FocusOn - Prepaying expenses

Prepaying expenses before year end can be a great way of reducing your current tax liability. It can be particularly beneficial if you expect to be on a higher tax bracket this year than next year. Additionally, if payments are due early in the next financial year, payment may get you the tax benefit much earlier.

Individual taxpayers such as employees and investors can claim a deduction for a prepayment provided it relates to a period that will end in the next financial year and is for no more than 12 months. Typically, this includes subscriptions, memberships and interest paid on investment loans. Business taxpayers who declare their business income under the Simplified Taxation System (STS) are also entitled to these deductions.

If prepaying interest, make sure the financial institution is aware of what you are doing. Otherwise they might use the payment to reduce the principal and no deduction will be available.

To be deductible, a prepayment must be incurred. Before making rent, insurance, interest or lease payments etc. for the purpose of claiming a prepayment deduction, check your contracts to ensure they can be made. Advance voluntary payments may not be deductible.

Published : 12 June 2007