Private ruling: Prepaid expense
Date of advice: 24 February 2016
Published: April 2016
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Do the prepayment rules allow for an apportionment other than on a time basis when the eligible service period ends after 30 June? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1936 Subdivision H, Division 3, Part III.

Reasons for decision: Summary: Subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the timing of deductions for certain advance expenditure incurred. The rules set out in section 82KZL to 82KZO of the ITAA 1936 potentially apply where an entity incurs expenditure for something to be done - in whole or in part - in a later income year. Where these rules apply, the deduction is spread or apportioned over the period covered by those services, up to a maximum of 10 years. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 and includes amounts of less than $1,000. In this case, the fee is not 'excluded expenditure' as defined in subsection 82KZL(1) of the ITAA 1936. Entity A carries on a business and has incurred deductible expenditure. Entity A is not a small business entity. The fees are incurred in return for the doing of a thing under the agreement that is not to be wholly done within the expenditure year. The rights granted under the licence will continue to be granted to entity A beyond 30 June. As a result, the portion of the fee that is deductible in each year of income that contains all or part of the 'eligible service period' (as defined in subsection 82KZL(1) of the ITAA 1936) is calculated using the formula contained in subsection 82KZMD(2) of the ITAA 1936. That is, the allowable deduction is calculated on a pro rata daily basis. Your special circumstances are acknowledged, however the legislation does not provide an alternative calculation when entity A uses most of their entitlement by 30 June.

Relevant facts: Entity A carries on a business which requires the holding of licences. | Entity A leases licenses and pays a fee. | Each licence entitles entity A given rights during a 12 month period. | Sometimes the business uses most of their entitlement by 30 June. | The expenditure is over $1,000 and is not excluded expenditure as defined in section 82KZL of the Income Tax Assessment Act 1936.