Who can claim
This deduction is available to individuals and companies.
- The underlying expense is deductible and the payment is for services to be provided over an eligible service period extending beyond the current income year.
- The 12-month rule can apply to an eligible small or medium business, or to an individual incurring deductible non-business expenditure, where the service period is no longer than 12 months and ends by the end of the following income year.
What you cannot claim
- A payment for a completed service is not a prepaid expense.
- Amounts specifically excluded from the prepayment rules, tax-shelter arrangements and expenditure subject to another timing provision require their own treatment.
- A service period longer than 12 months, or one ending after the following income year, does not satisfy the 12-month rule.
How the amount is worked out
If the 12-month rule applies, claim the otherwise deductible prepaid expense in the payment year. Otherwise, spread the deduction across the service period under the applicable statutory formula, subject to the exclusions and any applicable cap.
Records the ATO expects
- Agreement
- Invoice
- Payment record
- Service-period start and end dates
- Aggregated-turnover and taxpayer-eligibility evidence
- Apportionment schedule
Before you rely on this rule
Taxpayer eligibility, the exact service period and the prepayment exceptions determine when the deduction is available.
Where this rule comes from
Primary source: Income Tax Assessment Act 1936 section 82KZM (Section 82KZM). Reviewed 30 July 2026. Covers the 2025-26 and 2026-27 income years.
Supporting sources:
- ATO prepaid expenses rules (Deductions for prepaid expenses 2022)