Eligible small business entities (including those with an aggregated turnover of less than $50 million for this specific concession) can legitimately manage taxable income by prepaying certain future business expenses before the end of the financial year. Paying for next year’s operational costs now may allow an eligible business to bring forward a tax deduction into the current financial year, reducing its immediate tax liability.
Before the end of the financial year (EOFY), eligible Australian small business entities can reduce their taxable income by prepaying certain business expenses that relate to a future period. One of the most common and effective EOFY tax planning strategies is to pay eligible operating expenses in advance, provided they meet the Australian Taxation Office (ATO) requirements. By bringing forward these deductible expenses, businesses can claim the tax deduction in the current financial year rather than the next, helping to reduce their immediate tax liability while also improving cash flow planning for the year ahead.
The Australian Taxation Office has strict rules about what is eligible for an immediate deduction and what is to be apportioned over the life of the expense. In addition, spending cash to get a tax deduction can actually hurt your working capital if not planned carefully. For the 2026/2027 financial year, executing this strategy safely requires a clear understanding of the ATO’s “12-month rule” and pristine visibility over your current cash flow. Here’s a breakdown of how prepayments work & what you can claim & can not claim.
Understanding the ATO's 12-Month Rule
The Plug-in Hybrid (PHEV) Exemption Cut-Off
For eligible small business entities, the key provision is the ATO prepaid expense concession, commonly known as the 12-month rule. Under this rule, an immediate deduction may be available where:
- The prepaid service or benefit will be provided over a period of 12 months or less; and
- The eligible service period ends before the end of the next income year.
In simple terms, if a business prepays an eligible expense before 30 June and receives the entire benefit in the next 12 months, the deduction can often be claimed immediately instead of being spread over several years.
The rule is pragmatic. It prevents businesses from having to apportion relatively short-term prepaid operating expenses while ensuring longer-term arrangements are recognised over the period they actually relate to. Determining whether a prepaid expense is eligible for an immediate deduction requires an ATO review of eligible service periods and deduction timing. This is why EOFY tax planning often involves specialist tax outsourcing services to review significant prepayment treatments before year-end.
A Practical Example
Take a consulting business that renews its professional indemnity insurance on 20 June 2027.
The annual premium is $6,000 and covers the period from 1 July 2027 to 30 June 2028. Because the coverage period is 12 months and ends before the end of the following income year, the business can generally claim the full deduction in the year the payment is made, subject to its particular circumstances.
Now consider another example.
A business prepays a three-year software agreement costing $9,000.
Although the payment occurs before 30 June, the benefit extends beyond 12 months. In this case, the immediate deduction concession does not apply. The expense must generally be apportioned across the relevant years rather than claimed upfront. This distinction is where many EOFY planning mistakes occur.
What You CAN Prepay (and Claim Immediately)
If your business is eligible for the immediate deduction concession and has excess cash reserves, prepaying certain operating expenses may help reduce taxable profit. Common eligible expenses include:
- Business Insurance Premiums: Any renewal of your public liability, professional indemnity, or commercial property insurance within 12 months before 30 June is fully deductible in the current year. (Note: Workers’ compensation premiums are also deductible, but check your state’s specific scheme rules regarding advance payments).
- Subscriptions and Software Licences: Annual subscriptions to industry bodies, professional memberships or cloud software such as Xero, Microsoft 365 or industry-specific CRM platforms are good candidates for prepayment.
- Commercial Rent: If your landlord issues an invoice for the next up to 12 months of rent, paying this before 30 June allows you to claim the deduction immediately.
- Interest on Business Loans: For a fixed rate commercial loan, you can prepay up to 12 months of interest. This requires coordination with your lender so that the payment is structured as prepaid interest and not a reduction in loan principal.
What You Cannot Prepay (or Must Apportion)
The ATO is highly vigilant about business owners attempting to classify capital purchases or balance sheet items as “prepaid expenses.” You can not claim an immediate deduction for the following under prepayment rules:
Expense Category | ATO Treatment |
Trading Stock (Inventory) | Buying bulk stock on 28 June does not immediately reduce your taxable profit. Inventory is an asset on your balance sheet. You only receive the deduction (as Cost of Goods Sold) when the stock is actually sold, or if it is written off. |
Capital Assets | Purchasing a company vehicle, heavy machinery, or office fit-outs are capital expenses (CAPEX). These do not fall under prepayment rules. They must be handled under the specific depreciation rules or the instant asset write-off thresholds applicable for the 26/27 tax year. |
Payments to Associates | You cannot prepay a salary or a “management fee” to a spouse, family member, or a connected trust simply to move money around. The ATO requires these transactions to be commercially justifiable, at arm’s length, and actually incurred. |
Services Extending Beyond 12 Months | If you pay for a three-year web hosting plan to secure a discount, you cannot claim the full cost immediately. You must apportion the deduction across the three separate financial years. |
These prepayment opportunities apply to construction and property businesses where insurance premiums, software subscriptions and financing are often major recurring operating expenses in construction accounting.
The Cash Flow Question
The biggest EOFY mistake is focusing only on the tax deduction and not considering the cash flow implications. Prepaying eligible expenses reduces taxable income but still leaves cash in the business. The tax deduction is nice but rarely covers the cost of the expenditure. The business still has to have enough cash available to pay for its day-to-day expenses once that payment is made.
Before prepaying any expense, business owners should consider whether enough working capital is left over for future commitments like payroll, supplier invoices, BAS liabilities, loan repayments and superannuation contributions. A deduction can help with a tax position, but not at the expense of how the business can operate in the months following. Best EOFY decisions balance both objectives: Reduced tax where necessary whilst maintaining cash flow to support ongoing operations.
Before prepaying big business expenses, owners need to know their profitability, upcoming liabilities and available working capital. Accurate management reporting delivered through accounting outsourcing supports those EOFY decisions with accurate financial data.
Why EOFY Planning Starts Before June
Many businesses only begin discussing EOFY tax planning in the final weeks of June. By that stage, some opportunities may already have been missed.
Most prepayment strategies are much more than making a payment before 30 June. There may be invoices that businesses need issued, financing reviewed, insurance renewed or discussions with advisers regarding the likely tax outcome. That leaves such decisions to the last days of the financial year, which may restrict choice and risk error.
The earlier start to EOFY planning means business owners can review potential deductions, expected profitability and whether a prepayment strategy suits the wider requirements. Businesses with unreconciled accounts or incomplete transaction data struggle to determine which prepayments are commercially and tax-effective, making outsourced bookkeeping services an important basis for year-end planning.
How Befree Supports EOFY Preparation
EOFY involves assessing profitability, upcoming tax liabilities, account reconciliation, management report finalisation, and information gathering for external accountants. Delaying these tasks until the last weeks of June often means business owners must make decisions with little information or in a hurry.
Befree supports Australian businesses with bookkeeping, reconciliations, management reporting, and accounting support throughout the year. We keep financial records current and month-end processes on track so businesses can enter EOFY with the information they need to assess opportunities, support discussions with tax advisers and meet reporting obligations without a last-minute scramble.
Final Thoughts
For eligible small business entities, prepaying business expenses can be a useful EOFY strategy, but it should never be viewed as an automatic tax-saving exercise. Successful approaches start with understanding the 12-month rule, knowing which expenses actually qualify and deciding whether the deduction makes up for the money leaving the business. Before making any significant EOFY prepayment, ensure the tax treatment is understood, the cash flow impact has been considered, and the expenditure aligns with the broader needs of the business.