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Saturday, 9 June 2012

Prepayment of deductible expenses

  1. Special prepayment rules apply to certain types of advance payments made by businesses and individuals that relate to something to be done, or services to be provided, in one or more subsequent years.
  2. Generally, a prepaid expense is deductible over the eligible service period, or ten years if that is less, rather than being immediately deductible. However, certain prepaid expenses may be immediately deductible under the prepaid rules if:
    • The expenditure is considered to be excluded prepaid expenditure; or
    • The expenditure comes within the 12-month rule where the entity is a small business or an individual incurring deductible non-business expenditure.
  3. Large businesses and small businesses and individuals that do not satisfy the prepayment rules are required to apportion the expenditure.
  4. In addition, specific deductible expenditure can be claimed immediately if they fall within a specific part of the tax law, such as:
    • Expenses incurred in managing your tax affairs;
    • Expenses incurred for repairs on a property used to produce assessable income;
    • Expenses incurred in preparing, registering or stamping a lease property;
    • Making payments of pensions or retiring allowances to employees or past employees; and
    • Payment of rates and land taxes on income producing property.
  5. To be able to claim an immediate tax deduction, the expenditure must be an existing liability and there must be a commercial advantage to the taxpayer.

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