A prepaid expense is expenditure you incur for things to be done in a later income year, for example lease payments.

Generally, a prepaid expense is deductible over the ‘eligible service period’, which cannot exceed 10 years. However, a prepaid expense may be immediately deductible in the year that it’s paid if the 12-month rule applies, or if it’s excluded expenditure.

The 12-month rule is available to small businesses with an aggregated turnover of less than $10 million.