P8 Business income and expenses

This item has three sections:

• Income
• Expenses
• Reconciliation items

The amounts to be included in the Income and Expenses sections of item P8 are amounts derived from your accounting system or financial statements, except for:

• the values of opening and closing stock, which are to be shown at tax values, and
• depreciation expenses for small business entities choosing to use the simplified depreciation rules, which are to be shown at tax values.

The income and expense amounts to be included at item P8 should form part of your profit and loss statement and are the basis for calculating your net profit or loss. You should deal with any adjustments to these amounts for tax purposes in the Reconciliation items section of item P8.

Former STS taxpayers

If you are eligible and are continuing to use the STS accounting method, you must complete the income and expenses sections using the STS accounting method, see Former simplified tax system (STS) taxpayers.

Show personal services income and related expenses at item P1, with the exception of personal services income subject to foreign resident withholding, which you show at this item.

Income

The business income to be shown at item P8 is divided into:

• income from which tax has been withheld because you did not quote your ABN to one of your payers
• gross payments subject to foreign resident withholding
• income that was subject to a PAYG voluntary agreement to withhold tax
• income received under a labour-hire arrangement or from other specified payments
• assessable government industry payments
• other business income.

Do not show the following types of income at item P8:

• gross interest; show the amount of income at item 10 on your tax return
• dividends and franking credits; show the amounts at item 11 on your tax return
• distributions from partnerships and trusts; show these at item 13 on your tax return (supplementary section)
• gross rental or similar income that is not derived from carrying on a business of renting property, such as agistment or hire fees; show the amount at item 21 on your tax return (supplementary section)
• net capital gains; show at item 18 on your tax return (supplementary section)
• PSI shown at item P1
• farm management repayments; show at item 17 on your tax return (supplementary section)
• attributed foreign income; show at item 19 on your tax return (supplementary section)
• foreign source income; show at item 20 on your tax return (supplementary section).

Goods and services tax (GST)

If you are registered or required to be registered for GST, the following apply:

• For income tax purposes, you should exclude GST from assessable income, exempt income and amounts received or receivable that you take into account in calculating income and deductions.
• You should reduce deductible losses and outgoings by the amount of input tax credit entitlement. In certain circumstances, for example, a change in how much you used an asset for business purposes, an adjustment for GST purposes results in an amount being included in assessable income (if the adjustment is a GST-decreasing adjustment) or being deductible (if the adjustment is a GST-increasing adjustment).
• You should also exclude GST components under other specific rules including capital gains tax (cost base, reduced cost base and capital proceeds) and capital allowances (the cost and termination value of a depreciating asset).

If you are not registered or required to be registered for GST, you do not need to adjust your income and deductions for GST. You can claim the GST-inclusive amount incurred on deductible outgoings.

What you may need

• Primary production worksheet: If you are a primary producer, you will need this worksheet to help you determine some of the amounts in this section. The worksheet is included in Information for primary producers 2016 . Complete the worksheet before proceeding.
• Individual PAYG payment summary schedule 2016 (NAT 3647).

Did you have amounts withheld from your business income – other than PSI included at item P1?

No	Go to Assessable government industry payments.
Yes	Read on.

If tax has been withheld from business income, you should have received a payment summary.

You will need to complete the Individual PAYG payment summary schedule 2016 (NAT 3647) before completing item P8 if you received any of the following payment summaries:

• PAYG payment summary – business and personal services income (NAT 72545)
• PAYG payment summary – withholding where ABN not quoted (NAT 3283)
• PAYG withholding payment summary – foreign residents (NAT 73297).

The PAYG payment summary – business and personal services income allows reporting of different payment types (including voluntary agreement, labour hire or other specified payments). When completing the individual payment summary schedule, you must specify the nature of the income and the payment type made to you.

For more information, see the next section How to complete the Individual PAYG payment summary schedule 2016.

A payer may issue a receipt, remittance or similar document in place of the PAYG payment summary – withholding where ABN not quoted containing the same information as a payment summary.

If you received income from which tax was withheld and you did not receive or have lost your payment summary, contact your payer and ask for a copy.

How to complete the Individual PAYG payment summary schedule 2016

Remember: If you have both business income (item P8) and personal services income (item P1), you will need to complete an Individual PAYG payment summary schedule 2016 for each type of income.

Step 1  Write your TFN and name in the appropriate boxes at the top of the schedule.

Step 2  Nature of income, print X in the Business income box.

Step 3  For each payment summary, transfer the following information to the schedule:

• the type of withholding; look at your payment summary carefully to determine its type and complete the Type box, using the following key
  V  voluntary agreement
  S  labour hire or other specified payments
  N  withholding where ABN not quoted
  F  foreign resident withholding
• the payer’s ABN or withholding payer number (WPN) and the payer’s name in the appropriate boxes
• the total tax withheld in the Tax withheld box
• the gross payment in the Gross payment box.

Step 4  Check that you have recorded details from all relevant payment summaries on your payment summary schedule, then attach the schedule to page 3 of your tax return.

Do not attach the payment summaries to your tax return. You must keep them for a period of five years.

Payers must report to us details of payments where amounts of tax have been withheld. This information will be cross-checked with that on your tax return to make sure that you have declared the correct amount of income and the correct amount of tax withheld.

Gross payments where Australian business number (ABN) not quoted

Did you have amounts of tax withheld for failure to quote an ABN?

No	Go to Gross payments subject to foreign resident withholding.
Yes	Read on.

You need to know

The amounts you show at C and D are the total income you received from which your payers have withheld an amount because you did not quote your ABN. You will be able to calculate these amounts from your completed Individual PAYG payment summary schedule 2016.

Completing this item

Step 1  Add up all the Gross payment amounts on your completed payment summary schedule derived from primary production activities that have an N in the Type box. Write the total at C item P8 on page 2 of your schedule. Do not show cents.

Step 2  Add up all the Gross payment amounts on your completed payment summary schedule derived from non-primary production activities that have an N in the Type box. Write the total at D. Do not show cents.

Step 3  Add up the amounts you have written at C and D and write the total in the adjacent Totals box.

If you complete C or D item P8 you must complete W item 15 on page 14 of your tax return (supplementary section).

Gross payments subject to foreign resident withholding

Did you receive any payments that were subject to foreign resident withholding?

No	Go to Gross payments – voluntary agreement.
Yes	Read on.

You need to know

The amount you show at B is the total income you received from your payers which is subject to foreign resident withholding. It includes any amounts of tax withheld. You will be able to calculate this amount from your completed Individual PAYG payment summary schedule 2016.

Completing this item

Step 1  Add up all the Gross payment amounts on your completed payment summary schedule derived from non-primary production activities that have an F in the Type box. Write the total at B item P8 on page 2 of your schedule. Do not show cents.

Step 2  Transfer the amount at B to the adjacent Totals box.

If you complete B item P8, you must complete E item 15 on page 14 of your tax return (supplementary section).

Gross payments – voluntary agreement

Did you receive any income that was subject to a PAYG voluntary agreement?

No	Go to Gross payments – labour hire or other specified payments.
Yes	Read on.

You need to know

The amounts you show at E and F are the total income you received that was subject to a voluntary agreement to withhold tax and include the tax withheld. You will be able to calculate this amount from your completed Individual PAYG payment summary schedule 2016.

Completing this item

Step 1  Add up all the Gross payment amounts on your completed payment summary schedule derived from primary production activities that have a V in the Type box. Write the total at E item P8 on page 2 of your schedule. Do not show cents.

Step 2  Add up all the Gross payment amounts on your completed payment summary schedule derived from non-primary production activities that have a V in the Type box. Write the total at F. Do not show cents.

Step 3  Add up the amounts you have written at E and F, and write the total in the adjacent Totals box.

If you complete E or F item P8, you must complete D item 15 on page 14 of your tax return (supplementary section).

Gross payments – labour hire or other specified payments

Did you receive:

• income under a labour-hire arrangement, or
• a specified payment, including    
  • income from tutorial services provided for the Indigenous Tutorial Assistance Scheme of the Department of Prime Minister and Cabinet
  • income from translation and interpretation services for the Translating and Interpreting Service National of the Department of Home Affairs, or
  • income as a performing artist in a promotional activity?
    
   

No	Go to Assessable government industry payments.
Yes	Read on.

You need to know

The amount you show at O is the total income you received from labour hire or specified payments and includes the tax withheld. You will be able to calculate this amount from your completed Individual PAYG payment summary schedule 2016.

Do not include income received as an employee of a labour-hire business. These amounts will appear on your PAYG payment summary – individual non-business, and should be shown at item 1 on your tax return.

Completing this item

Step 1  Add up all the Gross payment amounts on your completed payment summary schedule that have an S in the Type box. These amounts are non-primary production income. Write the total at O item P8 on page 2 of your schedule. Do not show cents.

Step 2  Transfer the amount at O to the adjacent Totals box.

If you complete O item P8, you must complete F item 15 on page 14 of your tax return (supplementary section).

You will not have any primary production amounts at this item. Leave N blank.

Assessable government industry payments

Did you receive assessable government industry assistance?

No	Go to Other business income.
Yes	Read on.

You need to know

Generally, government credits, grants, rebates, bounties and subsidies are assessable income in the hands of the recipient if they are received in, or in relation to, the carrying on of a business. This generally includes amounts of a capital nature. However, amounts relating to the commencement or cessation of a business may give rise to a capital gain.

Examples of assessable government industry assistance are:

• bounties
• cleaner fuels grant
• drought relief
• employee subsidies
• export incentive grants
• fuel tax credits
• industry restructuring and adjustment payments
• producer rebate (wine equalisation tax)
• product stewardship (oil) benefit.
• See also Taxation Ruling TR 2006/3: Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business.
• Do not show ‘Medicare payments received by medical practices’ at this item. Show them at Other business income.

Completing this item

Step 1 Write your total primary production government industry payments received by each business at G item P8 on page 2 of your schedule. Do not show cents.

If you have completed the Gross income from primary production worksheet in Information for primary producers 2016, include at G the amount at PP11 on the worksheet.

Step 2  If your assessable primary production government industry payments include fuel tax credits, print D in the Type box at the right of the amount at G.

Step 3  Write your total non-primary production government industry payments received by each business at H. Do not show cents.

Step 4  If your assessable non-primary production government industry payments include fuel tax credits, print D in the Type box at the right of the amount at H.

Step 5  Add up the amounts you have written at G and H, and write the total in the adjacent Totals box.

Other business income

Did you receive any other business income?

No	Go to Total business income.
Yes	Read on.

You need to know

Other business income includes:

• gross sales of trading stock
• gross sales from produce
• goods taken from stock for your own use
• value of livestock killed for rations
• value of livestock exchanged for other goods or services
• gross earnings from services
• rent derived from carrying on a business of renting property
• taxi driver earnings (income you earned as a non-employee taxi driver if it is not shown at item P1)
• amounts received as recoupment of expenses
• bad debts recovered
• profit on sale of depreciating assets
• royalties
• insurance recoveries
• subsidies
• employee contributions for fringe benefits
• assessable non-government assistance from all sources
• foreign exchange (forex) gains.

Your ‘other business income’ excludes amounts shown at C, D, B, E, F, N, O, G and H on your schedule.

If you are a primary producer, you must add the amounts shown at PP1, PP2, PP6, PP7 and PP10 on your Gross income from primary production worksheet. This worksheet is included in the publication Information for primary producers 2016. You must add the total to any other income from a business of primary production referred to above. You show the total of all other income from the business of primary production at I item P8 on page 2 of your schedule.

Completing this item

Step 1  Write your total amount of ‘other’ primary production business income or loss at I item P8 on page 2 of your schedule. Do not show cents.

Step 2  If you made a loss, print L in the box at the right of the amount at I.

Step 3  Write your total amount of ‘other’ non-primary production business income or loss at J. Do not show cents.

Step 4  If you made a loss, print L in the box at the right of the amount at J.

Step 5  Add up your ‘other’ primary production and non-primary production business income or loss and write the total in the adjacent Totals box.

Step 6  If you made a loss, print L in the box at the right of the Totals box.

Total business income

Completing this item

Step 1  Add up the primary production amounts shown at C, E, N, G and I item P8 on your schedule. Write the total at TOTAL BUSINESS INCOME in the Primary production column. Remember that N will be blank.

Step 2  If you made a loss, print L in the box at the right of the amount at TOTAL BUSINESS INCOME in the Primary production column.

Step 3  Add up the non-primary production amounts shown at D, B, F, O, H and J item P8 . Write the total at TOTAL BUSINESS INCOME in the Non-primary production column.

Step 4  If you made a loss, print L in the box at the right of the amount at TOTAL BUSINESS INCOME in the Non-primary production column.

Step 5  Add up the amounts at TOTAL BUSINESS INCOME in the Primary production and Non-primary production columns and write the total in the adjacent Totals box. If you made a loss, print L in the box at the right of this amount.

Expenses

Do not include the following expense items on your schedule:

• non-business interest and dividend income expenses; claim deductible expenses at items D7 and D8 on your tax return
• farm management deposits; take them into account as required at item 17 on your tax return (supplementary section)
• non-business rental expenses; claim deductible expenses at item 21 on your tax return (supplementary section)
• expenses and losses relating to foreign source income; take them into account as required at item 20 or, in the case of certain debt deductions, claim them at item D15 on your tax return (supplementary section)
• expenses relating to your personal services income shown at item P1 on your schedule
• low-value pool deduction, where the pool contains assets used for work-related, self-education or non-business rental purposes; see question D6 in Individual tax return instructions 2016.

You need to complete all items that relate to your business or businesses.

If you are a primary producer, you will need a primary production worksheet to help you work out some of the amounts in this section. This worksheet is included in the publication Information for primary producers 2016. Complete the worksheet before proceeding.

Goods and services tax

If you are registered or required to be registered for GST, exclude from the deductions any input tax credit entitlements that arise in relation to outgoings.

If you pay GST by instalments, and incurred a penalty for underestimating a varied GST instalment, you can claim a deduction for the penalty at item D10 on your tax return. Do not show the penalty on your Business and professional items schedule for individuals 2016.

Find out about:

• Individual tax return instructions 2016

Records you need to keep

You must keep your business expenses records for five years after you prepared or obtained them, or five years after you completed the transactions or acts to which they relate.

Prepayments of $1,000 or more

If you made a prepayment of $1,000 or more for something to be done (in whole or in part) in a future income year, the timing of your deduction may be affected by the rules relating to prepayments. Generally, you will need to apportion your deduction for prepaid business expenditure over the service period, or 10 years, whichever is less. There is an exception for small business entities if the 12-month rule applies.

Where expenses shown at item P8 include prepaid expenses that differ from the amounts allowable as deductions in 2015–16, then make an expense reconciliation adjustment at H in the Reconciliation items section of item P8.

Find out about:

• Deductions for prepaid expenses 2016

Thin capitalisation

The thin capitalisation provisions apply to entities (including individuals) to reduce certain deductions (called ‘debt deductions’) for costs incurred in obtaining and servicing debt finance, where the debt applicable to Australian operations exceeds the limits set out in Division 820 of the ITAA 1997.

Do the thin capitalisation provisions apply to you?

The thin capitalisation rules may apply to you if:

• you are an Australian resident and you, or any of your associate entities, are an Australian controller of a foreign entity or carry on business overseas at or through a permanent establishment, or
• you are a foreign resident with operations or investments in Australia and you are claiming debt deductions.

The thin capitalisation rules will not affect you if:

• your debt deductions (combined with the debt deductions of your associate entities) do not exceed $2,000,000 in the income year, or
• you are an Australian resident and the combined value of your associates’ and your Australian assets is not less than 90% of the value of your associates’ and your total assets.

If the thin capitalisation rules affect you, the amount of any debt deductions you can claim may be reduced by these rules.

See also:

• Thin capitalisation

Opening stock

Did you have trading stock on hand at the start of the year?

No	Go to Purchases and other costs.
Yes	Read on.

You need to know

The opening value of an item of stock must equal its closing value in the previous year. The total value of all stock on hand at the start of the year is equal to the amount shown as closing stock on your 2015 schedule.

If you are a primary producer, you must add the value of your opening stock from your livestock account at PP4 on your primary production worksheet to the value of your opening stock from your produce account at PP9 on your primary production worksheet. The total of these amounts is the total value of your primary production opening stock.

Do not include any amounts representing opening stock of a business which commenced operations during the year. Include the purchase costs of these items in the relevant Purchases and other costs box.

Completing this item

Step 1  Write the total value of your primary production opening stock at Opening stock in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write the total value of your non-primary production opening stock at Opening stock in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production opening stock values and write the total at K.

Purchases and other costs

Did you have purchases and other costs?

No	Go to Closing stock.
Yes	Read on.

You need to know

This represents the direct cost of materials used for manufacture, sale or exchange in deriving the gross proceeds or earnings of the business. It includes inwards freight; and also the cost of stock acquired when starting or acquiring a business during the year. It may also include some costs for labour and services provided under contract, if these are recorded in the cost of sales account in your business books of account. If so, do not also include this amount as Contractor, sub-contractor and commission expenses.

If you are a primary producer, you must include the value of your purchases from your livestock account at PP5 on your primary production worksheet.

Completing this item

Step 1  Work out the value of your primary production purchases and other costs directly related to trading stock. If you have more than one business, add up all your primary production purchases and costs.

Step 2  Write the total value of your primary production purchases and other costs directly related to trading stock at Purchases and other costs in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 3  Work out the value of your non-primary production purchases and other costs directly related to trading stock. If you have more than one business, add up all your non-primary production purchases and other costs.

Step 4  Write the total value of your non-primary production purchases and other costs directly related to trading stock at Purchases and other costs in the Non-primary production column. Do not show cents.

Step 5  Add up your primary production and non-primary production purchases and other costs directly related to trading stock, and write the total at L.

Former STS taxpayers

If you are eligible and are continuing to use the STS accounting method, show at L only purchases and other costs that you have paid. See Former simplified tax system (STS) taxpayers.

Closing stock

Did you have trading stock on hand at the end of the year?

No	Go to Cost of sales.
Yes	Read on.

If you are a small business entity and are choosing to use the simplified trading stock rules, read on. Otherwise, go to Other businesses.

Small business entities

You need to know

You need to account for changes in the value of your trading stock only if there is a difference of more than $5,000 between the value of all your stock on hand at the start of the income year and a reasonable estimate of the value of all your stock on hand at the end of the income year.

The value of your stock on hand at the start of the income year is the same value as the closing value shown on your schedule in the previous year. This may not necessarily reflect the actual value of your stock if you did not account for the change in value of your stock in the previous year. For more information on a reasonable estimate of the value of stock, see ato.gov.au or phone 13 28 66.

You can still choose to conduct a stocktake and account for changes in the value of trading stock, if you wish.

Is the difference between the value of your opening stock and a reasonable estimate of your closing stock more than $5,000?

Yes	You must account for changes in the value of your trading stock. Go to step 2.
No	If you choose not to account for changes in the value of your trading stock, go to step 1. Otherwise, go to step 2.

Completing this item

Step 1  If the difference referred to above is $5,000 or less and you choose not to account for this difference, the closing stock values you put in both the Primary production and Non-primary production columns at item P8 on page 3 of your schedule must be the same as the values you put at Opening stock. Do not put your reasonable estimate.

Add up your primary production and non-primary production closing stock values, and write the total at M.

Write in the Type box at the right of M the code letter you used last year to value closing stock:

C cost
M market selling value
R replacement value.

If this is your first year in business, the value of your closing stock will be zero. Print C in the Type box.

Go to Cost of sales

Step 2  If the difference referred to above is more than $5,000 or you choose to account for the difference in trading stock, the closing stock values must be brought to account under section 70-35 of the ITAA 1997. See Other businesses for how to complete this item.

You must include in your closing stock value at M item P8 the value of all stock on hand, regardless of whether you have paid for the stock.

Other businesses

You need to know

The amount that is shown at Closing stock is the total of the value of all items of trading stock, with the value of each item calculated for tax purposes in accordance with section 70-45 of the ITAA 1997.

Trading stock is anything you have on hand which you produced, manufactured, acquired or purchased for the purpose of sale, manufacture or exchange. For example, trading stock includes livestock but not working animals (except those used by a primary producer), crops and timber when harvested, and wool after it is removed from the sheep.

Manufacturers must include as trading stock partly manufactured goods and materials on hand. However, closing stock excludes any amount that represented closing stock of a business that ceased operations during the year. This amount is included in Other business income at I or J in the Income section of item P8. For more details about what constitutes trading stock, read Simplified trading stock rules or phone 13 28 66.

You can choose one of the following three methods to value your trading stock:

• cost
• market selling value
• replacement value.

You may elect to value an item of trading stock below the lowest value calculated by any of these methods because of obsolescence or other special circumstances. The value you elect must be reasonable. Where you elect to value an item of trading stock below cost, market selling value and replacement value, you must complete item P19 on your schedule.

You may use different methods to calculate each item of trading stock in different years or for different items in the same year. However, the opening value of each item in a particular year must be the same as the closing value for that item in the previous year.

If you are registered for GST, the value of closing stock should not include an amount equal to the input tax credit that would arise if you had acquired the item solely for business purposes at the end of the income year. Input tax credits do not arise for some items of trading stock, such as shares.

If you are a primary producer, you must add the value of your closing stock from your livestock account at PP3 on your primary production worksheet to the value of your closing stock from your produce account at PP8 on your primary production worksheet.

The total of these amounts is the total value of your primary production closing stock.

As the tax values of closing stock on hand are shown at PP3 and at PP8 on your primary production worksheet, you cannot reduce these values by accounting entries. Keep records showing how each item was valued.

Completing this item

Step 1  Work out the value of your primary production closing stock. If you have more than one business, add up all your primary production closing stock values.

Step 2  Write the total value of your primary production closing stock at Closing stock in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 3  Work out the value of your non-primary production closing stock. If you have more than one business, add up all your non-primary production closing stock values.

Step 4  Write the total value of your non-primary production closing stock at Closing stock in the Non-primary production column. Do not show cents.

Step 5  Add up your primary production and non-primary production closing stock values and write the total at M.

Step 6  From the list below, choose the letter that matches the method you used to value closing stock. If more than one method was used, select the letter that applies to the largest value:

C  cost
M  market selling value
R  replacement value.

Step 7  Print the letter from step 6 in the Type box at the right of the amount at M.

Cost of sales

Did you have any cost of sales?

No	Go to Foreign resident withholding expenses.
Yes	Read on.

You need to know

Goods taken for your own use should not be accounted for as stock on hand at 30 June 2016. Include at I and J Other business income in the Income section of item P8 on your schedule the value of:

• livestock killed for rations
• livestock exchanged for other goods or services
• goods taken for your own use.

Use worksheet 1 to work out your cost of sales.

Worksheet 1: Cost of sales

	Primary production	Non-primary production
Stock at 1 July 2015	$	$	(a)
Purchases at cost	$	$	(b)
Freight inwards	$	$	(c)
Other, for example, labour and services	$	$	(d)
Add (a), (b), (c) and (d).	$	$	(e)
Stock at 30 June 2016	$	$	(f)
Your cost of sales Take away (f) from (e).	$	$

For further information on stock on hand at 1 July 2015, see Opening stock . For information on stock on hand at 30 June 2016, see Closing stock.

Completing this item

Step 1  Write your total primary production cost of sales at Cost of sales in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  If the cost of sales in the Primary production column, after taking away (f) from (e), is a negative amount, print L in the box at the right of this amount.

Step 3  Write your total non-primary production cost of sales at Cost of sales in the Non-primary production column. Do not show cents.

Step 4  If the cost of sales in the Non-primary production column after taking away (f) from (e), is a negative amount, print L in the box at the right of this amount.

Step 5  Add up your primary production and non-primary production cost of sales and write the total at Cost of sales in the Totals column.

Step 6  If your total cost of sales is a negative amount, print L in the box at the right of this amount.

Foreign resident withholding expenses

Did you have any expenses directly relating to income subject to foreign resident withholding?

No	Go to Contractor, sub-contractor and commission expenses.
Yes	Read on.

Completing this item

Step 1  Write your total non-primary production foreign resident withholding expenses at Foreign resident withholding expenses in the Non-primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Transfer the amount you wrote at step 1 to the adjacent Totals box at U.

You will not have any primary production expense amounts at this item.

Contractor, sub-contractor and commission expenses

Did you have any contractor, sub-contractor or commission expenses in your business?

No	Go to Superannuation expenses.
Yes	Read on.

You need to know

These are expenses for labour and services provided under contract, other than salaries or wages, for example:

• payments to self-employed people, such as consultants and contractors, including payments subject to a PAYG voluntary agreement to withhold, and payments made under a labour-hire arrangement
• commissions paid to people not receiving a retainer
• agency fees, for example, for services provided by an advertising agency
• service fees, for example, plant service
• management fees
• consultant fees.

Do not include the following at this item:

• expenses for external labour which have been included in the business cost of sales account
• expenses for accounting or legal services; include these at All other expenses.

Completing this item

Step 1  Write your total primary production contractor, sub-contractor and commission expenses at Contractor, sub-contractor and commission expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production contractor, sub-contractor and commission expenses at Contractor, sub-contractor and commission expenses in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production contractor, sub-contractor and commission expenses and write the total at F.

Superannuation expenses

Did you make any superannuation contributions on behalf of eligible employees or their dependants as a business expense?

No	Go to Bad debts.
Yes	Read on.

You need to know

Show superannuation expenses for the income year. Do not include any amount that was a contribution for yourself. The deduction for your own superannuation contributions must be claimed at item D12 on your tax return (supplementary section). See question D12 in Individual tax return instructions supplement 2016.

Employers are entitled to a deduction for the contributions they made to a complying superannuation, provident, benefit or retirement fund or retirement savings account (RSA) where the contributions are to provide superannuation benefits for employees or to provide benefits to the employee’s dependants on the employee’s death. A deduction is allowable in the income year in which the contributions are made.

Contributions made to a non-complying fund:

• are not allowable as a deduction, and
• do not count towards superannuation guarantee obligations.

You can check the compliance status of superannuation funds at superfundlookup.gov.auExternal Link Under the superannuation guarantee, an employer needs to provide a minimum level of superannuation for employees. If the employer does not make the minimum contribution by the relevant date, the employer is required to pay the superannuation guarantee charge on the superannuation guarantee shortfall. The superannuation guarantee charge is not a superannuation contribution and is not tax deductible. Contributions made by employers to offset a superannuation guarantee charge liability are not deductible.

Contributions paid by an employer to a non-complying superannuation fund on behalf of an employee are generally fringe benefits (other than where the contributions are made for a temporary resident) and may be subject to tax under the Fringe Benefits Tax Assessment Act 1986.

There is no age-related limit on deductions for contributions made on or before the 28th day following the end of the month in which the employee turns 75. However, the employee may be liable to pay additional tax if their concessional contributions exceed their concessional contributions cap.

Find out about:

• Super contributions - too much super can mean extra tax

For contributions made after the 28th day following the end of the month of the employee’s 75th birthday, the deduction claimable is limited to:

• the amount of the contribution required under an industrial award, determination or notional agreement preserving State awards, or
• the amount of the contribution that reduces an employer's charge percentage under the Superannuation Guarantee (Administration) Act 1992 in respect of the employee, or
• where both amounts are applicable, the greater of the two amounts is to be applied.

Completing this item

Step 1  Write your total primary production superannuation contributions at Superannuation expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production superannuation contributions at Superannuation expenses in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production superannuation contributions and write the total at G.

Bad debts

Did you write off any bad debts in your business?

No	Go to Lease expenses.
Yes	Read on.

You need to know

Include income from the recovery of bad debts in Other business income at I or J in the Income section of item P8.

You are not allowed a deduction for bad debts unless you have previously included the amount in your assessable income and it relates to money you lent in the ordinary course of a money-lending business or it represents a business loss or outgoing of a revenue nature.

Before you can claim a bad debt, it must be bad and not merely doubtful. The question of whether a debt is a bad debt will depend on the facts in each case and, where applicable, the action taken for recovery.

Do not include accounting provisions for doubtful debts at I. You show them in the Expenses section at All other expenses, then add them back at H Expense reconciliation adjustments in the Reconciliation items section.

See also:

• Taxation Ruling TR 92/18 – Income tax: bad debts

You can also claim a deduction for:

• partial debt write-offs; where only part of a debt is bad and is written off, you may claim a deduction for the amount written off
• losses incurred for debt written off under a debt-for-equity swap where you discharge, release or otherwise extinguish the whole or part of a debt owed to you in return for equity in the debtor.

In the case of a debt-for-equity swap, you can claim a deduction for the difference between the amount of the debt and the greater of the market value of the equity at the time of issue or the value of the equity recorded in your books at the time of issue.

Records you need to keep

Keep a statement for all debtors whose bad debts you wrote off during the year, showing:

• their name and address
• the amount of the debt
• the reason you regarded the debt as bad
• where applicable, the year that you returned the amount as income.

Completing this item

Step 1  Write your total primary production bad debts at Bad debts in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production bad debts at Bad debts in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production bad debts and write the total at I.

Lease expenses

Did you have lease expenses in your business?

No	Go to Rent expenses.
Yes	Read on.

You need to know

This is expenditure incurred on financial leases and on operating leases for assets such as motor vehicles and plant. Do not include the cost of leasing real estate (show this cost at K Rent expenses).

If you include capital expenditure incurred to terminate a lease or licence you will need to add back the amount at H Expense reconciliation adjustments. Although capital expenditure to terminate a lease or licence is not deductible in one year, a five-year straight-line write-off may be allowable (see section 25–110 of the ITAA 1997) for certain capital expenditure incurred to terminate a lease or licence if the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business, See worksheet 4 and note 3.

In some circumstances, lease expenses may be debt deductions for the purposes of the thin capitalisation rules.

If you include an amount of lease expense which is not allowable as a deduction, such as amounts disallowed under the thin capitalisation rules, you will need to add back the amount at H Expense reconciliation adjustments in the Reconciliation items section on your schedule.

Expenses incurred under a hire purchase agreement are not lease expenses. Such expenses are dealt with at H Expense reconciliation adjustments in the Reconciliation items on your schedule.

Special rules apply to leased cars if the cost of the car exceeds the car limit that applies for the financial year in which the lease commences. The car limit for 2015–16 is $57,466.

If you lease a car that is subject to the special rules, the reconciliation between the lease expense and the tax treatment is carried out at H Expense reconciliation adjustments in the Reconciliation items section. For more information, see Luxury car leasing.

Records you need to keep

List the assets leased and keep full details of the leasing expenses for each item, including motor vehicles, and details of any private use. Leasing expenses of certain cars fall under the substantiation rules.

Completing this item

Step 1  Write your total primary production lease expenses at Lease expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production lease expenses at Lease expenses in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production lease expenses and write the total at J.

Rent expenses

Did you have rent as a business expense?

No	Go to Interest expenses within Australia.
Yes	Read on.

You need to know

This is expenditure you incurred as a tenant for rental of land and buildings used in the production of income. Include the cost of leasing real estate.

Completing this item

Step 1  Write your total primary production rent expenses at Rent expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production rent expenses at Rent expenses in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production rent expenses and write the total at K.

Interest expenses within Australia

Did you incur interest as a business expense on money borrowed within Australia?

No	Go to Interest expenses overseas.
Yes	Read on.

You need to know

Include interest you incurred on money borrowed within Australia to acquire income-producing assets used in your business, to finance business operations or to meet current business expenses.

Do not include interest incurred in deriving rental income. Claim this at item 21 on your tax return (supplementary section).

If you include an amount of interest which is not allowable as a deduction, such as amounts denied by the thin capitalisation rules, you will need to add back the amount at H Expense reconciliation adjustments in the Reconciliation items section on your schedule.

Completing this item

Step 1  Write your total primary production interest expenses within Australia at Interest expenses within Australia in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production interest expenses within Australia at Interest expenses within Australia in the Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3  Add up your primary production and non-primary production interest expenses within Australia and write the total at Q.

Interest expenses overseas

Did you incur interest as a business expense on money borrowed overseas?

No	Go to Depreciation expenses.
Yes	Read on.

You need to know

Include any interest incurred on money borrowed from overseas sources to acquire income-producing assets used in your business, to finance business operations or to meet current business expenses.

Do not include interest incurred in deriving rental income. Claim this at item 21 on your tax return (supplementary section).

Generally, you are required to withhold an amount of withholding tax from interest paid or payable to non-residents and from interest derived by a resident through an overseas branch. You must send these amounts to us. You cannot deduct an interest expense if you were required to withhold tax on that interest and you failed to do so.

If you paid or credited any interest or amounts in the nature of interest to a non-resident of Australia or to a resident’s overseas branch, you will need to provide additional information. Print Schedule of additional information – Item 15 on the top of a separate piece of paper. Show the name and address of each recipient, total amounts paid or credited to each non-resident or overseas branch of a resident and the amount of tax withheld. If no tax was withheld, state the reason for this. Include your name, address and TFN. Print X in the Yes box at Taxpayer’s declaration on your tax return. Attach the schedule to page 3 of your tax return.

For information on the tax treatment of interest paid to non-residents, phone 13 28 66.

If you include an amount of interest which is not allowable as a deduction, such as amounts denied by the thin capitalisation rules, you will need to add back the amount at H Expense reconciliation adjustments in the Reconciliation items section on your schedule.

Completing this item

Step 1  Write your total primary production overseas interest expenses at Interest expenses overseas in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production overseas interest expenses at Interest expenses overseas in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production overseas interest expenses and write the total at R.

Depreciation expenses

Did you have depreciation as a business expense?

No	Go to Motor vehicle expenses.
Yes	If you are a small business entity and are choosing to use the simplified depreciation rules, read on. Otherwise go to Other businesses.

Continuing small business pools

If you are not carrying on a business this year, but in a prior year you allocated assets to a general small business pool or long-life small business pool (or the law allocated the assets to such a pool), do not include the pool deductions at this item. Show such deductions at item D15 on your tax return (supplementary section).

Small business entities

You need to know

You show at M Depreciation expenses item P8 the total depreciation deductions being claimed under the small business entity capital allowances (depreciation) rules and for the business use of other assets under the uniform capital allowances (UCA) rules. This includes your deduction under the small business entity rules for depreciating assets used for work-related or self-education purposes. However, this excludes any amount included at part B of item P1.

Small business entities can claim an immediate deduction for most depreciating assets costing less than $20,000 (excluding input tax credit entitlements) and can pool most of their other depreciating assets in a general small business pool.

Some depreciating assets are excluded from these simplified depreciation rules, but a deduction may be available under the UCA rules.

If you are a small business entity and are choosing to use these simplified depreciation rules, you must use immediate write-off and pooling as applicable. You cannot choose to use one and not the other.

Five-year restriction

Small business entities that have previously elected out of the simplified depreciation rules are no longer subject to the ‘lock-out’ rule (which prevented small businesses from re-entering the simplified depreciation regime for five years if they had opted out). These entities may re-elect to use the simplified depreciation rules.

Find out about:

• Simplified depreciation rules
• Phone 13 28 66

Calculating your depreciation deductions

If your accounting system or financial statements provide you with the amounts to complete worksheet 2, write these amounts in the worksheet. Otherwise, use calculations 1 to 5 to calculate your depreciation deductions.

The amounts you write in worksheet 2 must be tax values and not accounting values.

Calculation 1: Deduction for certain assets (costing less than $20,000)

An immediate deduction is available for certain depreciating assets:

• which you started to use, or have installed ready for use during the income year
• whose cost at the end of the year is less than $20,000 (excluding input tax credit entitlements)
• that qualify for a deduction under the small business entity depreciation rules.

Work out the taxable purpose proportion of each of these types of asset. You calculate the deduction for each eligible asset as follows:

asset's adjustable value x taxable purpose proportion

Add up these results and write the total at (a) in worksheet 2.

The adjustable value of an asset, at the time it was first used (or installed ready for use) for a taxable purpose, will be its cost unless the asset was previously used (or installed ready for use) by the small business solely for private purposes. For example, for a vehicle bought on 1 December at a cost of $19,990 (excluding input tax credit entitlements) and used for producing assessable income from that date at an estimated 70% of the time, the immediate deduction would be $19,990 × 70% = $13,993.

Do not include the following amounts in this calculation; allocate these assets to the general small business pool (see calculation 2).

• depreciating assets costing less than $20,000 which you held prior to using the simplified depreciation rules
• depreciating assets that cost $20,000 or more. Such assets must be allocated to the general small business pool (see calculation 2) even if the taxable purpose proportion is less than $20,000. For example, if the vehicle above cost $20,200, the taxable purpose proportion is $14,140 ($20,200 x 70%). However, you cannot obtain an instant deduction and the vehicle must still be allocated to the general small business pool because its cost is not less than $20,000.

Definitions

Adjustable value of a depreciating asset is its cost (excluding input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

Assessable balancing adjustment amount arises where the termination value of the depreciating asset is more than the adjustable value.

Cost addition amounts include the cost of capital improvements to assets and costs reasonably attributable to disposing of or permanently ceasing to use an asset (this may include advertising and commission costs or the costs of demolishing the asset).

Decline in value (previously ‘depreciation’) is the value that an asset loses over its effective life.

Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.

Depreciating asset is an asset with a limited effective life which declines in value over that life.

Taxable purpose includes the purpose of producing assessable income.

Taxable purpose proportion is the extent to which you use the asset for a taxable purpose, such as for the purpose of producing assessable income.

Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. Exclude the GST component where the amount received is for a taxable supply.

Calculation 2: General small business pool deduction

To calculate your deductions for the general small business pool you must first calculate the opening pool balance of the pool.

If 2015–16 was the first income year for which you were a small business entity and chose to apply the simplified depreciation rules, the opening balance of the general small business pool is the sum of the taxable purpose proportions of the adjustable values of the depreciating assets that were:

• used, or held for use, just before the start of 2015–16
• not excluded from the simplified depreciation rules.

Include only the taxable purpose proportion of the adjustable value of each depreciating asset. For example:

• for an asset with an adjustable value of $50,000 which is used only 50% for an income-producing purpose, add only $25,000 to the pool
• for an asset with an adjustable value of $20,200 which is used 70% for an income-producing purpose, add only $14,140 to the pool.

You can choose not to allocate an asset to your general small business pool if you first used it, or installed it ready for use, for a taxable purpose before 1 July 2001.

For an income year that is not the first income year for which you were a small business entity, the opening pool balance of the general small business pool is the closing pool balance for the previous income year, except where you make an adjustment to reflect the changed business use of a pooled asset.

Calculate your deduction for the general small business pool in 2015–16 as follows:

• opening pool balance ($) x 30%
• where necessary, make a reasonable apportionment for the general small business pool deduction between primary production and non-primary production activities
• write the result of your general small business pool deduction at (b) in worksheet 2
• if the pool balance (after taking into account additions and disposals but before calculating the deductions in steps 2, 3 and 4) is below $20,000, you instead work out the deduction for the pool using calculation 5.

Calculation 3: Depreciating assets including motor vehicles first used for a taxable purpose during 2015–16 and cost addition amounts for assets already allocated to a pool

You calculate your deduction at half the general small business pool rate for:

• depreciating assets that you first used or installed ready for use for a taxable purpose during the year
• cost addition amounts for assets already allocated to the general small business pool.

Calculate your deduction as follows:

• the taxable purpose proportion of the adjustable value of each depreciating asset first used for a taxable purpose this year multiplied by 15%, plus
• the taxable purpose proportion of the cost addition amounts multiplied by 15%.

Write the total deduction for general small business pool assets at (c) in worksheet 2.

Calculation 4: Other depreciating assets

Work out your deduction for the decline in value of all your other depreciating assets that are not included in calculations 1 to 3.

For information on how to calculate the decline in value of these assets, see the Guide to depreciating assets 2016 (NAT 1996).

Write your total deduction for other depreciating assets at (e) in worksheet 2.

Do not include at (e) in the worksheet depreciating assets which qualify for a deduction under Subdivision 40-F or 40-G of the ITAA 1997 as water facilities, fencing assets, fodder storage assets or landcare operations in your primary production business and for which you have chosen to claim a deduction under those Subdivisions and not these small business entity depreciation rules. Show these deductions at W Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset item P8 Reconciliation items.

Calculation 5: Disposal of depreciating assets

(a) Certain assets (costing less than $20,000) and low-cost assets claimed in previous years

If you have disposed of a depreciating asset (costing less than $20,000) for which you have claimed an immediate deduction in calculation 1 this year and/or a low-cost asset for which you have claimed an immediate deduction in a prior year, include the taxable purpose proportion of the termination value in the Reconciliation items section of item P8.

For example, you acquired an asset on 1 February 2013 for $6,400 for 100% taxable use and claimed an immediate write-off under the threshold which existed at that time. You disposed of this asset at arm's length on 1 February 2016 for $3000. Include $3000 as income at Reconciliation items Item 5.

(b) Assets allocated to the general small business pool

Where you dispose of depreciating assets that have been allocated to the general small business pool, you deduct the taxable purpose proportion of the termination value from the closing pool balance. For example, for a pooled depreciating asset which used only 50% for an income-producing purpose, and was sold for $3,000 (excluding GST), only $1,500 will be deducted from the closing pool balance. If the balance of a pool is below $20,000 but greater than zero (after taking into account any additions and disposals but before calculating the deductions in calculations 2, 3 and 4) you can claim an immediate deduction for this amount. Write this deduction against general small business pool assets at (b) in worksheet 2.

If the closing pool balance is less than zero, you include the amount below zero in your assessable income in the Reconciliation items section of item P8.

If expenses are incurred in disposing of a depreciating asset, these expenses may be taken into account in calculation 3.

(c) Other depreciating assets

For information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets, see the Guide to depreciating assets 2016.

Balancing adjustment amounts are included in the Reconciliation items section of item P8. See What are income reconciliation adjustments? and What are expense reconciliation adjustments?

Closing pool balance

The closing balance of each small business pool for an income year is:

• the opening pool balance (see calculation 2) plus
• the taxable purpose proportion of the adjustable value of assets that were first used, or installed ready for use, for a taxable purpose during the year (see calculation 3) plus
• the taxable purpose proportion of any cost addition amounts for assets in the pool during the year (see calculation 3) less
• the taxable purpose proportion of the termination value of any pooled assets disposed of during the year (see calculation 5) less
• the general small business pool deduction (see calculation 2) less
• the deduction for assets first used by you during the year (see calculation 3) less
• the deduction for any cost addition amounts for pooled assets during the year (see calculation 3).

If your closing pool balance is less than zero, see calculation 5.

The closing pool balance for this year becomes the opening pool balance for 2016–17 except where you made an adjustment to reflect the changed business use of a pooled asset.

You will need your opening pool balance to work out the pool deduction next year. Do not write your closing pool balance on your tax return (supplementary section).

Worksheet 2: Depreciation deductions for small business entities

	Primary production ($)	Non-primary production ($)	Total ($)
Certain assets				(a)
General small business pool				(b)
General small business pool (1/2 rate)				(c)
Other assets				(d)
Depreciation expenses: add (a), (b), (c) and (d).				(e)

Completing this item

Step 1  Write your total primary production depreciation deductions at Depreciation expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production depreciation deductions at Depreciation expenses in the Non-primary production column. Do not show cents.

Do not show any amount included at part B of item P1.

Step 3  Transfer the amount at (e) in worksheet 2 to M Depreciation expenses item P8. Do not show cents.

Step 4  Transfer the amount at (a) in worksheet 2 to A item P10 Small business entity simplified depreciation on page 4 of your schedule. Do not show cents.

Step 5  Add up the amounts at (b) and (c) in worksheet 2 and write the total at B item P10. Do not show cents.

Step 6 Go to Motor vehicle expenses

Other businesses

You need to know

You show at M Depreciation expenses item P8 the depreciation claimed in your books of account other than for those assets allocated in a prior year to a general pool or a long-life pool. For assets allocated to such a pool, include here the amount of the pool deduction to be claimed for tax purposes. For further information, see definitions.

The depreciation amount shown at M item P8 should not include profit or loss on the sale of depreciating assets. You should include profits on the sale of depreciating assets in Other business income at I or J in the Income section of item P8 on your schedule. You should include losses on the sale of depreciating assets at All other expenses in the Expenses section.

Accounting or book depreciation may differ from the deduction for the decline in value of depreciating assets.

You carry out the reconciliation between accounting depreciation and the deduction for decline in value at H Expense reconciliation adjustments in the Reconciliation items section of item P8.

• To calculate the decline in value of these assets you can use the Depreciation and Capital Allowances Tool (DCAT) at ato.gov.au
• For more information on how to calculate decline in value see the Guide to depreciating assets 2016.

Is expenditure revenue or capital in nature?

Law Administration Practice Statement PS LA 2003/8 – Practical approaches to low-cost business expenses provides guidance on two straightforward methods that can be used by taxpayers carrying on a business to help determine whether expenditure incurred to acquire certain low-cost items is to be treated as revenue expenditure or capital expenditure.

Subject to certain qualifications, the two methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost items. The threshold rule allows an immediate deduction for qualifying low-cost business items costing $100 or less. The sampling rule allows taxpayers with a low-value pool to use statistical sampling to determine the proportion of the total purchases on qualifying low-cost business items that are revenue expenditure.

We will accept a deduction for expenditure incurred on low-cost assets calculated in accordance with this practice statement.

Completing this item

Step 1  Write your total primary production depreciation expenses at Depreciation expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production depreciation expenses at Depreciation expenses in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production depreciation expenses and write the total at M Depreciation expenses.

Motor vehicle expenses

Did you have motor vehicle expenses in your business?

No	Go to Repairs and maintenance.
Yes	Read on.

You need to know

Special substantiation and calculation rules for car expenses apply to an individual. Under these rules, motor vehicle expenses can be claimed using one of two methods where the expense is for a motor car, station wagon, panel van, utility truck or other road vehicle designed to carry a load of less than one tonne and fewer than nine passengers. For an explanation of these methods, see question D1 in Individual tax return instructions 2016.

Do not include depreciation, finance leasing charges or interest paid. You should include these at M Depreciation expenses, J Lease expenses, Q Interest expenses within Australia or R Interest expenses overseas item P8 on your schedule.

Completing this item

Step 1  Write your total primary production motor vehicle expenses at Motor vehicle expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production motor vehicle expenses at Motor vehicle expenses in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production motor vehicle expenses and write the total at N item P8 on your schedule.

Step 4  If you worked out the amount you are claiming for motor vehicle expenses using one of the two methods described in question D1 in Individual tax return instructions 2016, find the code letter that identifies the method you used and print it in the Type box at the right of the amount at N.

S if you used the ‘cents per kilometre’ method

B if you used the ‘logbook’ method.

Print the code letter N in the Type box if the amount shown at N relates to a:

• motorcycle
• taxi taken on hire
• road vehicle designed to carry a load of one tonne or more, or nine or more passengers
• any other motor vehicle expenses covered by question D2 in Individual tax return instructions 2016.

If you have more than one code, print the code that applies to the largest claim.

Repairs and maintenance

Did you have repairs and maintenance as a business expense?

No	Go to All other expenses.
Yes	Read on.

You need to know

This is expenditure shown in your accounts for repairs and maintenance of premises, plant, machinery, implements, utensils, rolling stock or articles associated with the production of income. Any non-deductible expenditure, such as items of a capital nature or amounts relating to private use of an item, included at this item, should also be included at H Expense reconciliation adjustments in the Reconciliation items section item P8 on your schedule. The following information on deductions for repairs will assist you to work out whether you need to make an expense reconciliation adjustment.

Repairs

You may deduct the cost of repairs (not being expenditure of a capital nature) to premises and depreciating assets such as plant, machinery or equipment used solely for producing assessable income, or in carrying on a business for that purpose.

Expenditure on repairs to property used partially for business or income-producing purposes (for example, where the property is also used for private purposes or in the production of exempt income) is deductible only to the extent that is reasonable, taking account of such use.

Where items are newly acquired, including by way of a legacy or gift, the cost of repairs to defects in existence at the time of acquisition is generally of a capital nature.

Expenditure incurred in making alterations, additions or improvements is of a capital nature and is not deductible.

For more information on deductions for repairs, see Taxation Ruling TR 97/23 – Income tax: deductions for repairs.

Records you need to keep

To support your claim for the cost of repairs, you must keep full details, including source documents, of the nature and cost of repairs to each item.

Completing this item

Step 1  Write your total primary production repairs and maintenance expenses at Repairs and maintenance in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production repairs and maintenance expenses at Repairs and maintenance in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production repairs and maintenance expenses and write the total at O. Do not show cents.

All other expenses

Did you have any other business expenses?

No	Go to Total expenses.
Yes	Read on.

You need to know

This is the total of all other expenses which you incurred in deriving your profit or loss and which you have not already shown elsewhere at item P8. Other expenses include wages, accounting and professional fees, advertising, office supplies, foreign exchange (forex) losses and any loss on the sale of a depreciating asset as shown in your accounts.

You should also include gifts and donations that are a business expense and amounts you pay professionals in managing the tax affairs of the business at item P8. You should not claim these amounts at the gifts and donations label or the cost of managing tax affairs label on your individual tax return.

For information about forex losses, go to ato.gov.au or see question D15 in Individual tax return instructions supplement 2016.

You should also include capital and other non-deductible items (including debt deductions denied by thin capitalisation rules) shown here at H Expense reconciliation adjustments in the Reconciliation items section of item P8 on your schedule. For further information, see Income and expense reconciliation adjustments.

For further information, see Thin capitalisation.

Home office expenses

If part of your home was specifically set aside as your place of business and used solely for the purpose of conducting your business affairs and you had no other place from where they were mainly carried on, the following expenses are partly deductible:

• occupancy expenses, including rent, mortgage interest, rates, and house and contents insurance
• running expenses, including electricity, cleaning, depreciation, leasing charges and repairs to furniture and furnishings in the office.

In most cases, you can apportion expenses on a floor area basis and, if the area of your home was a place of business for only part of the year, on a time basis.

Where you used part of your home as a home office but it did not qualify as a place of business, only the additional running expenses you incurred may be deductible.

See also:

• Taxation Ruling TR 93/30 – Income tax: deductions for home office expenses
• Law Administration Practice Statement PS LA 2001/6 – Home office expenses: diaries of use and calculation of home office expenses

Records you need to keep

You should keep records to show how you have calculated your home office expenses. We may ask you for these at a later date.

Completing this item

Step 1  Write your total ‘other’ primary production expenses at All other expenses in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total ‘other’ non-primary production expenses at All other expenses in the Non-primary production column. Do not show cents.

Step 3  Add up your ‘other’ primary production and ‘other’ non-primary production expenses and write the total at P item P8 on your schedule.

Total expenses

Completing this item

Step 1  Add up all the expenses you have written in the Primary production column, from Cost of sales down to and including All other expenses. Write the total at S item P8 on page 3 of your schedule. Do not show cents.

Step 2  If your total of primary production expenses is a negative amount, print L in the box at the right of the amount at S.

Step 3  Add up all the expenses you have written in the Non-primary production column, from Cost of sales down to and including All other expenses. Write the total at T. Do not show cents.

Step 4  If your total of non-primary production expenses is a negative amount, print L in the box at the right of the amount at T.

Step 5  Add up your primary production and non-primary production expenses. Write the total at TOTAL EXPENSES in the Totals column.

Step 6  If your total expenses is a negative amount, print L in the box at the right of this amount.

Reconciliation items

Consider the following items to see whether you qualify for a deduction.

Any adjustments to your income and expense amounts are dealt with at Income and expense reconciliation adjustments.

Section 40-880 deduction

Can you deduct business-related costs under section 40-880?

No	Go to Business deduction for project pool.
Yes	Read on.

Immediate deductibility for small business start-up expenses

Section 40-880 of the Income Tax Assessment Act 1997 allows for certain start-up expenses, including costs associated with raising capital, to be immediately deductible where they are incurred by a small business entity or an entity that is not in business. These provisions apply from 2015–16 and onwards.

If you are an individual (operating either alone or in partnership), the non-commercial loss provisions may apply to defer your deduction to a later income year.

Claimable business related start-up costs

Expenses can be fully deductible in the year in which the expenditure is incurred if the expenditure relates to a small business that is proposed to be carried on and is either:

• incurred in obtaining advice or services relating to the proposed structure or the proposed operation of the business
• a payment to an Australian government agency of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structure.

See also:

• Other capital expenses

Five-year write-off for a range of business related costs not recognised elsewhere in the tax law

Section 40-880 also provides a five-year write-off for certain capital expenditure incurred by you in relation to a past, present or prospective business if the expenditure is not already taken into account or not denied a deduction by another provision.

You can claim a deduction for capital expenditure:

• in relation to your business
• in relation to a business that used to be carried on, such as capital expenses incurred in order to cease the business
• in relation to a business proposed to be carried on, such as the costs of feasibility studies, market research or setting up the business entity
• as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership (the company, trust or partnership must have carried on a business).

If you incur expenditure in relation to your existing business, a business that you used to carry on or a business that you propose to carry on, the expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.

You cannot deduct expenditure in relation to an existing business that is carried on by another entity. However, you can deduct expenditure you incur in relation to a business that used to be, or is proposed to be, carried on by another entity. The expenditure is only deductible to the extent that:

• the business was, or is proposed to be, carried on for a taxable purpose
• the expenditure is in connection with the business that was or is proposed to be carried on and with you deriving assessable income from the business.

Generally, you can deduct 20% of the expenditure in the year you incur it and in each of the following four years. However, for some pre- and post-business expenditure you may have to defer your claim for a deduction because the non-commercial loss rules apply.

For example, if you were carrying on a business during the year, but your relevant capital expenditure relates to a new business that did not commence before 1 July 2016, you cannot claim a deduction for the expenses incurred until the business activity commences. If you incur such expenditure in these circumstances, you should not claim the deductible amount (20%) but note it in your business or taxation records and claim the amounts deferred for this item in the year the business commences. However, these claims may be subject to further deferral to the extent that they would otherwise give rise to a business loss in the current year.

See also:

• Losses

The deduction cannot be claimed for capital expenditure if it:

• can be deducted under another provision
• forms part of the cost of a depreciating asset you hold, used to hold or will hold
• forms part of the cost of land
• relates to a lease or other legal or equitable right
• would be taken into account in working out an assessable profit or deductible loss
• could be taken into account in working out a capital gain or a capital loss
• would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
• is specifically not deductible under the income tax laws for a reason other than the expenditure is capital expenditure
• is of a private or domestic nature
• is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
• is excluded from the cost or cost base of an asset because, under special rules in the UCA or capital gains tax regimes respectively, the cost or cost base of the asset was taken to be the market value
• is a return of or on capital or is a return of a non-assessable amount (for example, repayments of loan principal).

Claim the amount deductible under section 40-880 here if you carried on a business as an individual at any time during the year, or if the amounts relates to a proposed primary production or performing arts business.

If you have incurred relevant capital expenses that relate to a business that ceased in a previous income year and you carried on the business as a sole trader or through a partnership, claim the expenses here. If you carried on the business through a company or trust, you claim the amount deductible (20%) at item D15 on your tax return (supplementary section).

You must show any recoupment of the expenditure as assessable income, either at Other business income or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8 on your schedule.

Completing this item

Step 1  Write your deduction for primary production business-related costs at Section 40-880 deduction in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your deduction for non-primary production business-related costs at Section 40-880 deduction in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production deductions for business-related costs and write the total at A.

Business deduction for project pool

Did you have capital expenditure directly connected with a business project?

No	Go to Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset.
Yes	Read on.

You need to know

Certain capital expenditure you incurred after 30 June 2001 which is directly connected with a project you carry on or propose to carry on for a taxable purpose can be allocated to a project pool and written off over the life of the project. Each project has a separate project pool. The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a ‘project amount’ is directly connected with the project.

You are carrying on a project if it involves a continuity of activity and active participation. Merely holding a passive investment, such as a rental property, would not be regarded as carrying on a project.

Such capital expenditure, known as a project amount, is expenditure incurred on:

• creating or upgrading community infrastructure for a community associated with the project; this expenditure must be paid (not just incurred) to be a project amount
• site preparation for depreciating assets (other than to drain swamp or low-lying land or to clear land for horticultural plants, including grapevines)
• feasibility studies for the project
• environmental assessments for the project
• obtaining information associated with the project
• seeking to obtain a right to intellectual property
• ornamental trees or shrubs.

Project amounts also include mining capital expenditure and expenditure on certain facilities used to transport minerals or quarry materials. For more information on these project amounts, see the Guide to depreciating assets 2016.

The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset. If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value.

Project amounts are allocated to a ‘project pool’. Your deduction for project amounts allocated to a project pool is spread over the ‘project life’. The project life is the period from the date on which the project starts to operate until the date on which it stops operating. The period must be limited by something inherent in the project. If there is no limited project life, no deduction is available under these rules.

A deduction is available from the income year in which you started to operate a project to gain or produce assessable income. The deduction is worked out on the value of the project pool at the end of the income year at the rate of 150%. For pools containing only project amounts incurred on or after 10 May 2006 for projects starting on or after that day, the rate is 200%. Your deductions are capped at 150% if on or after 10 May 2006 you abandon, sell or otherwise dispose of an existing project and then restart it after that date in circumstances where it would be reasonable to conclude that this was done for the main purpose of ensuring that deductions would be calculated using the higher rate.

Use worksheet 3A or worksheet 3B to work out your deduction. For projects which started to operate on or after 10 May 2006 the calculation is as follows:

Worksheet 3A: Project pool deduction for projects which started on or after 10 May 2006

Value of the project pool at 30 June 2016. This is the closing pool value for 2014–15 (if any) plus the sum of the project amounts you allocated to the pool in 2015–16.	$	(a)
Your estimate of the life of the project (in years).	years	(b)
Divide (a) by (b).	$	(c)
Multiply (c) by 200%. This is your 2015–16 deduction for the project pool.	$	(d)
Your deduction at (d) must not be more than the amount at (a). If a project operated in 2015–16 for purposes other than earning assessable business income, you must reduce your deduction at (d) by a reasonable amount for the extent to which the project operated for such other purposes.

Worksheet 3B: Project pool deduction for projects which started before 10 May 2006

Value of the project pool at 30 June 2016. This is the closing pool value for 2014–15 (if any) plus the sum of the project amounts you allocated to the pool in 2015–16.	$	(a)
Your estimate of the life of the project (in years)	years	(b)
Divide (a) by (b).	$	(c)
Multiply (c) by 150%. This is your 2015–16 deduction for the project pool.	$	(d)
Your deduction at (d) must not be more than the amount at (a). If a project operated in 2015–16 for purposes other than earning assessable business income, you must reduce your deduction at (d) by a reasonable amount for the extent to which the project operated for such other purposes.

The pool value can be subject to adjustments, for example, a foreign exchange (forex) adjustment may apply where you met an obligation to pay foreign currency incurred as a project amount which you had allocated to a project pool.

Closing pool value for 2015–16

This is (a) minus (d) in worksheet 3A and worksheet 3B. You will need the closing pool value for 2015–16 to work out your deduction for the project pool next year.

Any recoupment of the expenditure must be shown as assessable income either at Other business income or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8 on your schedule.

Where a project was abandoned, sold or otherwise disposed of in 2015–16

In this case, whether or not the project had begun to operate, you can claim a deduction for the 2014–15 closing pool value (if any) plus any project amounts allocated to the pool in the 2015–16 year. You must show any proceeds from the abandonment, sale or disposal of the project as assessable income either at Other business income or as part of your Income reconciliation adjustments in the Reconciliation items section of your schedule.

Completing this item

Step 1  Write your total primary production project pool business deduction at Business deduction for project pool in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total non-primary production project pool business deduction at Business deduction for project pool in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production project pool business deductions and write the total at L.

Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset

Did you have any of the following expenses:

• landcare operations
• water facilities
• fencing assets
• fodder storage assets?

No	Go to Income and expense reconciliation adjustments.
Yes	Read on.

You need to know

Landcare operations expenses

You can claim a deduction for capital expenditure you incur on a landcare operation for land in Australia in the year it is incurred.

If the water facilities and landcare operation rules both apply, you can only deduct the expenditure as expenditure on a water facility; see Water conservation and conveyance facilities. If the carbon sink forest and landcare operation rules both apply, you can only deduct the expenditure as expenditure on carbon sink forests.

Unless you are a rural land irrigation water provider, the deduction is available if you use the land for either:

• a primary production business, or
• in the case of rural land, a business for the purpose of producing assessable income from the use of that land, except a business of mining or quarrying.

However your deduction is reduced by a reasonable amount to reflect your use of the land other than for the purpose of carrying on the relevant business in an income year after you incurred the expenditure.

You may claim the deduction even if you are only a lessee of the land.

Rural land irrigation water providers can claim a deduction for certain expenditure they incur. A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia. The supply of water by using a motor vehicle is excluded.

If you are a rural land irrigation water provider, you can claim a deduction for capital expenditure you incurred on a landcare operation for land used by other entities that you supply with water if the land is:

• land in Australia that those entities use at the time for primary production businesses, or
• rural land in Australia that those entities use at the time for carrying on businesses for a taxable purpose, except a business of mining or quarrying.

If you are a rural land irrigation water provider your deduction is reduced by a reasonable amount to reflect an entity’s use of the land for other than a taxable purpose in an income year after you incurred the expenditure.

A landcare operation is one of the following:

1. erecting fences to separate different land classes in accordance with an approved land management plan
2. erecting fences primarily and principally to keep animals out of areas affected by land degradation in order to prevent or limit further damage and assist in reclaiming the areas
3. constructing a levee or similar improvements
4. constructing drainage works, other than the draining of swamps or low-lying land, primarily and principally to control salinity or assist in drainage control
5. an operation primarily and principally for eradicating or exterminating animal pests from the land
6. an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land
7. an operation primarily and principally for preventing or fighting land degradation other than by erecting fences, or
8. an extension, alteration or addition to any of the assets described in 1 to 4 above or an extension of an operation described in 5 to 7 above.

A landcare operation also includes:

• a repair of a capital nature to an asset described in 1 to 4 above
• constructing a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible as capital expenditure on a landcare operation
• a repair of a capital nature, or an alteration, addition or extension to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible as capital expenditure on a landcare operation.

An example of a structural improvement that may be reasonably incidental to drainage works is a fence constructed to prevent livestock entering a drain that was constructed to control salinity.

No deduction is available if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements.

If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

These deductions are not available to a partnership. Expenses for landcare operations incurred by a partnership are allocated to each partner, who can then claim the relevant deduction for their share of the expenditure.

You may need to show any recoupment of the expenditure as assessable income either at Other business income in the Income section of item P8 on your schedule or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8. For further information, see the Guide to depreciating assets 2016 or phone 13 28 66.

Water conservation and conveyance facilities

You can claim a deduction for the decline in value of a water facility. A water facility includes plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily or principally for the purpose of conserving or conveying water.

Water facility includes dams, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills. Water facility also includes certain other expenditure incurred on or after 1 July 2004 for:

• a repair of a capital nature to plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water, for example, if you purchase a pump that needs substantial work done to it before it can be used in your business, the cost of repairing the pump may be treated as a water facility
• a structural improvement, or an alteration, addition or extension to a structural improvement that is reasonably incidental to conserving or conveying water
• a repair of a capital nature to a structural improvement that is reasonably incidental to conserving or conveying water.

Examples of structural improvements that are reasonably incidental to conserving or conveying water include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes that are laid under a road to allow the flow of water in a channel to pass under the road), or a fence preventing livestock entering an irrigation channel.

If you incurred the expenditure from 7.30pm (AEST), 12 May 2015 you claim the full amount in the year you incurred it. If you incurred the expenditure before this time, you deduct one-third of the amount in the income year in which you incurred it, and one-third in each of the following two years.

Unless you are an irrigation water provider, the expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the facility is not wholly used for either:

• carrying on a primary production business on land in Australia, or
• a taxable purpose, for example, producing assessable income.

Irrigation water providers are entitled to a deduction for water facilities expenditure incurred on or after 1 July 2004. An irrigation water provider is an entity whose business is primarily and principally the supply of water to entities for use in primary production businesses on land in Australia. The supply of water by using a motor vehicle is excluded.

If you are an irrigation water provider, you must incur the expenditure primarily and principally for the purpose of conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia (being entities supplied with water by you). The deduction is reduced if the facility is not used wholly for a taxable purpose.

If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

These deductions are not available to a partnership. Costs incurred by a partnership for facilities to conserve or convey water are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

You may need to show any recoupment of the expenditure as assessable income either at Other business income in the Income section of item P8 on your schedule or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8. For further information, see the Guide to depreciating assets 2016 or phone 13 28 66.

Fencing assets

You can claim a deduction for the decline in value of a fencing asset. A fencing asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension to a fence.

If you incurred the expenditure from 7.30pm (AEST), 12 May 2015 you claim the full amount in the year you incurred it. If you incurred the expenditure before this time (or if the expenditure relates to a stockyard, pen or portable fence), the previous decline in value rules that apply to fences based on their effective life continue to apply.

The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of a fencing asset that is used primarily and principally in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the fencing asset is not wholly used for either:

• carrying on a primary production business on land in Australia, or
• a taxable purpose, for example, producing assessable income.

If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

These deductions are not available to a partnership. Costs incurred by a partnership on fencing assets are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

You may need to show any recoupment of the expenditure as assessable income either at Other business income in the Income section of item P8 on your schedule or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8. For further information, see the Guide to depreciating assets 2016 or phone 13 28 66.

Fodder storage assets

You can claim a deduction for the decline in value of a fodder storage asset. A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.

Fodder refers to food for livestock, usually but not exclusively dried, such as grain, hay or silage. Fodder can include liquid feed and supplements. Examples of typical fodder storage assets include:

• silos
• liquid feed supplement storage tanks
• bins for storing dried grain
• hay sheds
• grain storage sheds, and
• above-ground bunkers.

If you incurred the expenditure from 7.30pm (AEST), 12 May 2015 you deduct one-third of the amount in the income year in which you incurred it, and one-third in each of the following two years. If you incurred the expenditure before this time, the previous decline in value rules that apply to fodder storage assets based on their effective life continue to apply.

The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of a fodder storage asset that is used primarily and principally in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the fodder storage asset is not wholly used for either:

• carrying on a primary production business on land in Australia, or
• a taxable purpose, for example, producing assessable income.

If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

These deductions are not available to a partnership. Costs incurred by a partnership on fodder storage assets are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

You may need to show any recoupment of the expenditure as assessable income either at Other business income in the Income section of item P8 on your schedule or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8. For further information, see the Guide to depreciating assets 2016 or phone 13 28 66.

Small business entities

Small businesses are now able to claim an immediate deduction for assets they start to use, or have installed ready for use for a taxable purpose, provided each depreciable asset costs less than $20,000. This will temporarily replace the previous instant asset write-off threshold of $1,000.

This measure applies to expenditure incurred from 7.30pm (AEST) 12 May 2015 and will end on 30 June 2017.

The amount you show at W must not include any amount relating to a depreciating asset used in your primary production business if you have chosen to claim a deduction for it under the small business entity depreciation rules.

Completing this item

Step 1  Write your total deductions for primary production landcare operations expenses, water facilities, fencing assets and fodder storage assets at Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2  Write your total deduction for non-primary production landcare operations expenses, water facilities, fencing assets and fodder storage assets at Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset in the Non-primary production column. Do not show cents.

Step 3  Add up your primary production and non-primary production deductions for landcare operations, water facilities, fencing assets and fodder storage assets and write the total at W.

Income and expense reconciliation adjustments

Do you need to make any income or expense reconciliation adjustments?

No	Go to Net income or loss from business this year.
Yes	Read on.

You need to know

You may need to make income reconciliation adjustments or expense reconciliation adjustments. These adjustments reconcile your business operating profit or loss with your business taxable income.

Do not complete any income reconciliation adjustments or expense reconciliation adjustments if all the amounts you have written at C Gross payments where Australian business number not quoted to W Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset item P8 on your schedule are assessable income or allowable tax deductions for income tax purposes.

If you have included amounts such as exempt income or non-deductible expenses or have not included amounts which are assessable income or expenditure that is deductible, you must work out your reconciliation adjustments.

Worksheet 4 will assist you with your calculations.

What are income reconciliation adjustments?

Income reconciliation adjustments include:

• income add backs; this is income not shown in the accounts which is assessable income for tax purposes, such as
  • assessable balancing adjustment amounts on disposal of depreciating assets
  • other assessable income not included in the profit and loss statement
   
• income subtractions; this is income shown in the accounts which is not assessable income, such as
  • profit on sale of depreciating assets
  • other income that is not assessable for income tax purposes, for example, gross exempt income.
   

Your income reconciliation adjustment is your total income add backs less your total income subtractions.

Use worksheet 4 to work out your income reconciliation adjustments for your primary and non-primary production businesses. The amount you write at X Income reconciliation adjustments item P8 on your schedule is the total of your primary production and non-primary production income adjustments.

If the amount is negative, print L in the box at the right of the amount.

What are expense reconciliation adjustments?

Expense reconciliation adjustments include the following.

• Expense add backs are expenses shown in the accounts which are not tax deductible, such as
  • prepaid expenses not deductible in this year
  • depreciation
  • loss on sale of a depreciating asset
  • other items not allowable as a deduction, for example, capital expenditure, additions to provisions and reserves, income tax expense, expenses relating to exempt income, debt deductions denied by the thin capitalisation rules, other non-deductible expenses; for further information, see Thin capitalisation and PSI deductions.
   
• Expense subtractions are items not shown as expenses in the accounts but which are deductible for tax purposes, such as
  • prepaid expenses from a prior year that are deductible this year but not included elsewhere
  • deduction for decline in value of depreciating assets
  • deductible balancing adjustment amounts on disposal of depreciating assets
  • deduction for environmental protection expenses
  • other items deductible for tax purposes.
   

Your expense reconciliation adjustment is your total expense add backs less your total expense subtractions.

Use worksheet 4 to work out your expense reconciliation adjustments for your primary and non-primary production businesses. The amount you write at H Expense reconciliation adjustments item P8 on your schedule is the total of your primary production and non-primary production expense adjustments.

If the amount is negative, print L in the box at the right of the amount.

Specific reconciliation adjustments

Following are examples of specific reconciliation adjustments that may apply to you.

If you were previously in the STS read Former STS taxpayers below first. Otherwise, go to Depreciating assets deducted under the simplified depreciation rules.

Former STS taxpayers

Make adjustments in this section of item P8 on your schedule if you:

• are eligible and have chosen to continue using the STS accounting method and the amounts you have shown at the Income and Expense sections of item P8 are not based on the STS accounting method, or
• stopped using the STS accounting method in the 2015-16 income year.

These adjustments are explained in more detail at Adjustments when ceasing to use the STS accounting method.

Worksheet 4 will assist you with your calculations.

Income derived but not received as at 30 June 2016 and expenses incurred but not paid as at 30 June 2016

If you are eligible and have chosen to continue using the STS accounting method and have included at item P8 amounts of ordinary income that have been derived but not received in 2015–16, the amounts not received are not assessable this year, for example, trade debtors as at 30 June 2016.

These amounts form part of your income reconciliation adjustments at X at P8. Include these amounts at (f) on worksheet 4.

If you are eligible and have chosen to continue using the STS accounting method and have included at item P8 amounts for general deductions, repairs and tax-related expenses that have been incurred but not paid in 2015–16, the amounts not paid are not deductible this year, for example, trade creditors as at 30 June 2016.

These amounts form part of your expense reconciliation adjustments at H item P8. Include these amounts at (n) on worksheet 4.

Adjustments when ceasing to use the STS accounting method

If you have discontinued using the STS accounting method read on.

If you have not included at Income at item P8 any amounts of ordinary income that were derived but not received while using the STS accounting method, these amounts are assessable this year, for example, trade debtors as at 30 June 2015.

Include these amounts at (b) on worksheet 4.

If you have not included at Expenses at item P8 any amounts of general deductions, repairs or tax-related expenses that were incurred but not paid while using the STS accounting method, these amounts are deductible this year, for example, trade creditors as at 30 June 2015.

Include these amounts (other than tax-related expenses) at (t) on worksheet 4. Write your deduction for tax-related expenses at item D10 on your tax return.

Depreciating assets deducted under the simplified depreciation rules

Disposal of depreciating assets

If you disposed of any depreciating assets during the income year, the following amounts (if any) form part of your Income reconciliation adjustments at X item P8.

• the taxable purpose proportion of the termination value of assets that have been disposed of for which an immediate deduction has been claimed either this year or in a prior year
• if the closing pool balance of a general small business pool is less than zero, the amount below zero
• assessable balancing adjustment amounts on the disposal of depreciating assets not allocated to a general small business pool.

See the definitions box for an explanation of these terms.

Include the amounts at (b) on worksheet 4.

Any deductible balancing adjustment amounts on the disposal of depreciating assets that you have not allocated to a small business pool form part of your Expense reconciliation adjustments at H item P8. Include these amounts at (q) on worksheet 4.

See also:

• Guide to depreciating assets 2016

Prepaid expenses

Special rules may affect the timing of deductions for prepaid expenditure. Under these rules you may need to apportion certain prepaid expenses over more than one income year. You must make an expense reconciliation adjustment to add back that part of the expense that is not deductible in the year it is incurred. Show the adjustment at (k) on worksheet 4.

If you had a prepaid expense in a prior year which is to be apportioned over the service period and you are entitled to a deduction for part of the expense this year but have not included it elsewhere, show the adjustment as an expense subtraction at (s) on worksheet 4.

See also:

• Deductions for prepaid expenses 2016

Deduction for decline in value

A deduction for a decline in value of a depreciating asset calculated under income tax law may differ from the accounting or book calculation of depreciation. Different rules regarding such things as effective life, the calculation of balancing adjustment amounts and the treatment of debt forgiveness amounts can produce a discrepancy between the two calculations.

Under income tax law you can deduct an amount equal to the decline in value of a depreciating asset in 2015–16 if you held the depreciating asset for any time during the year and used it (or installed it ready for use) for a taxable purpose, such as for producing assessable income.

The deduction is reduced to the extent you do not use the asset for a taxable purpose.

To help you calculate your deduction for decline in value, see the Depreciation and Capital Allowances Tool (DCAT) at ato.gov.au or the Guide to depreciating assets 2016, which also provides explanations of relevant terms. The publication also explains the option to allocate to a low-value pool depreciating assets that cost less than $1,000 (excluding input tax credit entitlements) and depreciating assets that have an opening adjustable value of less than $1,000.

If you choose to use the low-value pool method to calculate the decline in value of low-cost or low-value depreciating assets and the pool contains assets used for work-related, self-education or non-business rental purposes, read question D6 in Individual tax return instructions 2016. Do not include the deduction at item P8 on your schedule. If none of the depreciating assets in the pool is used for any of those purposes, include the amount of your low-value pool deduction at (r) on worksheet 4. Where necessary, make a reasonable apportionment between primary production and non-primary production activities.

You should also include the deduction for decline in value of depreciating assets not allocated to a pool at (r) on worksheet 4.

You should also add back the depreciation charged in your accounts and shown at M Depreciation expenses in the Expenses section of item P8 as an expense reconciliation adjustment. Include the amount at (h) on worksheet 4. The amount at (h) should not include any small business pool deductions which you have claimed at M.

Luxury car leasing

A leased car, either new or second-hand, is a luxury car if its cost exceeds the car limit that applies for the income year in which the lease commences. The car limit for 2015–16 is $57,466.

A luxury car lease entered into after 7.30pm (by legal time in the ACT) on 20 August 1996 (other than genuine short-term hire arrangements) is treated as a notional sale-and-loan transaction.

The cost or value of the car specified in the lease (or the market value if the parties were not dealing at arm’s length in connection with the lease) is taken to be the cost of the car for the lessee and the amount loaned by the lessor to the lessee to buy the car.

In relation to the notional loan, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component for the notional loan applicable for the particular period (the accrual amount) is deductible to the lessee, subject to any reduction required under the thin capitalisation rules.

The amount forms part of your expense reconciliation adjustments at H item P8 on your schedule. Include the amount at (p) on worksheet 4.

In relation to the notional sale, the lessee is treated as the holder of the luxury car and may be entitled to claim a deduction for the decline in value of the car. If the lessee is a small business entity using the simplified depreciation rules for the income year in which the lease is entered into, the lessee allocates the car to their general small business pool.

For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the income year in which the lease is granted.

For more information on deductions for the decline in value of leased luxury cars, see the Guide to depreciating assets 2016.

In summary, the lessee is entitled to deductions equal to:

• the accrual amount
• the decline in value of the luxury car, based on the applicable car limit, unless the car is allocated to the general small business pool.

You reduce both deductions to reflect any use of the car for a non-taxable purpose.

Where you allocated the car to the general small business pool with the cost based on the applicable car limit, see Calculating your depreciation deductions.

If you have included the lease expense at J Lease expenses in the Expenses section of item P8 in your schedule, the amount should also form part of your expense reconciliation adjustments at H item P8. Include the amount at (i) on worksheet 4. Include the deduction for the accrual amount at (p).

If the lease terminates or is not extended or renewed and the lessee does not actually acquire the car from the lessor, the lessee is treated under the rules as disposing of the car by way of sale to the lessor. This constitutes a balancing adjustment event. If the car is not subject to the simplified depreciation rules, any assessable or deductible balancing adjustment amount for the lessee must be determined. If the car has been allocated to the lessee’s general small business pool, see calculation 4 for small business entities.

Hire-purchase agreements

Hire-purchase and instalment sale agreements of goods are treated as a sale of the property by the financier (or hire-purchase company) to the hirer (or instalment purchaser).

The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or value or the property’s arm’s length value.

The periodic hire-purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The interest component is deductible to the hirer, subject to any reduction required under the thin capitalisation rules. This amount forms part of the expense reconciliation adjustments at H item P8 on your schedule. Include the amount at (t) on worksheet 4.

In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and either allocates the asset to the appropriate small business pool if they are a small business entity using the simplified depreciation rules for the income year, or may be entitled to claim a deduction for the decline in value of the depreciating asset. The cost of the asset for this purpose is taken to be the agreed cost or value, or the arm’s length value if the dealing is not at arm’s length.

If you have included hire-purchase charges as an expense at item P8 on your schedule, the amount should also form part of your expense reconciliation adjustments at H item P8. Include the amount at (n) on worksheet 4.

Termination of a limited recourse debt

Excessive deductions for capital allowances are included in assessable income under the limited recourse debt rules contained in Division 243 of the ITAA 1997. This will occur where:

• expenditure on property has been financed or re-financed wholly or partly by the limited recourse debt
• the limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor
• because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply in working out whether the debt has been fully paid.

A limited recourse debt is a debt where the rights of the creditor as against the debtor, in the event of default in payment of the debt or of interest, are limited wholly or predominantly to the property which has been financed by the debt or is security for the debt, or rights in relation to such property. A debt is also a limited recourse debt if, notwithstanding that there may be no specific conditions to that effect, it is reasonable to conclude that the creditor’s rights as against the debtor’s are capable of being so limited.

A limited recourse debt includes a notional loan under a hire-purchase or instalment sale agreement of goods to which Division 240 of the ITAA 1997 applies, see section 243-20.

The amount that is included within assessable income as a result of these provisions forms part of your income reconciliation adjustments at X item P8 on your schedule. Include the amount at (b) on worksheet 4.

Worksheet 4: Reconciliation statement

Reconcile your primary production and non-primary production items separately.

Income reconciliation adjustments		Primary production		Non-primary production
Additions	Assessable balancing adjustment amounts on disposal of depreciating assets	$		$	(a)
	Assessable business income not included in the profit and loss statement	$		$	(b)
	Subtotal: add (a) and (b).	$		$	(c)
Subtractions	Net exempt income (gross exempt income less expenses relating to that exempt income)	$		$	(d)
	Profit on sale of depreciating assets included in accounts	$		$	(e)
	Other non-assessable income included in the profit and loss statement	$		$	(f)
	Subtotal: add (d), (e) and (f).	$		$	(g)
Income reconciliation adjustments: take (g) away from (c).		$		$
Expense reconciliation adjustments		Primary production		Non-primary production
Additions	Depreciation charged in accounts	$		$	(h)
	Lease payments for luxury cars	$		$	(i)
	Loss on sale of depreciating assets included in accounts	$		$	(j)
	Part of prepaid expenses not deductible this year	$		$	(k)
	Items not allowable as deductions:
	capital expenditure	$		$	(l)
	additions to provisions and reserves	$		$	(m)
	Other non-deductible items, including income tax	$		$	(n)
	Subtotal: add (h), (i), (j), (k), (l), (m) and (n).	$		$	(o)
Subtractions	Accrual amount deduction for lessee of luxury cars	$		$	(p)
	Deductible balancing adjustment amounts on disposal of depreciating assets	$		$	(q)
	Deduction for decline in value of depreciating assets	$		$	(r)
	Part of prepaid expenses deductible this year but not included elsewhere	$		$	(s)
	Other items deductible for tax purposes not included in the profit and loss statement	$		$	(t)
	Subtotal: add (p), (q), (r), (s) and (t).	$		$	(u)
Expense reconciliation adjustments: take (u) away from (o).		$		$

 

Note 1	Include amounts at (h) only if you are not using the simplified depreciation rules. However, exclude any pool deductions which you have included at M item P8 which relate to a continuing small business pool.
Note 2	See the Guide to depreciating assets 2016 for an explanation of depreciating assets.
Note 3	If you have included an amount of capital expenditure incurred to terminate a lease or licence at J Lease expenses item P8, make a reconciliation adjustment at H Expense reconciliation adjustments by including the amount of capital expenditure as an expense add back and taking away that part of the expense which is allowed as a tax deduction.

Completing this item

Step 1  Complete worksheet 4 using the explanations provided. This will give you your total income and expense reconciliation amounts (primary and non-primary production) that you need for your schedule.

Step 2  Transfer the totals in the yellow rows on the worksheet to the appropriate boxes on page 3 of your schedule. Do not show cents.

Step 3  If any of the reconciliation adjustment amounts
is negative, print L in the box at the right of the amount.

Step 4  Add up your primary production and non-primary production income reconciliation adjustments and write the total at X.

Step 5  Add up your primary production and non-primary production expense reconciliation adjustments and write the total at H.

Step 6  If the total income reconciliation adjustment amount is negative, print L in the box at the right of the amount at X. If the total expense reconciliation adjustment amount is negative, print L in the box at the right of H.

Do not include in the amount at (t) on worksheet 4:

• section 40-880 deductions
• business deductions for project pools
• deductions for landcare operations, water facilities, fencing assets and fodder storage assets.

Reconciliation adjustments for these amounts are shown separately at A, L and W on your schedule.

Worksheet 5: Working out your net income or loss from primary production business this year

Write your primary production total business income shown in the Primary production column at TOTAL BUSINESS INCOME item P8.	$		(a)
Write your primary production total business expenses shown at S item P8.	$		(b)
Add up the amounts of any deductions for section 40-880 expenditure, project pool and landcare operations, water facilities, fencing assets and fodder storage assets and write the total at (c).	$		(c)
Add the amount at (b) to the amount at (c).	$		(d)
Take the amount at (d) away from the amount at (a).	$		(e)
Write your primary production income reconciliation adjustment (if any).	$		(f)
Write your primary production expense reconciliation adjustment (if any).	$		(g)
Your net income or loss from your primary production business: add (e), (f) and (g).	$		(h)

If the amount at (d) is more than the amount at (a), the amount at (e) is a loss. If it is, or if you have a negative amount at (f) or (g), the examples below will help you to work out your loss from primary production business.

Worksheet 6: Working out your net income or loss from non-primary production business this year

Write your non-primary production total business income shown in the Non-primary production column at TOTAL BUSINESS INCOME item P8.	$		(i)
Write your non-primary production total business expenses shown at T item P8.	$		(j)
Add up the amounts of any deductions for non-primary production section 40-880 expenditure, project pool and landcare operations and write the total at (k).	$		(k)
Add the amount at (j) to the amount at (k).	$		(l)
Take away the amount at (l) from the amount at (i).	$		(m)
Write your non-primary production income reconciliation adjustment (if any).	$		(n)
Write your non-primary production expense reconciliation adjustment (if any).	$		(o)
Your net income or loss from your non-primary production business: add (m), (n) and (o).	$		(p)

If the amount at (l) is more than the amount at (i), the amount at (m) is a loss. If it is, or if you have a negative amount at (n) or (o), the examples below will help you to work out your loss from non-primary production business.

Net income or loss from business this year

Use worksheet 5 and worksheet 6 to work out your net income or loss from your primary and non-primary production businesses this year, not including any non-commercial business losses deferred from a prior year.

Completing this item

Step 1  Transfer the amount at (h) on worksheet 5 to B item P8 on page 3 of your schedule. Do not show cents. If the amount is a loss, print L in the box at the right of this amount.

Step 2  Transfer the amount at (p) on worksheet 6 to C item P8 on page 3 of your schedule. Do not show cents. If the amount is a loss, print L in the box at the right of this amount.

Step 3  Add B and C and write the total in the adjacent Totals column. The amount shown should not include any non-commercial business losses deferred from a prior year (which are shown at D or E, see Deferred non-commercial business losses from a prior year).

If you made a loss from your business, print L in the box at the right of this amount.

If the amount at B or C includes details from more than one business activity, and any one of these activities resulted in a net loss, you also need to complete items P3 and P9 on your schedule.

Deferred non-commercial business losses from a prior year

Do you have any deferred non-commercial business losses from a prior year?

No	Go to Net income or loss from business this year
Yes	Read on

You need to know

A deferred non-commercial business loss is a loss you incurred in a prior year which you were unable to claim against other income. If your activity is carried on partly in Australia and partly overseas please phone 13 28 66 or see Foreign business losses.

The non-commercial business loss may be reduced if you:

• earned net exempt income in this income year, or
• became bankrupt or were released from any debts by the operation of an Act relating to bankruptcy.

For more information, phone 13 28 66.

Completing this item

Step 1  At D item P8 on page 3 of your schedule write the amount of any primary production losses you deferred in a prior year from activities that are the same or similar to your current year activity. Do not show cents.

Step 2  At E write the amount of any non-primary production losses you deferred in a prior year from activities that are the same or similar to your current year activity. Do not show cents.

Step 3  Add up your primary and non-primary production deferred non-commercial business losses. Write the total at Deferred non-commercial business losses from a prior year in the Totals column.

Net income or loss from business

This amount takes into account non-commercial losses deferred from a prior year.

Completing this item

Step 1  If you have net income from primary production business this year at B, take away from it the amount of your deferred non-commercial primary production business losses from a prior year shown at D. Write the answer at Y Net income or loss from business item P8 on page 3 of your schedule.

If the amount at Y is negative, print L in the box at the right of the amount.

If you have a loss from primary production business this year at B, add it to the amount of your deferred non-commercial primary production business losses from a prior year shown at D. Write the total at Y Net income or loss from business item P8 on your schedule and print L in the box at the right of the amount.

If you have printed L in the box at the right of the amount at Y, you also need to complete items P3 and P9 on your schedule.

Step 2  If you have net income from non-primary production business this year at C, take away from it the amount of your deferred non-commercial non-primary production business losses from a prior year shown at E. Write the answer at Z Net income or loss from business item P8 on page 3 of your schedule.

If the amount at Z is negative, print L in the box at the right of the amount.

If you have a loss from non-primary production business this year at C, add it to the amount of your deferred non-commercial non-primary production business losses from a prior year shown at E. Write the total at Z Net income or loss from business item P8 on your schedule and print L in the box at the right of the amount.

If you have printed L in the box at the right of the amount at Z, you also need to complete items P3 and P9 on your schedule.

Step 3  Add up the amounts shown at Y and Z.

Write the answer at Net income or loss from business in the Totals column. If the total is negative, print L in the box at the right of the amount.

Step 4  Transfer the amounts at Y and Z on your schedule to B and C (respectively) item 15 on your tax return (supplementary section).

Small business income tax offset

Are you a small business entity?

No	Go to item P9.
Yes	Read on.

You need to work out your net small business income so we can calculate your tax offset. The maximum offset is $1000 per year per person from all your sources of small business income.

Your net small business income is your assessable income from carrying on your business less your deductions to the extent that they are attributable to that assessable income.

If you carry on multiple businesses combine the profit or loss from each business activity to work out your net small business income from all your businesses. If one or more of your business activities made a loss you must first apply the non-commercial loss rules to work out how each loss is to be treated. Any loss you are unable to claim because of these rules is not taken into account in working out net small business income. See P9 for more information.

Use your Y and Z amounts as your starting point for working out your net small business income. Any prior year deferred non-commercial losses being claimed as a deduction this year are already included in the amounts shown at Y and Z. You do not need to include them again in your net small business income calculation.

Do not include:

• any net capital gains you made from assets used in carrying on your business
• any personal services income unless you were a personal services business
• any of the following deductions
  • tax-related expenses
  • gifts or contributions
  • personal superannuation contributions
  • tax losses from prior years.
   

Completing this item

Step 1 Did you have either of the following:

• business income or deductions shown at items other than Y or Z item P8 (see Worksheet 7 for a list of these items)
• business losses that are not deductible under the non-commercial loss rules – see P9.

No The amount at Y and Z item P8 is your net small business income. Add Y and Z together, a negative amount will offset a positive amount. Show the result at A item 15 on your tax return (supplementary section). You are finished with this item. Go to P9.

Yes Go to step 2.

To work out your net small business income, use the worksheet or our small business income tax offset calculator.

Step 2 Use the worksheet below to adjust your Y or Z item P8 amount. Show these amounts at (a) and (b) in the worksheet.

Step 3 If any business losses are not allowable deductions for non-commercial loss purposes show them at row (h). If the loss includes a net capital gain, deduct the amount of net capital gain from the loss and show the result at (h).

Step 4 Add up all the amounts at (a) to (h) and deduct the amount at (i) and (j). Show the result at (k). If the result is positive this is your net small business income. Show this amount at A item 15 on your tax return (supplementary section). If the result is a loss show zero. Do not show cents.

 

Worksheet 7

Item 15 Net income or loss from business	B primary production *if this amount is a negative show the amount in brackets, for example (5000)		(a)
	C non-primary production *if this amount is a negative show in brackets, for example (5000)		(b)
Additions	FMD withdrawals at item 17 relating to the business		(c)
	Foreign source business income from item 19 or 20		(d)
	Business interest income		(e)
	Business dividend income		(f)
	Other business income not already shown at this item		(g)
	Business losses which are not allowable deductions (excluding any net capital gains)		(h)
Deductions	FMD deductible deposits at item 17 relating to the business		(i)
	Other business deductions not already claimed at this item		(j)
Net small business income (including foreign income)	Add up all the amounts at rows (a) to (h) and deduct the amounts at row (i) and (j). Show the result at row (k).		(k)