Prepaying Expenses Before 30 June: The 12-Month Rule Explained

Every May, business owners ask us the same question: "What can I prepay before 30 June?"

For many small businesses, the answer is: more than you'd think. Annual software subscriptions, insurance premiums, rent, professional memberships, even some interest. If you're eligible and get the dates right, the deduction can come into this year rather than next.

This guide is written by BPAG Accountants and is based on the ATO's prepaid expenses guidance for 2026. It's general information. Check with your tax agent before you prepay anything significant.

What counts as a prepaid expense?

A prepaid expense is an amount you pay in one income year for something you'll receive, at least partly, in a later year. The classic examples:

• A 12-month software subscription paid in June.
• An annual insurance premium.
• Rent paid in advance.
• Annual professional or industry memberships.
• Interest paid in advance on a business loan.

If the service is fully delivered in the same income year, it isn't a prepayment for these rules. The ATO's example is a A$1,500 journal subscription for 1 July 2025 to 30 June 2026: it's simply deductible in 2025–26.

The 12-month rule

The ATO says eligible taxpayers can claim an immediate deduction for prepaid expenditure if:

1. the eligible service period is 12 months or less, and
2. that period ends in the next income year (that is, by 30 June of next year, for a standard balance date).

If the rule doesn't apply, the deduction is generally spread over the eligible service period (or 10 years, if less).

Who can use it

According to the ATO's 2026 guidance, the 12-month rule is available to:

• Small business entities.
• Entities that would be small business entities if the aggregated turnover threshold were A$50 million. In practice, that's most businesses with aggregated turnover under A$50 million.
• Individuals with deductible non-business expenditure (for example, prepaid interest on an investment loan).

Prepayments under certain tax shelter arrangements (some managed investment schemes) can't use the rule.

What's excluded from the prepayment rules entirely

Some amounts are excluded expenditure, which means they're deductible when incurred, whatever the service period. The ATO lists:

• Amounts under A$1,000, measured excluding any GST input tax credits you can claim.
• Amounts you're required to pay by law or a court order, such as vehicle registration. The ATO's example is a A$1,200 truck registration.
• Salary or wages under a contract of service.
• Capital, private or domestic amounts (these aren't deductible under the general rules anyway, apart from some R&D amounts).

The A$1,000 test uses the GST-exclusive amount if you're registered. The ATO's example: a payment of A$1,045 including A$95 GST is A$950 after the credit, so it's under A$1,000 and deductible when incurred.

Worked examples

Assume a business with a 30 June year end and aggregated turnover of A$4 million, so it's eligible for the 12-month rule.

The rent example fails twice: it's longer than 12 months and it doesn't end by 30 June 2027. That's the most common mistake we see: a prepayment that runs "just a bit" past the next year.

GST on prepaid expenses

GST credits are separate from income tax deductions. If you're registered for GST, you can generally claim the full GST credit on a prepaid annual invoice in the BAS period it's attributed to (when you're invoiced or pay, depending on your GST method), as long as you hold a valid tax invoice. It isn't spread like the deduction might be.

Is prepaying actually worth it?

A deduction is worth your tax rate, not the full amount. If your company pays 25% tax, prepaying A$10,000 of expenses saves about A$2,500 of tax this year. It doesn't create money. It moves the deduction forward, and you've spent A$10,000 of cash earlier than you had to.

Prepaying makes sense when:

• You were going to buy it anyway.
• You have the cash and won't need it in the next few months.
• Your tax rate this year is likely to be higher than next year, so the deduction is worth more now.
• The supplier gives you a discount for paying annually.

It doesn't make sense when it leaves you short of cash for wages, BAS and super in July and August. Annual plans you sell your own customers can create a similar timing gap on the income side: see subscriptions and cash flow.

Software subscriptions: the common questions

Is a SaaS subscription a capital expense? Generally, a subscription to use software you don't own (like Xero, Microsoft 365 or a CRM) is a revenue expense for the right to use it, deductible under the general rules. Buying or building software you own can be capital, with different treatment. If you're paying a large upfront fee for a custom build, get advice.

What about a multi-year plan? A two- or three-year plan paid upfront fails the 12-month rule. The deduction is spread over the service period.

Monthly plans? No issue. Each month is deducted as it's incurred.

End of financial year checklist

1. Confirm you're eligible for the 12-month rule (aggregated turnover under A$50 million, or an individual for non-business expenses).
2. List what you'd buy in the next 12 months anyway.
3. Check each service period: 12 months or less, ending by 30 June next year.
4. Get an invoice showing the service period. An invoice alone doesn't create a deduction: the expense must be incurred by 30 June.
5. Make sure the payment actually leaves your account before 30 June, or the expense is properly incurred.
6. Keep enough cash for July: BAS, super, wages and tax instalments.
7. Ask your tax agent to confirm before you commit anything large.

Free Subscription Profit Review

Australian business owners can book a free 30-minute review with a BPAG Accountants adviser. An honest conversation about:

• whether a subscription model could work for your business
• how recurring revenue could cover your fixed costs each month
• how it could lift what your business is worth

Book my free review Call 1300 272 422

No cost, no obligation. General information only until we understand your situation.

Frequently asked questions

Written by BPAG Accountants

This guide was written by the tax team at BPAG Accountants, a Sydney accounting firm that helps Australian business owners with tax, structuring, cash flow and business advice. Reviewed by Robert Coorey, a Director at BPAG and author of The Subscription Playbook. Talk to BPAG on 1300 272 422 or at bpag.net.au.