Quick answer
For most Australian businesses, the costs of invoice finance used to run the business are deductible business expenses, because the ATO lists interest on money borrowed to produce assessable income, and bank fees and charges, among common operating expenses. How each fee is recorded depends on whether you borrowed against invoices or sold them, and GST on finance charges follows its own rules. Keep every statement and confirm the treatment with your accountant.
Key points
- Finance costs for business purposes are generally a deductible operating expense.
- Borrowing against invoices and selling them are recorded differently.
- Many finance charges carry no GST, so don't assume you can claim a credit.
- Late payment penalties from statutory bodies are not deductible.
- Monthly lender statements are the record your accountant needs.
In most cases, yes. When invoice finance is used to run your business, its costs are generally a deductible business expense. The ATO lists interest on money borrowed to produce assessable income, and bank fees and charges, among common operating expenses. The details depend on whether you borrowed against invoices or sold them, so give your accountant the full picture.
That’s the short version. The rest of this guide explains why the structure matters, where GST trips people up, and what records make tax time painless.
What does the ATO say about finance costs for a business?
The ATO’s page on deductions for operating expenses lists the everyday costs most businesses can claim. Among them:
- bank fees and charges
- interest on money borrowed to produce assessable income or buy income-producing assets
- interest on money borrowed for income tax obligations, employer super contributions, or late payment or lodgment of tax
- legal expenses, including those incurred in borrowing money
- bad debts
It also makes the point that penalties imposed by statutory bodies for breaching Australian law aren’t deductible. So a lender’s late fee under a commercial contract and a government penalty are very different things on your tax return.
None of that names invoice finance specifically, which is why the structure of your facility matters.
Does it matter whether I borrowed against invoices or sold them?
It matters for how the cost is recorded, even if the end result is often similar.
If you borrowed against your invoices (common with confidential invoice discounting and many debtor finance facilities), the invoices are security for a loan. You still own them. The lender’s charges look and behave like interest and finance fees, and they’re usually recorded that way.
If you sold your invoices (common with factoring and some single-invoice products), the lender buys the debt from you at a discount. The difference between the face value and what you receive is effectively the cost of selling the debt. Your accountant may record it as a discount or loss on sale rather than as interest.
| Facility type | Who owns the invoice? | How costs are often recorded | Questions for your accountant |
|---|---|---|---|
| Invoice discounting (borrowing) | You | Interest and finance fees | Is the facility recorded as a liability? |
| Factoring (sale) | The lender | Discount or loss on sale of debts | How does the sale affect GST timing? |
| Selective / single invoice | Depends on the contract | Either, depending on structure | Is each invoice sold or pledged? |
| Set-up and legal costs | n/a | Borrowing or legal expenses | Claim now or spread over time? |
Your contract will say whether you’re assigning the debts outright or giving security over them. If you’re not sure, ask the lender before you sign, and give your accountant a copy.
Can you claim GST credits on invoice finance fees?
This is where many owners get it wrong. Lending money and dealing in debts are generally treated as financial supplies under the GST law, and the ATO’s GST and financial supplies guidance sets out separate rules for them. In practice, many finance charges carry no GST at all, so there’s no credit to claim.
Some service or administration fees may include GST. The only safe rule is to claim a credit only where GST has actually been charged and appears on a valid tax invoice. business.gov.au’s how to invoice guide lists what a valid tax invoice must show, including the GST amount payable.
Factoring can also raise GST timing questions if you account on a cash basis, because selling an invoice can change when you’re treated as being paid. Raise it with your accountant before your first drawing.
If you’re weighing invoice finance against another kind of funding, start a short enquiry and we’ll talk through the options with you. A real person reads every one.
What records should you keep for tax time?
Invoice finance throws off a lot of paperwork. Keep it tidy and your accountant’s job, and your bill, gets smaller.
- The facility agreement, including any variations. It decides whether you borrowed or sold.
- Monthly lender statements showing advances, collections, fees and balances.
- Set-up invoices for establishment and legal costs.
- A reconciliation of your debtor ledger to the lender’s records each month.
- Notes on any write-offs, including the customer, the amount and the steps you took to recover it.
Most accounting software can be connected to a lender’s portal, which helps with reconciliation. Even so, set up a separate account or tracking code for the facility so fees don’t get lost among general bank charges.
An illustrative example
Illustrative only. An IT services company funds about $150k of monthly invoices through a confidential discounting facility. Each month it pays a service fee and finance charges on the amount drawn, and it paid a one-off establishment fee and legal costs at set-up.
The bookkeeper sets up three expense accounts: finance charges, facility service fees, and borrowing costs. Lender statements are reconciled monthly, and only the service fee lines that show GST on the lender’s tax invoice are claimed as GST credits. At year end, the accountant has everything in one place, decides how to treat the set-up costs, and the finance charges flow through as ordinary operating expenses.
What if a financed invoice is never paid?
Sometimes a customer simply doesn’t pay, and the invoice you funded turns into a loss. How that’s recorded depends again on who owned the debt when it went bad.
If you borrowed against the invoice, you still own it. Under a recourse facility you repay the advance, and the unpaid amount sits in your ledger like any other doubtful debt. The ATO lists bad debts among common operating expenses, but a write-off has to be properly recorded and supported, so keep a note of when you decided the debt was unrecoverable and why.
If you sold the invoice outright and the lender carries the loss under a non-recourse arrangement, the debt may no longer be yours to write off. Any amount you have to refund to the lender, for example because the customer disputed the work, is a separate cost again.
Either way, don’t make the call on your own at year end. Bring the facility statements, the customer correspondence and any liquidator notices to your accountant and let them decide how each item should be treated.
Does the tax treatment change which funding you should choose?
Rarely on its own. The tax treatment of most business finance is broadly similar: if the money is used to earn income, the cost of it is usually deductible. What changes between products is the total cost, flexibility and what you have to give up.
So compare options on the questions that matter most:
- What will this cost all-in over the time I expect to use it?
- Does it grow with my sales, or is it a fixed amount?
- What security does it need?
- How easily can I exit?
An unsecured cash-flow loan, typically $5k to $500k and sized on turnover and bank statements, may be simpler to account for than a factoring facility if you only need funds for a few months. A property-secured loan from $20k to $5m may suit a larger, longer need. Our guide to recourse and non-recourse factoring covers another cost decision worth making early.
Planning your funding around tax time?
Tax time is often when owners notice how much cash is tied up in unpaid invoices. If that’s where you are, the next step is working out which kind of funding fits the gap without creating a bookkeeping headache.
The enquiry form takes about 60 seconds, and there’s no credit check when you first enquire. Your details won’t be sprayed across dozens of lenders. A real person looks at your invoices, turnover and what you’re trying to fund, then calls you with options. Please fill the form in accurately, including your real turnover and how your customers pay, so the first conversation is a useful one.
Frequently asked questions
Is the discount fee on invoice finance tax deductible?
Generally it's treated as a cost of running the business when the facility funds business operations. Whether it's recorded as an interest-type expense or as a loss on selling the invoice depends on how your facility is structured, so your accountant will want to see the contract.
Can I claim GST credits on invoice finance fees?
Only where GST has actually been charged and shown on a valid tax invoice. Many finance charges are financial supplies with their own GST rules and carry no GST, while some administration or service fees may include it. Check each lender statement rather than assuming.
Are set-up fees and legal costs deductible?
Costs of establishing borrowing can be deductible, but the timing may differ from ongoing fees. The ATO notes legal expenses can include costs incurred in borrowing money. Give your accountant the invoices for every set-up cost so they can treat them correctly.
Is the money I receive from invoice finance taxable income?
The advance itself is not new income. You already recorded the sale when you issued the invoice, assuming you account on an accruals basis. The advance is either a loan or the proceeds of selling a debt you already own.
What happens to my GST if I'm on a cash basis and I sell my invoices?
This is a tricky area. Selling invoices can affect when you're treated as having received payment for GST purposes. If you account for GST on a cash basis and plan to factor invoices, speak to your accountant before you start.
Is the cost of the invoice finance facility still deductible if I borrowed to pay a tax debt?
The ATO lists interest on money borrowed for income tax obligations among common operating expenses. That differs from the ATO's own interest charges and penalties. Your accountant can confirm how this applies to your facility.