Question

DB Pty Ltd carries on a business with an annual turnover of $11million per annum. Towards the end of the income year ended 30 June 2018, the company incurred the following outgoings, all of which exclude GST:

1. Prepaid insurance expenses of $12,000 on 1 May 2018 for the period 1 May 2018 to 30 April 2019.
2. Prepaid employee bonuses totalling $120,000 on 1 June 2018 representing bonuses that would otherwise have been due for payment on 1 July 2018.
3. Prepaid advertising of $900 on 1 June 2018 for an online advertising campaign that will run for the next 10 months.

Required

Advise DB Pty Ltd how much, if any, of each of the payments would be tax deductible in the year ended 30 June 2018.

Answer 1

1. Prepaid insurance expenses of $12,000 on 1 May 2018 for the period 1 May 2018 to 30 April 2019.

As the expense is for the period beyond the tax year ended on 30th June 2018, only partial amount which belong to year ended on 30th June 2018 will be tax deductible and remaining portion will be deductible in the next year.

Thus, $2000 for May and June is deductible in this year ($12000/12 months x 2 months).

2. Prepaid employee bonuses totalling $120,000 on 1 June 2018 representing bonuses that would otherwise have been due for payment on 1 July 2018.

As the employee bonus is due for payment on July 1, 2018, which belongs to next tax year, the whole amount is non deductible in this year.

3. Prepaid advertising of $900 on 1 June 2018 for an online advertising campaign that will run for the next 10 months.

This expense is partially for the year ended on 30th June 2018 and partial for the year ended on 30th June 2019.

Thus, tax deductible amount is:

$900/10 months x 1 month = $90 for the month of June 2018