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. Small business entities...8 7.1 When is a taxpayer a small business entity?...8 7.2 Passing the $2 million aggregated turnover test...9 7.3 Calculating aggregated turnover...10 7.4 The small business tax concessions...10 7.5 Summary of the small business tax concessions...15 Income...17 1. When is income derived for tax purposes?...18 1.1 The cash (or receipts) method...18 1.2 The accruals (or earnings) method...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 2008 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 X Forestry managed investment scheme income...27 Label F Gross interest...28 Label G Gross rent and other leasing and hiring income...28 Label H Total dividends...29 Label I Fringe benefit employee contributions...31 Label Q Assessable government industry payments...31 Label J Unrealised gains on revaluation of assets to fair value...32 Label R Other gross income...32 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 Expenses...57 Advertising and sponsorship expenses...57 Amortisation...58 (a) Amortisation of goodwill...58 (b) Amortisation of leases...59 Bad debts...59 Bank fees and charges...61 Blackhole expenditure...61 Borrowing costs...63 Commercial debt forgiveness...64 Cost of goods sold ( COGS )...64 Depreciation...65 1. What is a depreciating asset?...65 ii National Tax & Accountants Association Ltd: March 2008
2. Calculating depreciation...66 3. Disposal of a depreciating asset...68 4. Recording depreciation on the income tax return...69 Directors fees, allowances etc...70 Division 43 deductions...71 Donations...72 Electricity costs...73 Entertainment...73 1. What is deductible entertainment?...73 2. Recording entertainment expenses on the tax return...74 Fringe benefits and Fringe benefits tax ( FBT )...74 Insurance premiums, including workers compensation...74 Interest expenses...75 1. Interest incurred before the derivation of income...75 2. Interest incurred after an income activity has ceased...76 3. Interest on bills of exchange...77 4. Interest paid overseas...77 Land tax on business premises...78 Lease expenses (and hire purchase agreements)...78 1. Hire purchase agreements...78 2. Luxury car lease expenses...79 3. Recording lease expenses on the income tax return...80 4. Recording HP expenses on the income tax return...81 Legal Expenses...81 1. Revenue or Capital?...81 Motor vehicle expenses...83 Office stationery...83 Penalties, fines and breaches of the law...84 Phone expenses...84 Postage expenses...85 National Tax & Accountants Association Ltd: March 2008 iii
Prepayments...85 1. Taxpayer is an SBE and has chosen to apply the 12 month rule...85 2. Taxpayer is not an SBE (or is an SBE who has not chosen to apply the 12 month rule)...86 3. Eligible service period...86 Provisions and reserves in the accounts...87 Rates on business premises...89 Rent or lease of business premises...89 Repairs and maintenance...89 1. What is a repair?...89 2. What is not a repair?...90 Research and development ( R & D )...91 1. What expenditure is eligible for the R & D concessions?...92 2. The R & D tax offset...93 3. Recording R & D expenses on the income tax return...93 Royalties paid...94 Salaries and wages...95 Subscriptions...96 Superannuation contributions...96 Tax related expenses...98 Trading stock...98 1. Valuing trading stock for tax purposes...98 2. Trading stock for manufacturers... 100 3. Trading stock taken for own use... 101 4. Other items become trading stock... 101 5. Recording trading stock on the income tax return... 102 Travel expenses... 102 Water rates on business premises... 103 The tax reconciliation process... 105 1. The reconciliation process...106 iv National Tax & Accountants Association Ltd: March 2008
2. Differences in accounting and tax...107 2.1 Income for accounting purposes, but not taxable...107 2.2 Assessable income, but not included in accounting income...109 2.3 Expense for accounting, but not tax deductible...111 2.4 Deductible expense, but not included for accounting...115 3. Performing a tax reconciliation...117 3.1 Consolidated example tax reconciliation...117 Tax reconciliation worksheet...120 Completing the calculation statement...123 Calculating the tax liability...124 Label A Taxable or net income...124 Label B Gross tax...124 Label C Rebates/tax offsets...124 Tax assessed...125 Label D Foreign tax credits...125 Label E Franking deficit tax (FDT) offset...125 Label G Total of labels D and E...126 Tax payable...126 Label H Section 102AAM interest...126 Label T PAYG instalments raised...127 Label V Credit for interest on early payments amount of interest...127 Label I Credit for tax withheld foreign resident withholding...128 Label W Credit for tax withheld where ABN not quoted...128 Label Y Tax withheld from interest/investments...128 Label U R & D tax offset...129 Label Z Other refundable credits...129 Label R Total of labels T, V, I, W, Y, U and Z...129 Label S Total amount of tax payable or refundable...129 National Tax & Accountants Association Ltd: March 2008 v
Financial information disclosure... 131 Label N Functional currency translation rate... 131 Label O Functional currency chosen... 131 Label A Opening stock... 131 Label S Purchases and other costs... 132 Label B Closing stock... 132 Trading stock election...133 Label C Trade debtors... 133 Label D All current assets... 133 Label E Total assets...133 Label F Trade creditors... 133 Label G All current liabilities... 134 Label H Total liabilities... 134 Label J Total debt... 134 Label K Commercial debt forgiveness... 134 Label R Shareholders funds...134 Label J Franked dividends paid... 135 Label K Unfranked dividends paid... 135 Label M Franking account balance... 135 Label F Balance of conduit foreign income... 135 Label G Conduit foreign income distributed during the income year... 136 Label H Excess franking offsets... 136 Label L Balance of unfranked non-portfolio dividend account at year end... 136 Label N Loans to shareholders and their associates...136 Label Z Intangible depreciating assets first deducted... 137 Label A Other depreciating assets first deducted... 138 Label P Termination value of intangible depreciating assets... 138 Label E Termination value of other depreciating assets... 139 Label D Total salary and wage expense... 139 vi National Tax & Accountants Association Ltd: March 2008
Label Q Payments to associated persons...140 Labels R, S, B, C, U, V, W, X, O, I and Y...140 Schedules...140 (a) Dividend and interest schedule...140 (b) Capital allowances schedule...141 (c) Capital gains tax (CGT) schedule...141 (d) Other schedules...142 Franking account rules the simplified imputation system ( SIS )...143 1. The franking account return...143 1.1 Franking account and company tax return labels...143 2. Operation of the franking account...144 2.1 Franking credits...144 2.2 Franking debits...145 3. Franking a distribution of dividends...147 STEP 1 The benchmark rule...147 STEP 2 Allocating franking credits to the distribution...149 STEP 3 Distribution statements...150 STEP 4 Franking account...151 4. Companies receiving franked distributions...152 5. Other franking account matters...152 5.1 Over and under franking...152 5.2 Franking deficit tax ( FDT )...153 5.3 Franking deficit tax offset...153 5.4 Franking account disclosure requirements...153 5.5 Refund of excess franking credits...154 5.6 No wastage of losses...154 5.7 Trans-Tasman imputation regime...154 6. Summary table of franking credits and debits...154 National Tax & Accountants Association Ltd: March 2008 vii
Partnerships and trusts... 157 1. Primary production v non-primary production... 158 2. Partnerships... 158 2.1 Revenue losses incurred by a partnership... 159 2.2 Net capital gains and losses... 160 2.3 Partner salaries... 161 2.4 Completing the Statement of Distribution (Item 61)...161 3. Trusts... 165 3.1 Trust income vs. net income... 165 3.2 When is a beneficiary assessable?... 165 3.3 When is the trustee assessable?... 165 3.4 Revenue losses incurred by a trust... 166 3.5 Franking credits in a loss trust... 167 3.6 Net capital gains and losses... 167 3.7 Distributions by family trusts... 169 3.8 Completing the statement of distribution (Item 61)...169 The BIG picture... 177 1. Personal services income ( PSI )... 177 1.1 Definition of PSI... 177 1.2 When will income not be PSI?... 178 1.3 Completing the PSI Schedule for 2008... 180 1.4 Completing the 2008 income tax return... 180 1.5 Personal services income losses... 182 2. Non-commercial losses... 184 3. Fringe benefits tax ( FBT )... 184 3.1 Interaction of FBT with the tax return... 185 4. Impact of PAYG on salary and wage expense... 188 5. Goods and services tax ( GST )... 188 5.1 The effect of GST on allowable deductions... 189 viii National Tax & Accountants Association Ltd: March 2008
Record keeping requirements...191 1. Penalties for not keeping proper records...191 2. Income tax records...191 2.1 Keeping the records...192 3. Capital gains tax ( CGT )...193 3.1 Records that must be kept...193 4. Fringe benefits tax ( FBT )...194 4.1 Record keeping exemption...194 5. Goods and services tax ( GST )...195 6. Pay as you go ( PAYG )...195 7. ATO compliance activities...195 7.1 Individual taxpayers...195 7.2 Business taxpayers...196 7.3 Dividend, interest and income...196 7.4 Capital gains tax...196 7.5 Losses...197 7.6 General return preparation information...197 National Tax & Accountants Association Ltd: March 2008 ix