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Small business entities

Last updated 27 May 2020

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.

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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.
  • 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 and 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.

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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 2018–19 income years
  • are a small business entity for the 2019–20 income year.

If you meet these 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 have been incurred and 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 2020, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2020 and ending on 30 June 2021.

The prepayment satisfies the 12-month rule as the eligible service period for the expenditure:

  • does not exceed 12 months
  • ends on or before the last day of the income year following the year in which the expenditure was incurred.

The Jacobs Trust can therefore choose to claim an immediate deduction of $24,000 in the 2019–20 income year.

End of example

Calculating 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:

A × (B ÷ C)

Where:

A is expenditure

B is the number of days of eligible service period in the income year

C is the 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 2020, it paid $15,000 for business advertising to cover the period 1 June 2020 to 30 June 2021 (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:

2019–20 (1 June 2020 to 30 June 2020)

$15,000 × (30 ÷ 395) = $1,139

2020–21 (1 July 2020 to 30 June 2021)

$15,000 × (365 ÷ 395) = $13,861

The total deduction allowed proportionately over 2019–20 and 2020–21 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 2020 – 14 July 2021 (365 days), providing payment was made by 30 June 2020. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2020.

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:

2019–20

Nil. No part of the eligible service period occurred in this income year although expenditure for the service period occurred in this income year.

2020–21 (15 July 2020 to 30 June 2021)

$10,200 × (351 ÷ 365) = $9,809

2021–22 (1 July 2021 to 14 July 2021)

$10,200 × (14 ÷ 365) = $391

The total deduction allowed proportionately over 2020–21 and 2021–22 will be $10,200.

End of example

See also:

QC62041