Are you a small business entity?
You are a small business entity if you are an individual, partnership, company or trust that:
- is carrying on a business
- has an aggregated turnover of less than $10 million.
Aggregated turnover is your annual turnover plus the annual turnovers of any businesses you are connected with or have influence over. The aggregation rules determine when you need to include the annual turnover of another business when calculating your aggregated turnover.
You are a small business entity if you are not linked with any other business and your business turnover is less than $10 million.
See also:
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. For more information, see Investments in tax shelter arrangements.
- Prepaid expenditure incurred by a small business entity 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.
Note: This rule, known as the 12-month rule, applies to both deductible business expenditure and deductible non-business expenditure incurred by a small business entity that chooses to use this concession.
- If a prepayment does not meet the 12-month rule, you cannot claim an immediate deduction. Small business entities must apportion the deduction over the eligible service period or 10 years, whichever is less.
Small business entities still using the simplified tax system (STS) accounting method
You may continue using the STS accounting method if you:
- were an STS taxpayer and used it until the end of the 2006–07 income year
- used the STS accounting method for the 2007–08 to 2016–17 income years
- are a small business entity for the 2017–18 income year.
If you meet these three requirements, you can continue using the STS accounting method until you choose not to, or are no longer a small business entity.
If you are a small business entity using the STS accounting method, the expense must not only have been incurred, it must also have been paid before a deduction can be claimed.
Calculating your deduction if the 12-month rule is satisfied
Example: Prepaid expense that is immediately deductible
The Jacobs Trust is a small business entity. On 1 June 2018, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2018 and ending on 30 June 2019.
As the eligible service period for the expenditure does not exceed 12 months and ends on or before the last day of the income year following the year in which the expenditure was incurred, the prepayment satisfies the 12-month rule. The Jacobs Trust can therefore choose to claim an immediate deduction of $24,000 in the 2017–18 income year.
End of exampleCalculating your deduction if the 12-month rule is not satisfied
If you make a prepayment that does not satisfy the 12-month rule, you cannot claim an immediate deduction. As a small business entity, you must apportion the deduction over the eligible service period or 10 years, whichever is less, using the following formula:
Expenditure
× number of days of eligible service period in the income year
÷ total number of days of eligible service period
Example: Prepaid expense where eligible service period is greater than 12 months
Tom Pty Ltd is a small business entity. On 31 May 2018, it paid $15,000 for business advertising to cover the period 1 June 2018 to 30 June 2019 (395 days). Because the eligible service period is longer than 12 months, the prepayment does not satisfy the 12-month rule. Tom Pty Ltd cannot claim an immediate deduction for the prepayment. Instead, the deduction for the expenditure must be apportioned over the eligible service period as follows:
2017–18 (1 June 2018 to 30 June 2018)
$15,000 × 30 ÷ 395 = $1,139
2018–19 (1 July 2018 to 30 June 2019)
$15,000 × 365 ÷ 395 = $13,861
The total deduction allowed proportionately over 2017–18 and 2018–19 will be $15,000.
End of example
Example: Prepaid expense where the eligible service period is 12 months or less but ends after the last day of the next income year
Noel Pty Ltd, a small business entity, was offered a 15% discount on advertising to cover the period 15 July 2018 to 14 July 2019 (365 days) providing payment was made by 30 June 2018. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2018.
Although the eligible service period is for a period of 12 months or less, the 12-month rule has not been satisfied. This is because the eligible service period does not end on or before the last day of the income year following the one in which the expenditure was incurred. The deduction for the expenditure must be apportioned over the eligible service period as follows:
2017–18
Nil. No part of the eligible service period occurred in this income year although expenditure for the service period occurred in this income year.
2018–19 (15 July 2018 to 30 June 2019)
$10,200 × 351 ÷ 365 = $9,809
2019–20 (1 July 2019 to 14 July 2019)
$10,200 × 14 ÷ 365 = $391
The total deduction allowed proportionately over 2018–19 and 2019–20 will be $10,200.
End of exampleSee also: