Chase Overdue Invoices or Push Them into the Next Financial Year?
You might find yourself chasing customers for unpaid invoices before 30th June. But could it be better to wait to recover any outstanding invoices in the next financial year?
We take you through the aspects that influence when you pay tax on your outstanding invoices.
Accrual or Cash Accounting
Depending on your accounting method, if you have performed work for someone this financial year, the receivable may be included in your taxable income regardless of whether you’ve been paid yet.
What is accrual accounting?
With accrual accounting, you account for income and expenses as they arise, rather than when money exchanges hands. For example, if you provide a service for a customer on 15th June and you use accrual accounting, you would record the income on 15th June. If the customer doesn’t pay you until after 1st July, the amount is still assessed as taxable income in the year you completed the job.
If you use this accounting method, then it makes no difference to your taxable income if you chase the payment now or next financial year. However, recovering funds sooner rather than later helps manage cash flow, so if you have the time and resources to chase up the funds now, it might be a good idea to do so.
What is cash accounting?
With cash accounting, income and expenses are recorded with the incoming and outgoing of money. Consider the example above, you’ve performed a service on 15th June, but the income is only included as assessable income in the financial year that the money is received. If the invoice is paid before 30th June, the amount will be included in the current financial year, but if it’s paid after 30th June, it won’t be included until the end of the next financial year.
If you are using the cash basis of accounting, you have the freedom to decide if you’d rather chase up invoices now or hold off to push the income into the next financial year. There are pros and cons for both sides, and they depend on factors like your marginal tax rate, expected sales for the next financial year and cash flow requirements.
Impacts of Delaying Chasing Overdue Invoices
Falling into different tax brackets
The structure of your business determines which tax rates you pay. If your business is a registered company, you will pay tax at the company tax rate on every dollar earned. The company tax rate is 25% or 30%, depending on your turnover. If you are working as a sole trader or a partnership, your share of profit is taxed at the individual tax rate. This is where you may have the opportunity to slip into a lower tax bracket.
The 2026/27 Australian individual tax rates are as follows:
|
Taxable Income |
Tax rate |
|
$0 to $18,200 |
0% |
|
$18,201 to $45,000 |
15% |
|
$45,001 to $135,000 |
30% |
|
$135,001 to $190,000 |
37% |
|
$190,001 and over |
45% |
Your marginal tax rate is the rate of tax you pay on your next dollar. For example, if you have earned $190,000 for the year, your marginal tax rate is 37%. However, your next dollar of income falls in the next tax bracket, which means your marginal tax rate would be 45% — that next dollar is taxed at 45% instead of 37%. While it’s probably not going to break the bank having to pay 45 cents for that extra dollar, if you have to pay 45% on an additional $10,000, it can start to add up.
Consider a business that has made a taxable income of exactly $190,000. They’re waiting on $50,000 of unpaid invoices. If they receive their money before the end of the financial year, they will need to pay $22,500 in tax (45%) (before considering deductions) on the additional $50,000 because it pushes the taxable income into the higher tax bracket. But if they wait until the next financial year to chase the money, they can keep their marginal tax rate at 37%.
This strategy doesn’t help you avoid paying tax — the amount will still be assessed for tax purposes; it will just be deferred to the next financial year. But it does allow you to pay a lower tax rate on those late payments in the next financial year. However, paying a lower tax rate would mean the assessable income would need to be lower than the current period. This may work for a business that is slowing down, but if you’re going through a period of growth and expansion, it may be wise to chase down your invoices in the current period — otherwise, it could tip you into a higher tax bracket if your income is significantly higher next year.
For example, earning $135,000 means you’ll pay 30% tax. The next dollar would be taxed at 37%. By pushing those next dollars into the following financial year, you avoid paying 37% on it, but if you earn more than $135,000 in that period, you’ll still end up paying 37% anyway. The only way you could completely avoid paying tax would be if your business incurred a loss the next financial year.
As you can see, pushing your overdue income into the next tax period could be a pro for the current period, but could turn into a con if you end up having to pay a higher rate of tax in the next period. It really comes down to the circumstances of your business.
Remaining within tax offset thresholds
For the 2026–27 financial year, Australian residents with taxable income below $66,667 may be eligible for the low income tax offset.
The maximum offset is $700 for taxable incomes of $37,500 or less. It then gradually reduces as taxable income increases and is no longer available once taxable income reaches $66,667. The offset can reduce the amount of tax you owe, but it cannot generate a tax refund on its own.
Before the end of the financial year, consider whether legitimate deductions or deductible business expenses could reduce your taxable income. The timing of customer payments may only affect taxable income for businesses that report on a cash basis. Businesses using accrual accounting will generally recognise income when it is earned or invoiced, regardless of when the customer pays.
Speak with your accountant before changing the timing of income or expenses solely for tax purposes.
Check whether you are eligible for the small business income tax offset
Eligible sole traders and individuals who receive income from a small business partnership or trust may be able to claim the small business income tax offset
The offset can reduce the tax payable on eligible small business income by up to $1,000 each year. Eligibility and the amount available depend on factors including the business structure, turnover and the individual’s share of business income.
The offset is not available for income earned through a company. A registered tax agent can help determine whether it applies to your circumstances.
Cash flow issues
If you don’t have enough cash on hand to keep up with the operating expenses of your business, it is essential to chase your unpaid invoices to ensure timely payment. Lack of cash flow is a key contributor to the failure of many businesses, so it’s important to have an understanding of how much liquidity you need.
If you have a large amount of unpaid invoices and you’re noticing problems with cash flow, such as not having enough money to pay your staff on time or purchase new stock, invoice finance can help close the gap between issuing an invoice and being paid. You borrow an amount of money based on your unpaid invoices, which is repaid once your customers fix up their bill. It can be an efficient way of ensuring your cash flow needs are covered.
Tips for chasing overdue invoices
Generally speaking, it’s a good idea to chase up your invoices early on to avoid the risk of non-payment. Here are some tips on how to chase overdue invoices:
- Automated overdue invoices email. Be consistent with your process. Set up a series of automated emails to touch base with your customer periodically. For example, five days after the due date, ten days later and 15 days later. Your bookkeeping software may even have templates you can use.
- Discuss overdue invoices via a phone call. After your emails have been sent out, it’s time to follow up with a phone call. Your customer may bring to your attention that they’re suffering from financial hardship. This is your opportunity to offer alternative payment terms, such as an instalment plan.
- Overdue invoices letter of demand. If you still have not received payment after the first two steps, it’s time to send a letter of demand. There are many good letter of demand templates available on the internet — often, when people see the threat of legal action, they’ll make their payment promptly.
If these steps fail, you may need to consider using a debt collector or legal action.
If you’re thinking about taking a break from following up invoices to push the income into the next financial year, it may work in your favour by reducing your taxable income in this tax period. However, it’s generally best to keep on top of receiving your payments to avoid non-payment risk and cash flow issues.
Comprehensive tax strategies plan for more than just your current financial year, so it’s a good idea to speak to your accountant about your tax planning for not just this EOFY, but for future financial years — especially to get advice relating to your personal situation. While we know a few tricks, it certainly isn’t intended to be taxation advice. If you’re wondering how these tips might work for your business, have a chat with your adviser or trusted financial professional.
If you'd like to learn more about invoice finance or equipment finance with Earlypay, please visit us at earlypay.com.au, call our friendly team on 1300 760 205 or contact your broker or BDM.
