Contents Overview...1 1. The self-assessment system...1 1.1 Periods of review...2 2. Preparing the business return...3 2.1 Accounting records vs. tax records...3 2.2 Process for completing the business return...4 2.3 Types of business returns...4 2.4 Lodgment of income tax returns...7 3. The Small Business Entity regime...8 3.1 When is a taxpayer a small business entity?...9 3.2 Passing the $2 million aggregated turnover test...9 3.3 Calculating aggregated turnover...10 3.4 The small business tax concessions...11 4. The Personal Services Income rules...14 4.1 What is Personal Service Income ( PSI )?...14 4.2 Working out if the PSI rules apply...15 4.3 What if the PSI rules do not apply?...18 4.4 What are the consequences of the PSI rules applying?...18 5. Record keeping requirements...24 5.1 Income tax records...24 5.2 Capital gains tax ( CGT )...26 5.3 Fringe benefits tax ( FBT )...27 5.4 Goods and services tax ( GST )...28 5.5 Pay as you go ( PAYG )...28 The Simplified Imputation System ('SIS')...29 1. Operation of the franking account...29 1.1 Franking credits...29 1.2 Franking debits...30 National Tax & Accountants Association Ltd: March 2012 i
1.3 Summary table of franking credits and debits...32 2. Franking a distribution of dividends...33 2.1 Franking account and company tax return labels...38 3. Franking Deficit Tax ( FDT )...39 3.1 Franking deficit tax offset...39 3.2 Franking account disclosure requirements...39 4. Companies receiving franked distributions...40 4.1 No wastage of losses for corporate shareholders...40 Income... 41 1. When is income derived for tax purposes?...42 1.1 The cash (or receipts) method...42 1.2 The accruals (or earnings) method...43 2. What is (or is not) included in assessable income?...43 3. 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
4. Recording net capital gains...58 4.1 Tax return obligations for net capital gains or losses...58 4.2 Calculating and recording a net capital gain or loss...59 4.2.1 STEP 1 Calculate the total current year capital gains...60 4.2.2 STEP 2 Applying capital losses...65 4.2.3 STEP 3 Apply the general discount...68 4.2.4 STEP 4 Apply the small business CGT concessions...69 4.2.5 STEP 5 Calculate the net capital gain...78 4.2.6 Consolidated case study...79 Expenses...81 Advertising and sponsorship expenses...81 Amortisation...81 1. Amortisation of goodwill...82 2. 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...89 1. Calculating depreciation...89 1.1 Where the taxpayer is an SBE and has chosen to apply the simplified depreciation rules...90 1.2 Where the taxpayer is not an SBE (or is an SBE that has not chosen to use the simplified depreciation rules)...91 2. Disposal of a depreciating asset...92 3. Recording depreciation on the income tax return...93 3.1 Balancing adjustments on disposal of depreciating assets...94 National Tax & Accountants Association Ltd: March 2012 iii
Directors fees, allowances etc...94 Division 43 deductions...95 Donations...96 Electricity costs...97 Entertainment...97 1. What is deductible entertainment?...97 2. Recording entertainment expenses on the tax return...98 Fringe benefits and Fringe Benefits Tax ( FBT )...98 1. Interaction of FBT with the tax return...99 1.1 FBT instalments...99 1.2 Employee contributions...99 1.3 Deductibility of entertainment-related fringe benefits... 100 1.4 Employers who provide gifts to their employees...101 2. Recording fringe benefits on the tax return... 102 Goods and Services Tax ( GST )... 102 1. Depreciation deductions under the GST regime... 103 Insurance premiums, including workers compensation... 103 Interest expenses... 103 1. Interest incurred before the derivation of income... 104 2. Interest incurred after an income activity has ceased... 105 3. Interest on bills of exchange... 105 4. Interest paid overseas... 106 Land tax on business premises...106 Lease expenses (and hire purchase agreements)... 106 1. Hire purchase agreements... 107 2. Luxury car lease expenses... 107 3. Recording lease expenses on the income tax return... 107 4. Recording HP expenses on the income tax return... 108 iv National Tax & Accountants Association Ltd: March 2012
Legal Expenses...108 1. Revenue or Capital?...108 Motor vehicle expenses...110 Office stationery...110 Penalties, fines and breaches of the law...111 Phone expenses...111 Postage expenses...111 Prepayments...112 1. Taxpayer is an SBE and has chosen to apply the 12 month rule...112 2. Taxpayer is not an SBE (or is an SBE who has not chosen to apply the 12 month rule)...113 3. Eligible service period...113 Provisions and reserves in the accounts...114 Rates on business premises...115 Rent or lease of business premises...115 Repairs and maintenance...115 1. What is a repair?...116 2. What is not a repair?...116 2.1 Asset is improved...116 2.2 Initial Repair...116 2.3 Whole of an asset replaced...116 Research and development ( R&D )...117 Royalties paid...118 Salaries and wages...118 Subscriptions...120 Superannuation contributions...120 1. Recording superannuation contributions on the return...121 Tax related expenses...122 National Tax & Accountants Association Ltd: March 2012 v
Trading stock... 122 1. Valuing trading stock for tax purposes... 122 1.1 Valuation at cost... 122 1.2 Valuation at market selling value... 123 1.3 Valuation at replacement value... 123 2. Trading stock for manufacturers... 124 3. Trading stock taken for own use... 125 4. Other items become trading stock... 125 5. Recording trading stock on the income tax return... 125 Travel expenses... 126 Water rates on business premises... 126 The tax reconciliation process... 127 1. The reconciliation process...127 2. Differences in accounting and tax... 128 Tax reconciliation worksheet (Generic labels)... 129 2.1 Income for accounting purposes, but not taxable... 131 2.2 Assessable income, but not included in accounting income... 132 2.3 Expense for accounting, but not tax deductible... 134 2.4 Deductible expense, but not included for accounting... 138 Completing the Calculation Statement... 141 1. Calculating the tax liability for 2012... 142 Proposed Label A Taxable or net income... 143 Proposed Label T1 Tax on taxable income... 143 Proposed Label M R&D Recoupment Tax... 143 Proposed Label B Gross tax... 143 Proposed Label C Non-refundable non-carry forward tax offsets... 143 Proposed Label T2 Subtotal 1... 144 Proposed Label D Non-refundable carry forward tax offsets... 144 Proposed Label T3 - Subtotal 2... 144 vi National Tax & Accountants Association Ltd: March 2012
Proposed Label E Refundable tax offsets...145 Proposed Label T4 Subtotal 3...145 Proposed Label F Franking deficit tax offset...145 Proposed Label T5 - Tax payable...146 Proposed Label G Section 102AAM interest charge...146 Proposed Label H Eligible credits...147 Proposed Label H1 Credit for interest on early payments amount of interest...147 Proposed Label H2 Credit for tax withheld foreign resident withholding...147 Proposed Label H3 Credit for tax withheld where ABN is not quoted...148 Proposed Label H4 Tax withheld from interest or investments...148 Proposed Label H5 Credit for TFN amounts withheld from payments from closely held trusts...148 Proposed Label H7 Other credits...148 Proposed Label I Remainder of refundable tax offsets...148 Proposed Label K PAYG instalments raised...149 Proposed Label S Amount due or refundable...150 Financial information disclosure...151 Label N Functional currency translation rate...151 Label O Functional currency chosen...151 Label A Opening stock...151 Label S Purchases and other costs...152 Label B Closing stock...152 Trading stock election...153 Label C Trade debtors...153 Label D All current assets...153 Label E Total assets...153 Label F Trade creditors...153 Label G All current liabilities...153 Label H Total liabilities...154 Label J Total debt...154 National Tax & Accountants Association Ltd: March 2012 vii
Label K Commercial debt forgiveness... 154 Label R Shareholders funds...154 Label J Franked dividends paid... 154 Label K Unfranked dividends paid... 155 Label M Franking account balance... 155 Label F Balance of conduit foreign income... 155 Label G Conduit foreign income distributed during the income year... 155 Label H Excess franking offsets... 156 Label L Balance of unfranked non-portfolio dividend account at year end... 156 Label N Loans to shareholders and their associates...156 Label Z Intangible depreciating assets first deducted... 157 Label A Other depreciating assets first deducted... 157 Label P Termination value of intangible depreciating assets... 158 Label E Termination value of other depreciating assets...158 Label D Total salary and wage expense... 158 Label Q Payments to associated persons... 159 Label G (New) Gross foreign income... 160 Labels R, S, B, C, U, V, O, I, Y, T, U, R & S... 160 Schedules... 161 1. Dividend and interest schedule... 161 2. Capital allowances schedule... 161 3. Capital gains tax (CGT) schedule... 161 4. Losses schedule... 162 5. Other schedules... 162 Case Study ABC Retailing Pty Ltd... 163 1. Background...163 2. Financial Statements... 164 3. Notes to the Profit and Loss Statement... 165 4. Case Study Solution... 167 viii National Tax & Accountants Association Ltd: March 2012
Partnerships and trusts...173 1. Primary production vs. non-primary production...173 2. Partnerships...173 2.1 Revenue losses incurred by a partnership...174 2.2 Net capital gains and losses...175 2.3 Partner salaries...175 2.4 Completing the Statement of Distribution (Item 65)...176 3. Trusts...182 3.1 Trust income vs. net income...182 3.2 When is a beneficiary assessable?...182 3.3 When is the trustee assessable?...183 3.4 Revenue losses incurred by a trust...184 3.5 Franking credits in a loss trust...185 3.6 Net capital gains and losses...185 3.7 Distributions by family trusts...187 3.8 Completing the statement of distribution (Item 66)...187 Notes...202 National Tax & Accountants Association Ltd: March 2012 ix