Cash accounting is based on the cash received and the cash paid out. In cash accounting, if you invoice a client you don’t record that as income until you actually receive the cash from the client. With expenses when you receive a service or good and get the invoice, nothing is recorded until you actually pay the expense.
For businesses accounting for income on the cash basis, delaying the receipt of income from May or June to July results in tax savings for two reasons:
- The income is included in the next financial year, not this financial year. The tax savings arise as the tax liability on the income will be paid next financial year, not this financial year.
- The expenses incurred to generate the delayed income can be claimed this year as a deduction as they have been incurred (even though they may not be paid for until next year).
The easiest way to delay income is to not invoice May and June’s sales or fees until after the 30th of June. This ensures May and Junes income will be received in July or August (so included as income in the following year).