Tax treatment of prepaid deductible expenses

Special prepayment rules apply to certain types of prepaid expenses made by businesses and individuals that relate to something to be done in one or more subsequent years.

 

Generally, a prepaid expense that occurs within the same year is not considered a prepaid expense and therefore the prepayments rules do not apply. Prepayments that relate to more than one period may be subject to the prepayment rules unless the payment falls under the excluded categories.

 

A prepaid expense subject to the prepayment rules 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 prepayment rules if:

• The expenditure is considered to be excluded prepaid expenditure;
• The 12-month rule applies; or
• It is related to a pre-Review of Business Taxation (RBT) obligation.

Large businesses, small business entities and individuals that do not meet any of the exceptions to the prepayment rules are required to apportion the expenditure.

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