Introduction...1 1. What is the aim and structure of this seminar?...1 2. The self-assessment system...1 2.1 Complexity of returns has increased...2 3. Introduction to completing the business return...2 3.1 Accounting records vs. tax records...3 3.2 Accounting software packages...3 4. Types of business returns...3 4.1 Sole trader...3 4.2 Partnership...3 4.3 Company...4 4.4 Trusts...6 5. Lodgment of income tax returns...6 5.1 Company income tax returns...6 5.2 Partnership income tax returns...7 5.3 Trust income tax returns...7 6. Completing the returns from the accounts...7 7. The simplified tax system ( STS )...8 7.1 STS eligibility tests...8 7.2 Main concessions under the STS...9 7.3 STS elections for the 2007 income year...13 7.4 STS at a glance a summary of the benefits of STS...14 Income...17 1. Introduction...17 1.1 Methods for recognition of income...18 1.2 Differences between accounting profit and taxable income...19 2. What is (or is not) included in assessable income?...19 3. Completing Item 6 Calculation of total profit or loss...20 National Tax & Accountants Association Ltd: March 2007 i
Label B Certain income received by foreign residents...20 Label A Gross payments where an ABN was not quoted...21 Label C Other sales of goods and services...22 Label D Gross distribution from partnerships...22 Label E Gross distribution from trusts...24 Label F Gross interest...27 Label G Gross rent and other leasing and hiring income...28 Label H Total dividends...28 Label I Fringe benefit employee contributions...30 Label Q Assessable government industry payments...31 Label J Unrealised gains on revaluation of assets to fair value...31 Label R Other gross income...31 Label S Total income...32 4. Recording net capital gains...32 4.1 Tax return obligations for net capital gains or losses...33 4.2 Calculating and recording a net capital gain or loss...34 The small business CGT concessions ( the SBC )...43 Expenses...55 Advertising and sponsorship expenses...55 Amortisation...55 (a) Amortisation of goodwill...56 (b) Amortisation of leases...56 Bad debts...57 Bank fees and charges...59 Blackhole expenditure...59 Borrowing costs...61 Commercial debt forgiveness...62 Cost of goods sold ('COGS')...62 Depreciation...63 ii National Tax & Accountants Association Ltd: March 2007
1. What is a depreciating asset?...63 2. Calculating depreciation...63 3. Disposal of a depreciating asset...66 4. Recording depreciation on the income tax return...66 Directors fees, allowances etc...68 Division 43 deductions...69 Donations...70 Electricity costs...71 Entertainment...71 1. What is deductible entertainment?...71 2. Recording entertainment expenses on the tax return...72 Fringe benefits and Fringe benefits tax ('FBT')...72 Insurance premiums, including workers' compensation...72 Interest expenses...73 1. Interest incurred before the derivation of income...73 2. Interest incurred after an income activity has ceased...74 3. Interest on bills of exchange...75 4. Interest paid overseas...75 Land tax on business premises...76 Leasing expenses (and hire purchase agreements)...76 1. Hire purchase agreements...76 2. Luxury car lease expenses...77 3. Recording lease expenses on the income tax return...78 4. Recording HP expenses on the income tax return...79 Legal Expenses...79 1. Revenue or Capital?...79 Motor vehicle expenses...81 Office stationery...82 Penalties, fines and breaches of the law...82 Phone expenses...83 National Tax & Accountants Association Ltd: March 2007 iii
Postage expenses...83 Prepayments...83 1. STS taxpayers...83 2. Non-STS taxpayers...84 3. Eligible service period...84 Provisions and reserves in the accounts...85 Rates on business premises...87 Rent or lease of business premises...87 Repairs and maintenance...87 1. What is a repair?...87 2. What is not a repair?...88 Research and development...89 1. What expenditure is eligible for the R & D concessions?...90 2. The R & D tax offset...91 3. Recording R & D expenses on the income tax return...91 Royalties paid...91 Salaries and wages...92 Subscriptions...93 Superannuation...93 Tax related expenses...95 Trading stock...95 1. Valuing trading stock for tax purposes...96 2. Trading stock for manufacturers...97 3. Trading stock taken for own use...98 4. Other items become trading stock...98 5. Recording trading stock on the income tax return...99 Travel expenses...100 Water rates on business premises...100 The tax reconciliation process...103 Introduction...103 iv National Tax & Accountants Association Ltd: March 2007
1. The reconciliation process...104 2. Differences in accounting and tax...104 2.1 Income for accounting purposes, but not taxable...105 2.2 Assessable income, but not included in accounting income...107 2.3 Expense for accounting, but not tax deductible...109 2.4 Deductible expense, but not included for accounting...113 3. Performing a tax reconciliation...115 3.1 Consolidated example tax reconciliation...115 Tax reconciliation worksheet... 118 Label B Other assessable income...118 Label W Non-deductible expenses...118 Label Q Other income not included in assessable income...119 Label X Other deductible expenses...119 Completing the calculation statement... 121 Introduction...121 Calculating the tax liability...122 Label A Taxable or net income...122 Label B Gross tax...122 Label C Rebates/tax offsets...122 Tax assessed...123 Label D Foreign tax credits...123 Label E Franking deficit tax (FDT) offset...123 Label G Total of labels D and E...124 Tax payable...124 Label H Section 102AAM interest...124 Label T PAYG instalments raised...125 Label V Credit for interest on early payments amount of interest...125 Label I Credit for tax withheld foreign resident withholding...126 Label W Credit for tax withheld where ABN not quoted...126 Label Y Tax withheld from interest/investments...126 National Tax & Accountants Association Ltd: March 2007 v
Label U R & D tax offset...127 Label Z Other refundable credits...127 Label R Total of labels T, V, I, W, Y, U and Z...127 Label S Total amount of tax payable or refundable...127 Financial information disclosure...129 Introduction...129 Label N Functional currency translation rate...129 Label O Functional currency chosen...129 Label A Opening stock...129 Label S Purchases and other costs...130 Label B Closing stock...130 Trading stock election...131 Label C Trade debtors...131 Label D All current assets...131 Label E Total assets...131 Label F Trade creditors...131 Label G All current liabilities...131 Label H Total liabilities...132 Label J Total debt...132 Label K Commercial debt forgiveness...132 Label R Shareholders funds...132 Label J Franked dividends paid...132 Label K Unfranked dividends paid...133 Label M Franking account balance...133 Label F Balance of conduit foreign income...134 Label G Conduit foreign income distributed during the income year...134 Label H Excess franking offsets...134 Label L Balance of unfranked non-portfolio dividend account at year end...134 Label N Loans to shareholders and their associates...134 Label Z Intangible depreciating assets first deducted...135 vi National Tax & Accountants Association Ltd: March 2007
Label A Other depreciating assets first deducted...136 Label P Termination value of intangible depreciating assets...136 Label E Termination value of other depreciating assets...137 Label D Total salary and wage expense...137 Label Q Payments to associated persons...138 Labels R, S, B, C, U, V, W, X, O, I and Y...138 Schedules...138 (a) Dividend and interest schedule...138 (b) Capital allowances schedule...139 (c) Capital gains tax (CGT) schedule...139 (d) Other schedules...140 Franking account rules the simplified imputation system ( SIS )... 141 Introduction...141 1. The franking account return...141 1.1 Franking account and company tax return labels...141 2. Operation of the franking account...142 2.1 Franking credits...142 2.2 Franking debits...143 3. Franking a distribution of dividends...145 4. Companies receiving franked distributions...150 5. Other franking account matters...150 5.1 Over and under franking...150 5.2 Franking deficit tax ('FDT')...151 5.3 Franking deficit tax offset...151 5.4 Franking account disclosure requirements...151 5.5 Refund of excess franking credits...152 5.6 No wastage of losses...152 5.7 Trans-Tasman imputation regime...152 6. Summary table of franking credits and debits...152 National Tax & Accountants Association Ltd: March 2007 vii
Partnerships and trusts...155 Introduction...155 1. Primary production v non-primary production...156 2. Partnerships...156 2.1 Revenue losses incurred by a partnership...157 2.2 Net capital gains and losses...158 2.3 Partner salaries...159 2.4 Completing the Statement of Distribution (Item 59)...159 3. Trusts...163 3.1 Trust income vs. net income...163 3.2 When is a beneficiary assessable?...163 3.3 When is the trustee assessable?...163 3.4 Revenue losses incurred by a trust...164 3.5 Franking credits in a loss trust...165 3.6 Net capital gains and losses...165 3.7 Distributions by family trusts...167 3.8 Completing the statement of distribution (Item 59)...167 The BIG picture...175 Introduction...175 1. Personal services income ( PSI )...175 1.1 Definition of PSI...175 1.2 When will income not be PSI?...176 1.3 Completing the PSI Schedule for 2007...178 1.4 Completing the 2007 company, trust or partnership return...178 Personal services income losses...180 2. Non-commercial losses...182 3. Fringe benefits tax ('FBT')...182 3.1 Interaction of FBT with the tax return...183 4. Impact of PAYG on salary and wage expense...186 viii National Tax & Accountants Association Ltd: March 2007
5. Goods and services tax ('GST')...186 5.1 The effect of GST on allowable deductions...187 Record keeping requirements... 189 Introduction...189 1. Penalties for not keeping proper records...189 2. Income tax records...189 2.1 Keeping the records...190 3. Capital gains tax ('CGT')...191 3.1 Records that must be kept...191 4. Fringe benefits tax ('FBT')...192 4.1 Record keeping exemption...192 5. Goods and services tax ( GST )...193 6. Pay as you go ( PAYG )...193 7. ATO audits...193 7.1 Individual taxpayers...193 7.2 Business taxpayers...194 7.3 Dividend, interest and income...194 7.4 Capital gains tax...194 7.5 Losses...195 7.6 General return preparation information...195 National Tax & Accountants Association Ltd: March 2007 ix