January 08th, 2014

How to make sure you include your income and deductions in the right income year
By John Kelly
Editor-in-Chief, Smart Tax Handbook

The ATO is taking an increasingly tough stance on income and expenses which aren't disclosed in the correct year.

Income needs to be included in the year of income in which it is 'derived'. The 4 main ways to tell that you have derived income are:

• you have invoiced a customer or have a recoverable debt;
• you have received payment for goods or services;
• the money or property owing to you has been applied to your benefit, e.g. the money you are owed has been used to offset an amount you owe your customer or it has been paid to someone else on your behalf; and
• you do not need to do anything else before receiving that income.

Deductions should be claimed when expenses are 'incurred'. You have incurred an expense at the earliest of these 3 things occurring:

• you have been invoiced for that expense;
• you have paid for that expense; or  
• you are absolutely committed to that expense, e.g. you have received goods that you have ordered. 

If you have disclosed income or expenses in your tax return in the wrong year, the ATO is perfectly entitled to exclude that income or expense and include it in the correct year. Sometimes this won't have much of an impact on you, but at other times the results could be disastrous.

For example, if a large deduction was claimed in the year after it was incurred, the ATO could deny that deduction on the basis that it is not a valid deduction for that year. If the time limit for amending tax returns has expired for the previous year, you could end up not getting a deduction for that expense at all. Depending on the amount, it could end up being a very costly mistake.