ATO ID 2004/398: 'Excluded expenditure' under the prepayment rules and the impact of GST in determining whether an amount of expenditure is less than $1,000
Date of decision: 3 May 2004
Year of income: Year ended 30 June 2003
Business line: Indirect Tax

Issue
Can a taxpayer, who is registered for goods and services tax (GST), claim an immediate deduction for prepaid expenditure when:

Decision
Yes. A taxpayer can claim an immediate deduction as the GST exclusive amount of the expenditure is less than $1,000 and the prepayment rules exclude amounts of expenditure less than $1,000.

Facts
On 30 June 2003 a taxpayer that is registered for GST prepays expenditure for services to be provided by another registered entity over the period 1 July 2003 to 30 June 2004. The services to be provided are a taxable supply under section 9-5 of the A New Tax System (Goods and Services) Act 1999 (GST Act) and the taxpayer has acquired the services solely for a creditable purpose. The amount of the prepaid expenditure is $1,045, which includes GST of $95. The taxpayer's prepaid expenditure is a loss or outgoing deductible under subsection 8-1(1) of the ITAA 1997.

Reasons for decision
Summary: Prepaid expenditure that is deductible under section 8-1 of the ITAA 1997 is subject to the prepayment rules contained in Subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). The prepayment rules do not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include an amount of expenditure less than $1,000. Section 27-5 of the ITAA 1997 provides that a taxpayer cannot deduct, under the ITAA 1997, a loss or outgoing it incurs to the extent that the loss or outgoing includes an amount relating to an input tax credit to which it is entitled. Section 27-5 reflects the principle outlined in section 27-1 of the ITAA 1997 that, generally speaking, input tax credits, GST and adjustments under the GST Act are disregarded in working out deductions. In order to determine whether the taxpayer is entitled to an input tax credit for the loss or outgoing, consideration must be given to the GST Act. Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisition that it makes. Under section 11-5 of the GST Act, an entity makes a creditable acquisition if all of the following requirements are met: In this instance, the taxpayer has acquired the services solely for a creditable purpose, the supply to the taxpayer is a taxable supply and it is registered for GST. By making the prepayment of $1,045, the taxpayer has also provided consideration for the supply. As all of the requirements have been met, the taxpayer is making a creditable acquisition under section 11-5 of the GST Act and is entitled to an input tax credit for the acquisition. The amount of the input tax credit equals the GST component of the loss or outgoing, that is $95. As the taxpayer is entitled to an input tax credit section 27-5 of the ITAA 1997 applies so that the taxpayer can only claim the GST exclusive amount as a deduction under section 8-1 of the ITAA 1997. Accordingly, the deduction allowable to the taxpayer under section 8-1 of the ITAA 1997 for the prepaid expenditure will be reduced by the input tax credit of $95. As the resulting deduction of $950 is less than $1,000 it is 'excluded expenditure' and the prepayment rules do not apply. The GST exclusive amount of $950 is therefore deductible on 30 June 2003.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 section 11-5 section 11-20
Related ATO interpretative decisions: ATO ID 2001/555
Subject references: Adjustments Advance expenses & payments Creditable purpose Deductions & expenses Goods and services tax GST net amounts & adjustments GST supplies & acquisitions Income tax