Deductible expenses owing as at 30 June 2015

Please bear in mind that most deductible expenses do not necessarily have to be paid by 30th of June 2015 in order to be deductible in the 2015 year. The general section of the tax law which allows tax deductions states that an expense must be ‘incurred’ in order to be deductible. It does not use the word ‘paid‘. The word ‘incurred’ is not defined in the tax legislation but in cases before the courts it has generally been held that an expense is incurred when the debt arises and definitely must be paid. For example, if medical supplies are purchased and invoiced in June 2015 but not paid for until July, the expense would normally be deductible in the 2015 year. Therefore, it is a good idea to record expenses owing on 30th of June which were paid after this date. Clients using Xero software, which we highly recommend, can simply scan and upload outstanding 30 June invoices to their Xero file.

Interestingly, an SBE is eligible for a tax deduction on expenses it incurs by 30 June, but only pays tax on its income on a receipts basis. Effectively, this means that the practice gets a tax deduction for its creditors but does not have to pay tax on its debtors. Furthermore, in the case of a practice that is not an SBE (turnover in excess of $2 million), the cash basis for recording income might still be acceptable. This is particularly the case with a ‘personal services business’ practice where the income is primarily derived from the labour and skill of the principal practitioner.

For further reading, see Taxation Ruling TR97/7:http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR977/NAT/ATO/00001