Prepayment expenses can be complicated part of accounting & bookkeeping. Prepayment is an important area to know whether or not you can claim tax deduction or if you have already did some prepayment and not sure if you can claim it under s. 8-1 ITAA 1997 as tax deduction.
Prepayment can be claimed if you incur an eligible prepaid expense for something to be obtained over a service period of
- 12 months or less, and
- The service period ends in the income year following the year you incur the expense.
You can claim the expense straight away
Example for Immediate Deductible Expense
A company makes a prepayment of $19,000 on 1st March 2016 for a service from 1st April, 2016 to 31st January, 2017 this satisfies the 12 month rule as it runs for less than 12 months and finishes in the next financial year, therefore the entire cost can be expensed immediately.
Item Not Received until Next Tax Year
If there is no part of the goods or services received until the next tax year be sure to advise the tax agent to consider whether it is still a deductible item for tax in this year. Typically if the item is not received or no part of the service is provided until the following year it may not be deductible for tax in the year of payment.
Goods or Service Received Over More Than One Year
If the 12 month rule is not met you must treat it as a prepayment, for tax, and apportion the payment over the period of the service/goods for up to 10 years
Other Example for Prepayment
A company makes a prepayment of $200,000 on 1st June, 2016 for goods to be delivered in monthly batches from 1st August, 2016 to 30th July, 2017. This does not satisfy the 12 month rule as it runs for more than 12 months and covers 2 financial years. The payment will have to be apportioned out to relate to the relevant financial year.
Where the prepayment rules apply, the s. 8-1 deduction is spread over the period to which the expenditure relates (called the ‘qualified administration period’) utilizing a day by day division premise. The qualified administration time frame is topped at 10 years if the prepayment identifies with a more drawn out period. For business consumption, the recipe in s. 82 KZMD ITAA 1936 for ascertaining the reasoning is
Expenditure × Number of days of eligible service period in the year of income
Total number of days of eligible service period
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