Simplified Tax System (STS): accounting method - timing of deductions for amounts paid by B-pay

When is an amount an STS taxpayer pays by B-Pay viewed as 'paid' for the purposes of paragraph 328-105(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

For the purposes of paragraph 328-105(1)(b) of the ITAA 1997, an amount an STS taxpayer pays by B-Pay is viewed as paid in the income year in which the STS taxpayer authorises the payment.

An STS taxpayer authorises payment of an expense that is otherwise deductible under section 8-1 of the ITAA 1997 on 28 June 2002 using B-Pay. The amount of the payment was deducted from their bank account on 1 July 2002.

Under the STS accounting method, an STS taxpayer can generally claim a deduction for a loss or outgoing that would otherwise be deductible under section 8-1 (general deductions), section 25-5 (tax-related expenses) or section 25-10 (repairs) of the ITAA 1997 in the income year in which it pays that expense: paragraph 328-105(1)(b) of the ITAA 1997.

The term 'paid' is not defined for the purposes of paragraph 328-105(1)(b) of the ITAA 1997. It therefore needs to be interpreted according to its ordinary meaning and legislative context. In Case 10/2000 (2000) 45 ATR 1019; 2000 ATC 189, the Administrative Appeals Tribunal referred to the Macquarie dictionary definition of 'pay': 'Pay v, paid ... 1. To discharge (a debt, obligation, etc), as by giving or doing something. 2. To give (money, etc) as in discharge of debt or obligation. 3. To satisfy the claims of (a person, etc) as by giving money due. 4. To defray (cost or expense). 5. To give compensation for. 6. To yield a recompense or return to; be profitable to ...'

It is evident from this definition that the ordinary meaning of the term 'paid' includes an action by an entity that discharges an obligation or debt to another.

An STS taxpayer that discharges a liability they have incurred using the B-Pay system discharges that liability at the time they authorise the direct transfer of funds from their own account to the account of the other party.

This means that under paragraph 328-105(1)(b) of the ITAA 1997, the STS taxpayer in the circumstances described above can claim a deduction for the amount paid by B-Pay on 28 June 2002 in the 2001-02 income year, even though the amount was not deducted from their bank account until 1 July 2002.

This treatment is consistent with the approach taken in Goods and Services Tax Ruling GSTR 2000/23 to the question of when consideration is provided in cases where the consideration is provided via the B-Pay system. Paragraph 27 of GSTR 2000/23 makes clear that for B-Pay transactions, consideration is provided when the payment is authorised, and consideration is received when the payment is credited to the supplier's account.

Paragraph 4.7 of the explanatory memorandum for the New Business Tax System (Simplified Tax System) Act 2001 records the legislative intention that the STS accounting method is designed to allow STS taxpayers to align their income tax with their GST accounting methods.