It depends. For a business that returns income on an accruals (earnings) basis, money paid in advance for services you haven't yet provided may not be derived as income until you earn it, under the principle from the High Court's Arthur Murray case. The ATO's view (TR 2014/1) is that deferral relies on the amount still being subject to a contingency of repayment. If there's no such contingency, it's derived when you have a recoverable debt or receive it. Cash-basis taxpayers generally return income when received. GST follows separate timing rules.
Key takeaways
- Income tax and GST have different timing rules. An upfront annual plan can mean GST is due now even if some of the income is taxed later.
- Under the Arthur Murray principle, fees received in advance for services not yet provided may not be derived until earned, for accruals-basis taxpayers.
- The ATO says deferral depends on a real contingency of repayment. A strict "non-refundable once paid" structure can weaken the case for deferral.
- Cash-basis taxpayers generally return income when it's received. Don't assume you can defer without advice.
- Keep a schedule of unearned income at 30 June, linked to each customer's contract and service period.
A lot of Australian businesses are moving customers to annual plans. Gyms sell 12-month memberships. Clinics sell prepaid packs. Accountants and agencies take retainers in advance. Software companies offer two months free for paying yearly.
It's good for cash flow. It also raises a question we get from clients every June: do we pay tax on all of that money now?
This guide sets out how the rules work, as at October 2026. It's written by the tax team at BPAG Accountants. It's general information, and prepaid income is an area where the answer turns on your contracts and facts, so please get advice before you rely on deferring anything.
Why this matters for subscription businesses
Imagine a fitness studio that runs an annual membership sale in May and June. Members pay A$1,188 each upfront. If 100 members sign up, that's A$118,800 in the bank by 30 June.
If all of that is taxable in the year it's received, the studio could have a large tax bill on money it still has to earn by delivering 12 months of classes. If it's taxable as the classes are delivered, most of it falls into next year.
That difference can be tens of thousands of dollars of tax a year earlier. So it's worth getting right, and worth getting right conservatively.
The starting point: when is income "derived"?
Under section 6-5 of the Income Tax Assessment Act 1997, your assessable income includes ordinary income you derive during the income year. The legislation doesn't define "derived". The courts and the ATO work it out by looking at the nature of the income and the taxpayer's circumstances.
There are two broad methods:
- Cash (receipts) basis. Income is generally derived when you receive it. The ATO's ruling TR 98/1 says this can be appropriate for some taxpayers, such as individuals earning income from personal services without much in the way of business structure.
- Accruals (earnings) basis. Income is generally derived when it's earned, typically when you've done the work and have a recoverable debt. Most businesses with employees, premises and a business structure use this method.
Which method is appropriate for you isn't simply a choice. It depends on what gives "a substantially correct reflex" of your income, as TR 98/1 puts it, so talk to your tax agent if you're unsure which applies.
The Arthur Murray principle
The leading case is Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, a High Court decision about a dance studio.
Students paid for courses of lessons in advance. The studio hadn't given the lessons yet. The High Court held that the fees weren't income derived when they were received. They were derived as the lessons were given, because until then the studio still had to perform, and the money could, in substance, have to be given back.
That's the Arthur Murray principle: for an accruals-basis taxpayer, amounts received in advance for services you haven't yet provided may not be assessable until you earn them.
It's the reason a gym, clinic or software business can sometimes treat part of an upfront annual payment as unearned income at 30 June, and return it in the following year when the service is delivered.
The ATO's view: it turns on a "contingency of repayment"
The ATO's clearest modern statement is TR 2014/1, a ruling about when software developers derive income from licences, hosted services and support. Although written for software developers, it applies general principles from Arthur Murray and is the best guide to the ATO's approach to prepaid recurring services.
In summary, the ruling says:
- Where an amount for a contractual obligation is subject to a contingency of repayment, it's derived once you perform the obligation or the contingency lapses.
- Where no relevant contingency exists, the amount is derived when a recoverable debt arises for the fee.
- Accounting treatment doesn't decide the question. The ruling quotes Arthur Murray: commercial and accountancy practice can't be substituted for the legal test.
So the real question is: if you didn't deliver the rest of the service, would you have to give the money back?
What can create a contingency of repayment
- Your own terms. A refund clause for unused months, or a right for the customer to cancel and receive a pro-rata refund.
- Your actual practice. Regularly refunding unused periods on request, even if the terms are silent.
- Contractual exposure to damages for not performing the service.
What can weaken it
- Terms that say the fee is non-refundable in all circumstances and is earned on sign-up.
- Fees for something you deliver up front, such as a joining fee, an assessment or a setup service.
- Fees where you have nothing more to do, such as a licence that's fully delivered on day one.
- Consumer law alone isn't enough. The ATO's view (TR 2014/1, paragraph 10) is that potential exposure to damages under consumer protection law or in tort does not create a contingency of repayment.
Joining fees and setup fees are a common trap. Even if your membership fees are deferred, a separate A$99 joining fee for a service you complete in week one is probably derived then.
A worked example (illustrative)
A studio returns income on an accruals basis and is registered for GST on a non-cash basis. Its year ends on 30 June 2026.
On 15 May 2026, a member pays A$1,188 (GST-inclusive) for 12 months of classes starting that day. The terms allow a pro-rata refund of unused months if the studio can't provide the classes or the member cancels for a reason set out in the terms.
| Item | Amount |
|---|---|
| Payment received 15 May 2026 | A$1,188.00 |
| GST included (1/11) | A$108.00 |
| Ex-GST fee | A$1,080.00 |
| Earned to 30 June 2026 (1.5 of 12 months) | A$135.00 |
| Unearned at 30 June 2026 | A$945.00 |
GST. Because the studio received payment in the May–June BAS period, the A$108 of GST is generally reported then, on either the cash or non-cash GST basis. GST doesn't wait for the service to be delivered. See our guide to GST on subscriptions.
Income tax. If the Arthur Murray principle applies on these facts, the studio would return about A$135 in 2025–26 and A$945 in 2026–27. If it doesn't apply, for example because the fee is genuinely non-refundable and the studio has no further obligation that could require repayment, it would return the full A$1,080 in 2025–26.
The same logic applies at scale. One hundred of those memberships is the difference between returning A$13,500 and A$108,000 in the first year.
Cash-basis taxpayers
If you return income on a cash basis, the starting point is that you derive income when you receive it. A sole practitioner who's appropriately on a receipts basis and receives a year's fees in June should generally expect them to be assessable that year.
Don't switch methods to suit a single year. If your business has grown to the point where a cash basis may no longer be appropriate, that's a conversation to have with your tax agent, because the change can have its own consequences.
Accounting vs tax: they can differ
For your financial statements, AASB 15 generally requires you to recognise subscription revenue as you satisfy your performance obligations, so a prepaid annual plan sits as a contract liability (often called deferred or unearned revenue) and is released each month. Our guide to revenue recognition for subscriptions covers that.
The tax answer often lines up with the accounting answer for a genuine prepaid service. But TR 2014/1 is explicit that the accounting treatment doesn't decide the tax question. You need to check the tax test separately, especially for setup fees, non-refundable fees and bundled licences.
For how to record it in your books, see annual subscriptions and deferred revenue in Xero.
Selling annual plans before 30 June?
Talk to a BPAG adviser about the cash flow and tax timing before you launch the campaign, not after.
Common situations
Annual memberships and prepaid packs
Usually the strongest case for deferral, if the terms or law give the member a right to a refund for services not provided. Class packs and session bundles can be similar. Check what happens to unused sessions at expiry, because expiry can end the contingency.
Retainers paid in advance
If a client pays a monthly or quarterly retainer in advance for work you haven't yet done, the same principle can apply. If the retainer buys availability rather than specific work, and isn't refundable, the analysis may be different. Our retainer agreement guide covers the terms to think about.
Software and SaaS
TR 2014/1 goes into detail on software licences, hosted access, updates and support, and on splitting a bundled fee between obligations. If you sell software, read the ruling or get advice on your specific contract structure.
Gift cards and vouchers
Vouchers have their own GST rules, and unredeemed balances (breakage) raise both GST and income questions. See GST on gift cards, vouchers and memberships.
What we recommend
- Read your terms. What do they say about refunds, cancellation and unused periods? Does your practice match?
- Separate the fees. Joining, setup and onboarding fees should be identified separately from the recurring service.
- Keep a 30 June schedule. For each prepaid customer, record the amount, service period, months delivered and months unearned. Your billing system can usually export this.
- Be consistent. Apply the same treatment each year, and don't defer in a year you want to and recognise in a year you don't.
- Don't forget GST. Set aside one-eleventh of every upfront payment for the BAS, whatever happens with income tax.
- Get advice before a big June campaign. The tax result can change how much cash you need to hold back.
The bottom line
Prepaid income isn't automatically taxable on receipt, and it isn't automatically deferred either. For accruals-basis businesses with a genuine obligation to deliver the service, and a real chance of having to refund it if they don't, the Arthur Murray principle may allow you to return the income as you earn it. Where fees are earned upfront or are genuinely non-refundable, expect them to be taxed when received.
When the amounts are large, the conservative approach is to document your position, apply it consistently and have your tax agent sign off on it.
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- 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
No cost, no obligation. General information only until we understand your situation.
Frequently asked questions
Is money received in advance taxable in Australia?
Sometimes, but not always in the year you receive it. For businesses that return income on an accruals basis, fees received in advance for services not yet provided may not be derived until they're earned, under the Arthur Murray principle. The ATO's view in TR 2014/1 is that this depends on the amount being subject to a contingency of repayment. Cash-basis taxpayers generally return income when received.
What is the Arthur Murray principle?
It comes from the 1965 High Court case Arthur Murray (NSW) Pty Ltd v FCT. A dance studio received fees in advance for lessons it hadn't yet given. The Court held the fees weren't derived when received, but as the lessons were given. It's the basis for treating some prepaid income as unearned at year end.
Does a no-refunds policy change the tax treatment?
It can. The ATO says deferral relies on a contingency of repayment. If your fee is genuinely non-refundable and earned on sign-up, the case for deferring it is weaker. Note that a no-refunds statement can also be misleading under the Australian Consumer Law, because consumers have rights that can't be excluded. Get advice on both sides.
Is GST on an annual plan also deferred?
No. GST has its own timing rules. On either the cash or non-cash GST basis, GST on an upfront annual payment is generally reported in the BAS period you receive the payment (or issue the invoice, on a non-cash basis, if earlier). Set aside one-eleventh of every upfront payment.
Are joining fees and setup fees deferred too?
Usually not, if they pay for something you deliver at the start, such as onboarding, an assessment or account setup. Identify these fees separately from the recurring service and get advice on how they're treated for your business.
Important: This is general information only, current as at 29 October 2026. It is not tax, legal or financial advice and doesn't take into account your objectives, financial situation or needs. Tax law is complex and changes often, and the right answer depends on your facts. Before acting, get advice from a registered tax agent. BPAG Accountants can help: bpag.net.au or 1300 272 422. Where we quote thresholds and rates, check the linked ATO source for the income year that applies to you.
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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.
Sources and further reading
- ATO, TR 2014/1: Income tax: commercial software licencing and hosted agreements: derivation of income (applies Arthur Murray)
- ATO, TR 98/1: Income tax: determination of income; receipts versus earnings
- Income Tax Assessment Act 1997, section 6-5 (Federal Register of Legislation)
- ATO, GST and vouchers
- ATO, Choosing an accounting method (GST cash and non-cash)
- AASB 15 Revenue from Contracts with Customers (compiled)
- ACCC, Consumer rights and guarantees
Sources checked 29 October 2026. Spotted something out of date? Tell us.