Claiming Deductions for Expenses Not Paid At Year End

• Small businesses that entered the STS prior to 1 July 2005 and who have not opted out of the cash accounting rules, can only claim a deduction for expenses when they are paid. Therefore to claim an immediate deduction the business should pay for the expenses by 30 June 2007
• Non STS small businesses and small businesses that entered the STS from 1 July 2005 (including those who have opted out of the cash accounting rules) are entitled to an immediate deduction for certain expenses that have been “incurred” but not been paid by 30 June 2007 including:
  • Salary and Wages. A tax deduction can be claimed for the number of days that employees have worked but have not been paid until after 30 June 2007.
  • Directors Fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 2007 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2008 year when the amount is actually received.
  • Staff Bonuses and Commissions. Like directors fees a company can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2007 where it is “definitely committed” to the expense.
  • Repairs and Maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2007 but not paid until the new income year.

Writing Off Bad Debts

Where both STS and non STS small businesses account for income on a non-cash basis and have previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2006/07 so long as the debt is declared bad by 30 June 2007.

The business will need to show that it has made a genuine attempt to recover the debt by year end to prove that the debt is bad. Its important that this decision is made in writing (e.g. a board minute).

Note the business can claim back the GST paid on debts that have been written off as bad.

Prepayment of Expenses

• STS small businesses can claim an immediate and without limit deduction for prepayments that extend into the 2008 income year provided that the eligible service period does not exceed 12 months and ends no later than 30 June 2008. Subject to cash flow requirements, the most common expenses that an STS small business should consider prepaying by 30 June 2007 include lease payments, rent, business travel, insurances, business subscriptions, etc. Note that an immediate deduction for prepayments is not allowed simply where the STS small business makes a voluntary payment and there is no option or requirement under the contract for the payment to be made.
• Non STS small businesses may be able to claim a deduction for certain prepayments that are: 
  1. less than $1,000 GST exclusive; or
  2. incurred under a law of the Commonwealth, State, or Territory. Common examples are motor vehicle registration and compulsory third party insurance and Workcover premiums and statutory licences. Note the ATO require not only for there to be a legal requirement to pay the expenditure in advance, but also that the expenditure is required to be paid in advance; or
  3. paid under a contract of service (e.g. prepayments of salary and wages, bonuses and commissions).