Income Tax Basics 2012 Day 2. Overview...1

Transcription

1 Contents Overview The self-assessment system Periods of review Preparing the business return Accounting records vs. tax records Process for completing the business return Types of business returns Lodgment of income tax returns The Small Business Entity regime When is a taxpayer a small business entity? Passing the $2 million aggregated turnover test Calculating aggregated turnover The small business tax concessions The Personal Services Income rules What is Personal Service Income ( PSI )? Working out if the PSI rules apply What if the PSI rules do not apply? What are the consequences of the PSI rules applying? Record keeping requirements Income tax records Capital gains tax ( CGT ) Fringe benefits tax ( FBT ) Goods and services tax ( GST ) Pay as you go ( PAYG )...28 The Simplified Imputation System ('SIS') Operation of the franking account Franking credits Franking debits...30 National Tax & Accountants Association Ltd: March 2012 i

2 1.3 Summary table of franking credits and debits Franking a distribution of dividends Franking account and company tax return labels Franking Deficit Tax ( FDT ) Franking deficit tax offset Franking account disclosure requirements Companies receiving franked distributions No wastage of losses for corporate shareholders...40 Income When is income derived for tax purposes? The cash (or receipts) method The accruals (or earnings) method What is (or is not) included in assessable income? Completing Item 6 Calculation of total profit or loss...44 Label B Certain income received by foreign residents...44 Label A Gross payments where an ABN was not quoted...45 Label C Other sales of goods and services...46 Label D Gross distribution from partnerships...46 Label E Gross distribution from trusts...49 Label X Forestry managed investment scheme income...52 Label F Gross interest...52 Label G Gross rent and other leasing and hiring income...53 Label H Total dividends...53 Label I Fringe benefit employee contributions...55 Label Q Assessable government industry payments...56 Label J Unrealised gains on revaluation of assets to fair value...57 Label K Income from financial arrangements TOFA...57 Label R Other gross income...57 Label S Total income...57 ii National Tax & Accountants Association Ltd: March 2012

3 4. Recording net capital gains Tax return obligations for net capital gains or losses Calculating and recording a net capital gain or loss STEP 1 Calculate the total current year capital gains STEP 2 Applying capital losses STEP 3 Apply the general discount STEP 4 Apply the small business CGT concessions STEP 5 Calculate the net capital gain Consolidated case study...79 Expenses...81 Advertising and sponsorship expenses...81 Amortisation Amortisation of goodwill Amortisation of leases...82 Bad debts...83 Bank fees and charges...84 Blackhole expenditure...84 Borrowing costs...87 Commercial debt forgiveness...88 Cost of goods sold ( COGS )...88 Depreciation Calculating depreciation Where the taxpayer is an SBE and has chosen to apply the simplified depreciation rules Where the taxpayer is not an SBE (or is an SBE that has not chosen to use the simplified depreciation rules) Disposal of a depreciating asset Recording depreciation on the income tax return Balancing adjustments on disposal of depreciating assets...94 National Tax & Accountants Association Ltd: March 2012 iii

4 Directors fees, allowances etc...94 Division 43 deductions...95 Donations...96 Electricity costs...97 Entertainment What is deductible entertainment? Recording entertainment expenses on the tax return...98 Fringe benefits and Fringe Benefits Tax ( FBT ) Interaction of FBT with the tax return FBT instalments Employee contributions Deductibility of entertainment-related fringe benefits Employers who provide gifts to their employees Recording fringe benefits on the tax return Goods and Services Tax ( GST ) Depreciation deductions under the GST regime Insurance premiums, including workers compensation Interest expenses Interest incurred before the derivation of income Interest incurred after an income activity has ceased Interest on bills of exchange Interest paid overseas Land tax on business premises Lease expenses (and hire purchase agreements) Hire purchase agreements Luxury car lease expenses Recording lease expenses on the income tax return Recording HP expenses on the income tax return iv National Tax & Accountants Association Ltd: March 2012

5 Legal Expenses Revenue or Capital? Motor vehicle expenses Office stationery Penalties, fines and breaches of the law Phone expenses Postage expenses Prepayments Taxpayer is an SBE and has chosen to apply the 12 month rule Taxpayer is not an SBE (or is an SBE who has not chosen to apply the 12 month rule) Eligible service period Provisions and reserves in the accounts Rates on business premises Rent or lease of business premises Repairs and maintenance What is a repair? What is not a repair? Asset is improved Initial Repair Whole of an asset replaced Research and development ( R&D ) Royalties paid Salaries and wages Subscriptions Superannuation contributions Recording superannuation contributions on the return Tax related expenses National Tax & Accountants Association Ltd: March 2012 v

6 Trading stock Valuing trading stock for tax purposes Valuation at cost Valuation at market selling value Valuation at replacement value Trading stock for manufacturers Trading stock taken for own use Other items become trading stock Recording trading stock on the income tax return Travel expenses Water rates on business premises The tax reconciliation process The reconciliation process Differences in accounting and tax Tax reconciliation worksheet (Generic labels) Income for accounting purposes, but not taxable Assessable income, but not included in accounting income Expense for accounting, but not tax deductible Deductible expense, but not included for accounting Completing the Calculation Statement Calculating the tax liability for Proposed Label A Taxable or net income Proposed Label T1 Tax on taxable income Proposed Label M R&D Recoupment Tax Proposed Label B Gross tax Proposed Label C Non-refundable non-carry forward tax offsets Proposed Label T2 Subtotal Proposed Label D Non-refundable carry forward tax offsets Proposed Label T3 - Subtotal vi National Tax & Accountants Association Ltd: March 2012

7 Proposed Label E Refundable tax offsets Proposed Label T4 Subtotal Proposed Label F Franking deficit tax offset Proposed Label T5 - Tax payable Proposed Label G Section 102AAM interest charge Proposed Label H Eligible credits Proposed Label H1 Credit for interest on early payments amount of interest Proposed Label H2 Credit for tax withheld foreign resident withholding Proposed Label H3 Credit for tax withheld where ABN is not quoted Proposed Label H4 Tax withheld from interest or investments Proposed Label H5 Credit for TFN amounts withheld from payments from closely held trusts Proposed Label H7 Other credits Proposed Label I Remainder of refundable tax offsets Proposed Label K PAYG instalments raised Proposed Label S Amount due or refundable Financial information disclosure Label N Functional currency translation rate Label O Functional currency chosen Label A Opening stock Label S Purchases and other costs Label B Closing stock Trading stock election Label C Trade debtors Label D All current assets Label E Total assets Label F Trade creditors Label G All current liabilities Label H Total liabilities Label J Total debt National Tax & Accountants Association Ltd: March 2012 vii

8 Label K Commercial debt forgiveness Label R Shareholders funds Label J Franked dividends paid Label K Unfranked dividends paid Label M Franking account balance Label F Balance of conduit foreign income Label G Conduit foreign income distributed during the income year Label H Excess franking offsets Label L Balance of unfranked non-portfolio dividend account at year end Label N Loans to shareholders and their associates Label Z Intangible depreciating assets first deducted Label A Other depreciating assets first deducted Label P Termination value of intangible depreciating assets Label E Termination value of other depreciating assets Label D Total salary and wage expense Label Q Payments to associated persons Label G (New) Gross foreign income Labels R, S, B, C, U, V, O, I, Y, T, U, R & S Schedules Dividend and interest schedule Capital allowances schedule Capital gains tax (CGT) schedule Losses schedule Other schedules Case Study ABC Retailing Pty Ltd Background Financial Statements Notes to the Profit and Loss Statement Case Study Solution viii National Tax & Accountants Association Ltd: March 2012

9 Partnerships and trusts Primary production vs. non-primary production Partnerships Revenue losses incurred by a partnership Net capital gains and losses Partner salaries Completing the Statement of Distribution (Item 65) Trusts Trust income vs. net income When is a beneficiary assessable? When is the trustee assessable? Revenue losses incurred by a trust Franking credits in a loss trust Net capital gains and losses Distributions by family trusts Completing the statement of distribution (Item 66) Notes National Tax & Accountants Association Ltd: March 2012 ix