Prepaying expenses before tax time

It may be possible for small business owners to prepay certain expenses before the new tax year begins on 1 April. 

Prepaying expenses can be an opportunity to reduce your tax bill for the current year. 

When, and when not, to prepay

Although making a prepayment means cash leaves the business in the short term, if the expense relates to the next financial year it could save you money at tax time. 

According to Stuart Ruddell, Director of JBM & Associates Limited, the expenses best suited to being paid before the financial year ends include insurance and rent. 

“For most clients, I’d recommend looking at their insurance and requesting to pay six months’ worth at once, and also ask for a discount,” he says. “Consumables, such as stationery or small, non-stock items, and assets that are under $1,000 are also a good idea. 

“If you need to upgrade a phone, for example, and find one for under $1,000, then go for it. If there’s minor equipment you need to buy, that’s another good option.” 

The farming and agricultural industry is a good example of the type of industry where prepayments can come in handy, says Stuart. 

And making sure you secure an invoice in advance can be especially helpful. 

“If you have any upcoming repair commitments on a vehicle, for instance, clients to source a supplier who will give you good terms,” he says. “Then request an invoice. 

“If you start those repairs before the new tax year begins and claim those repairs this financial year, that can save you hundreds of dollars at tax time.” 

Don’t forget good financial management 

This example assumes that cash flow isn’t currently a concern for your business, explains Stuart. He recommends considering the potential impacts on your business’s cash flow before launching into prepaying expenses. 

“It won’t perfectly fit every business,” he says. “It really depends on your individual circumstances. Generally, there are a lot of outgoing payments coming up to tax time, so you might want to consider if you have enough money in reserve. 

Staying on top of cash flow and working capital is part of good financial planning and management. 

“Any business owner considering prepaying expenses should meet with their accountant and talk about your tax and financial goals, so you can build an accurate picture of your business going into the new financial year,” says Stuart. 

Other examples of expenses that can be prepaid include: 

• Rent and land 
• Travel and accommodation 
• Bad debts 
• Advertising 
• Phone expenses 

It’s worth checking with an accountant whether these apply to your business. 

Stuart’s top takeaways for prepaying expenses

• Do your research. “The number one thing is not to jump into it. Prepaying expenses still means you have to pay tax – because you just bring the expense forward. So make sure it makes sense commercially for your business before you start prepaying.”
• Be tax-conscious. “Some clients pay tax based on estimated provisional tax or wait for their accountant to tell them how much to pay. We try to get our clients in the mindset that every dollar they earn accrues tax, and to set aside the money accordingly.”
• Talk to an adviser. “Talk to your accountant to make sure that it will be a tax-deductible expense because everyone’s situation is different. For example, sometimes an insurance prepayment won’t be possible to claim. And make sure your accountant doesn’t charge you for talking to them – it should be a free service.”

If you would like to understand these tips better or are unsure about how they might apply to you, reach out to a qualified tax adviser.

Article updated on 31 Jan 2024