the gaining or producing of exempt income.

Where expenditure qualifies for a deduction, the deduction is generally allowable in full in the year the expenditure is incurred. However, special prepayment rules affect the timing of deductions for certain types of advance payments.

These prepayment rules potentially apply where a taxpayer incurs expenditure for something to be done, in whole or in part, in a later income year. Where these rules apply, the deduction for the expenditure is spread (or "apportioned") over the period covered by those services, up to a maximum of 10 years (the eligible service period).

The "eligible service period" generally begins on the day the thing under the agreement commences to be done, or on the day the expenditure is incurred, whichever is later. It continues until the end of the last day the thing under the agreement ceases to be done. The eligible service period is, however, always limited to 10 years.

For example: Eligible service period more than 12 months

On 1 November Year 1, a small business entity takes advantage of an early payment discount by paying $20,000 in advance for computer services over a three-year period from 1 December Year 1 to 30 November Year 4 (ie a period of 1,095 days, comprising 212 days in Year 1, 365 days in Year 2, 365 days in Year 3, and 153 days in Year 4). As the eligible service period is more than 12 months, the deduction for the $20,000 must be apportioned as follows:

In your case you purchased an Index Trading Subscription Service which will be available to you over the next five years. You are required to apportion your deductions in the same manner as the example above.

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