5 Business income and expenses
The amounts you include here, at business income C to G and D to H, and expenses P to N, are accounting system amounts subject to two exceptions for small business entities. These exceptions apply where small business entities choose to use:
- the simplified trading stock rules – they should use tax values for their closing stock in calculating their cost of sales shown at E
- the simplified depreciation rules – they should use tax values for their depreciation expenses at K.
For more information on small business entities, see Appendix 14: Small business entities.
The accounting system amounts are shown or included on the business profit and loss statements and form the basis of the calculation of the business net profit or loss. Make adjustments to these accounting amounts for tax purposes at item 5 Reconciliation items.
Goods and services tax (GST) is payable by entities that are registered, or required to be registered, for GST. If GST is payable on income, exclude the GST from the income derived. Exclude input tax credit entitlements on outgoings from deductions. Some GST adjustments (for example, occurring where the percentage of business use of an asset changes) may be included in assessable income or allowed as deductions.
Only include at item 5:
- business income amounts derived directly by the partnership. Include distributions received from other partnerships and trusts at item 8 Partnerships and trusts.
- Australian-sourced income. Include foreign source income at
- item 22 Attributed foreign income
- item 23 Other assessable foreign source income.
Income and expenses are divided into three columns:
- primary production, showing relevant amounts of income and expenses from primary production
- non-primary production, showing relevant amounts of income and expenses from non-primary production
- totals, showing the total of the amounts within the previous two columns.
Income subject to foreign resident withholding is shown only at B in the 'Non-primary production' column and the 'Totals' column.
If the partnership is eligible and is continuing to use the simplified tax system (STS) accounting method, see Former STS taxpayers, otherwise, see the information for All partnerships.
Former STS taxpayers
Continued use of the STS accounting method
Although the STS has now ceased, a transitional provision still allows for limited continued use of the STS accounting method.
A partnership may continue using the STS accounting method if it:
- was an STS taxpayer continuously from the income year that started before 1 July 2005 and until the end of the 2006–07 income year
- used the STS accounting method for the 2005–06 to 2014–15 income years, and
- is a small business entity for the 2015–16 income year.
If the partnership meets these three requirements, it can continue using the STS accounting method until it chooses not to, or is no longer a small business entity.
The STS accounting method recognises most income only when received. A partnership that is eligible to continue using the STS accounting method can claim deductions for the following expenses only when they are paid:
- general deductions, for example, stock purchases, wages and rent of business premises
- tax-related expenses
- expenses for repairs.
If the partnership is registered or required to be registered for GST, exclude GST payable from income amounts and input tax credit entitlements from deductions.
The STS accounting method does not apply to income or deductions that receive specific treatment in the income tax law, for example, net capital gains, dividends, depreciation expenses, bad debts and borrowing expenses.
In addition, if another provision of the income tax law apportions or alters the assessability or deductibility of a particular type of ordinary income or general deduction, the timing rule in the specific provision overrides the received or paid rule under the STS accounting method, for example, double wool clips or prepayment of a business expense for a period greater than 12 months. Because of these specific provisions you may need to make adjustments at item 5 Reconciliation items.
Accordingly, base the amounts at item 5 Reconciliation items on the STS accounting method where applicable. If the partnership is continuing to use the STS accounting method and its profit and loss statement does not reflect the STS accounting method rules, you may need to make additional adjustments to show the correct amounts at items Q, R and S for Net income or loss from business. For more information about these adjustments, see item 5 Reconciliation items.
Ceasing use of the STS accounting method
If the partnership has discontinued using the STS accounting method, business income and expenses that have not been accounted for (because they have not been received or paid), will be accounted for in this year. You may need to make additional reconciliation adjustments, see Appendix 14.
Income
All partnerships
Gross payments where ABN not quoted
Show at C and D item 5, as appropriate, gross income received by the partnership that was subject to withholding where an ABN was not quoted. This includes amounts of tax withheld.
If you show an amount at C or D, complete a Non-individual PAYG payment summary schedule 2016 and attach the completed schedule to the partnership tax return. For instructions on completing this schedule, see Non-individual PAYG payment summary schedule.
If you complete C or D, show the corresponding amount of tax withheld where an ABN was not quoted at T item 6.
Gross payments subject to foreign resident withholding
Complete this entry only if the partnership is a foreign resident.
Show at B item 5 gross payments to the partnership that was regulated foreign resident income. Gross payments include amounts withheld.
Regulated foreign resident income refers to payments which are prescribed in the Tax Administration Regulations 1976 as being subject to the foreign resident withholding measure.
Do not include payments where the amount was varied to nil under the foreign resident withholding measure because the income was not taxable under a Tax Treaty (also referred to as double tax agreement).
If an amount is shown at B, complete a Non-individual PAYG payment summary schedule 2016 and attach the completed schedule to the partnership tax return. For instructions on completing this schedule, see Non-individual PAYG payment summary schedule.
Broadly, the foreign resident withholding regime applies to foreign residents who engage in certain regulated categories of activities in Australia, such as foreign residents involved in sport, entertainment, and building and construction. Only foreign residents should complete this entry. An Australian resident should not include an amount, such as foreign sourced income, at this entry.
Show gross distributions of regulated foreign resident income from other partnerships and trusts at item 8. A Non-individual PAYG payment summary schedule 2015 is not required for these distributions because they do not have an associated payment summary.
You will not have any primary production amounts at this item.
Assessable government industry payments
Generally, government grants, rebates, bounties and subsidies are assessable income in the hands of the recipient if they are received in, or for, the carrying on of a business. This generally includes amounts of a capital nature. However, amounts relating to the starting or ceasing of a business may not be assessable.
Show at E and F, as appropriate, the total amount of assessable government industry assistance. Examples are:
- bounties
- cleaner fuels grant
- employee subsidies
- export incentives grants
- fuel tax credits
- industry restructure and adjustment payments
- product stewardship (oil) benefit
- producer rebate (wine equalisation tax).
If the amount at E or F includes fuel tax credit, cleaner fuels grant or a product stewardship (oil) benefit, print D in the CODE box at the right of the amount.
Medical practices should show their Medicare payments at H Other business income, not at F Assessable government industry payments.
Other business income
Show at G and H, as appropriate, other business income, such as revenue from the sale of goods, services rendered, disposal of depreciated assets, work in progress amounts assessable under section 15–50 of the ITAA 1997, and royalties.
If the TOFA rules apply to the partnership, include other business income from financial arrangements subject to the TOFA rules at G or H.
Do not include amounts that are shown at C, D, B, E and F.
If the amount at G or H is a loss, print L in the box at the right of the loss amount.
If you have included an amount for profit on the sale of depreciating assets at G or H, see Balancing adjustment amounts in Appendix 6.
Expenses
Apart from two exceptions for small business entities mentioned below, the amounts shown at P to N item 5 are amounts derived from the accounting system or financial statements of the partnership. Make any adjustments to these amounts for tax purposes at Reconciliation items, Expense reconciliation adjustments B item 5.
Small business entities using the simplified trading stock rules should use tax values for their closing stock in calculating their cost of sales shown at E.
Small business entities using the simplified depreciation rules should use tax values for their depreciation expenses at K.
If the partnership is registered or required to be registered for GST, exclude input tax credit entitlements on outgoings from deductions.
If any expenses have been prepaid, the prepayment provisions may affect the timing of the deduction that can be claimed. Generally, the partnership will need to apportion its deduction for prepaid business expenditure over the service period or 10 years, whichever is less. There are some exceptions to this under the 12-month rule for small business entities. If the amounts shown under any expense label at item 5 differ from the amount allowable as deductions in the 2015–16 income year, make a reconciliation adjustment at B item 5. For more information, see Deductions for prepaid expenses 2015–16.
Foreign resident withholding expenses
Show at P item 5 all expenses directly relating to gaining the income shown at B Gross payments subject to foreign resident withholding item 5. These amounts should not be shown at any other expenses label in item 5. Do not include any expenses incurred in gaining income not assessable in Australia.
Only foreign residents should complete this entry. An Australian resident should not include expenses, such as expenses incurred in deriving foreign sourced income, at this entry.
You will not have any primary production amounts at this item.
Contractor, sub-contractor and commission expenses
Show at C the expenditure incurred for labour and services provided under contract other than those in the nature of salaries and wages. For example:
- payments to self-employed people, such as consultants and contractors
- commissions paid to people not receiving a retainer
- agency fees, for example, advertising
- service fees, for example, plant service
- management fees
- consultant fees.
Do not include the following at C:
- expenses for external labour which are incorporated into the amount shown at E Cost of sales
- expenses for accounting or legal services. Show these at N All other expenses.
Record keeping
Keep a record of the following:
- name and address of the payee
- nature of the services provided
- the amount paid.
Superannuation expenses
Show at D the employee superannuation expenses incurred for the income year.
Employers are entitled to a deduction for contributions made to a complying superannuation fund or retirement savings account (RSA).
Contributions made to a non-complying fund:
- are not allowable as a deduction
- do not count towards superannuation guarantee obligations.
You can claim a deduction in the income year in which the contributions are made.
Employers can claim a deduction for superannuation contributions made in respect of a former employee where:
- the contribution reduces an employer's charge percentage under the Superannuation Guarantee (Administration) Act 1992
- the contribution is a one-off payment in lieu of salary or wages that relate to the employee’s period of service, or
- the contribution is made within four months after the employee has ceased employment (there is no time limit for contributions to a defined benefit fund).
Under the superannuation guarantee legislation, an employer needs to provide a minimum level of superannuation for employees by the quarterly due dates, or be liable for the superannuation guarantee charge (SGC). Where the SGC is incurred, an SGC statement needs to be lodged and the SGC is paid directly to us.
If you have paid super for your employees but paid late, but you generally pay on time, we are unlikely to pursue lodgment of SGC statements if you top up the employee's fund account to compensate for lost interest.
If you have paid late and generally don't pay on time, you should either apply the late payments to future quarters or lodge SGC statements. You may be able to elect to apply late payment offsets (LPO) to reduce the SGC liability. LPO can only be used for those contributions paid before a super guarantee charge (SGC) assessment is raised.
The SGC paid to us is not a superannuation contribution and is not tax deductible. Contributions paid to a complying super fund are deductible whether paid on time or paid late. However, late contributions lose their deductibility when the LPO is elected.
Contributions paid by an employer for employees to a non-complying superannuation fund are fringe benefits and may be subject to tax under the Fringe Benefits Tax Assessment Act 1986External Link.
There is no limit on the amount of contributions that can be claimed as a deduction by an employer contributing to a complying superannuation fund or RSA in respect of employees under the age of 75 years. However, the employee may be liable to pay additional tax if their concessional contributions exceed their concessional contributions cap. For more information, see ato.gov.au/supercaps
If an employee has reached the age of 75 years, there is a restriction on the deduction that can be claimed for an employer contribution to a complying superannuation fund or RSA. For contributions made after the 28th day of the month following the employee's 75th birthday, the deduction claimable is limited to the greater of:
- 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.
Cost of sales
If the partnership is a small business entity using the simplified trading stock rules, it will need to know the value of its closing stock in order to calculate cost of sales. Small business entities only need to account for changes in the value of their trading stock in limited circumstances. If the partnership does not need to account for the change in value of closing stock, its closing stock will equal its opening stock value. If the partnership does need to account for the change in value of closing stock, or chooses to do so, then for information about how to calculate the closing stock value, see item 40 Closing stock.
All partnerships
Show at E item 5 the total cost of anything produced, manufactured, acquired or purchased for manufacture, sale or exchange in deriving the gross proceeds or earnings of the business. This includes freight inwards and may include some external labour costs, if these are recorded in the cost of sales account in the normal accounting procedure of the business.
If the cost of sales account is in credit at the end of the income year (that is, a negative expense), print L in the box at the right of the amount. Do not print brackets around the amount.
For more information on the circumstances in which packaging items held by a manufacturer, wholesaler or retailer are ‘trading stock’ as defined in section 70–10 of the ITAA 1997, see TR 98/7 Income tax: whether packaging items (ie, containers labels, etc) held by a manufacturer, wholesaler or retailer are trading stock.
Bad debts
Show at F item 5 the bad debts expense incurred for the income year.
- Show recovery of bad debts at G or H as appropriate at Other business income.
- You cannot claim a deduction for bad debts unless the debt which is bad has previously been included in assessable income and it relates to money lent in the ordinary course of the business of the lending of money by a partnership carrying on that business or it represents a business loss or outgoing of a revenue nature.
- Do not include accounting provisions for doubtful debts at F. Show these under all other expenses at N then add them back at B Expense reconciliation adjustments. To calculate the amount of the expense reconciliation adjustment, see Worksheet 1.
- Before a bad debt can be claimed, it must be bad and not merely doubtful. The deduction depends upon the facts in each case and, where applicable, the action taken for recovery. For more information, see TR 92/18 Income tax: bad debts.
You can claim a deduction for partial debt write-offs where only part of a debt is bad and is written off. You can claim a deduction for the amount written off.
Deductions for bad debts may be reduced by the commercial debt forgiveness provisions, see Appendix 4.
You can claim a deduction for losses incurred in debt and equity swaps for debt written off. You may be able to claim a deduction for a debt and equity swap by the partnership if the provisions of sections 63E to 63F of the ITAA 1936 are satisfied. Under these provisions, a deduction may be allowable for the difference between the amount of the debt extinguished and the greater of the market value of the equity or the value at which the equity is recorded in the creditor’s books at the time of issue. The market value of the equity is the price quoted on the stock exchange or, if the equity is not listed, the net asset backing of the equity.
If the TOFA rules apply to the partnership, include all the partnership's bad debts from financial arrangements subject to the TOFA rules at F item 5.
Record keeping
If the partnership writes off bad debts during the income year, keep a statement for all debtors in respect of which a write-off occurred. This statement should show:
- their name and address
- the amount of the debt
- the reason why the debt is regarded as bad
- the year that the amount was returned as income.
Lease expenses
Show at G item 5 the expenditure incurred through both finance and operating leases on leasing assets, such as motor vehicles, plant or other equipment. Do not include the cost of leasing real estate (show this cost at H Rent expenses).
If you include capital expenditure incurred to terminate a lease or licence you will need to add back the amount at B 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 1.
Expenses incurred under a hire-purchase or instalment-sale agreement of goods are not lease expenses. Such expenses are referred to in Appendix 6.
In some circumstances, lease expenses may be debt deductions for the purposes of the thin capitalisation rules. For information on thin capitalisation, see Appendix 3.
In certain cases, an amount of tax (withholding tax) is withheld from amounts paid or payable under equipment leases to non-residents and overseas branches of residents, and must be remitted to us. This is also subject to the operation of any relevant Tax Treaty (also referred to as double tax agreement). If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report by 31 October 2016. For more information, phone 13 28 66.
If an amount of lease expense is not allowable as a deduction, such as amounts disallowed under the thin capitalisation rules, or capital expenditure incurred to terminate a lease or licence, add back the amount at B Expense reconciliation adjustments.
Record keeping
If a deduction is claimed for the cost of leasing depreciating assets, keep a record of the following:
- a description of the items leased
- full particulars of the lease expenses for each item, including motor vehicles, showing
- to whom the payments were made
- the terms of the payments including details of any prepayments or deferred payments
- if any assignment, defeasance or re-direction to pay the payments was entered into, full particulars of the arrangement including to whom the payments were made
- details of use other than for producing assessable income
- any documentation on or relating to the lease of the items.
Rent expenses
Show at H item 5 the expenditure incurred as a tenant for the rental or lease of land and buildings used in the production of income.
Total interest expenses
Show at I item 5 the interest incurred on money borrowed within Australia and overseas that relates to producing Australian income and that is to acquire income-producing assets, to finance business operations or to meet current business expenses.
If the TOFA rules apply to the partnership, include all interest incurred on money borrowed within Australia and overseas to acquire income-producing assets, to finance business operations or to meet current business expenses from financial arrangements subject to the TOFA rules at I.
Do not include interest expenses claimable against rental income. These interest deductions are shown at G item 9.
An amount of tax (withholding tax) is generally withheld from interest paid or payable to non-residents and to overseas branches of residents. You must remit this to us. If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest dividend and royalty payments paid to non-residents – annual report by 31 October 2016. For more information, phone 13 28 66.
The thin capitalisation rules may apply to reduce interest deductions. These rules place a limit on the amount of interest and other loan costs that can be deducted for Australian tax purposes. For more information, see Appendix 3. Include the disallowed amount at B Expense reconciliation adjustments.
You may not be able to claim interest in certain situations, for example, if it has been incurred for private or domestic purposes.
Show the amount of interest not allowable at B Expense reconciliation adjustments.
Record keeping
If interest is paid to non-residents or to overseas branches of residents, keep a record of the following:
- name and address of recipient
- amount of interest paid or credited
- amount of withholding tax withheld and the date on which it was remitted to us
- the period in which the payments were made
- the ABN or TFN (if known).
Total royalty expenses
Show at J the royalty expenses for the income year. Include royalties paid to residents and non-residents.
An amount of withholding tax is generally withheld from royalties paid or payable to non-residents and to overseas branches of residents. You must remit this to us. If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest dividend and royalty payments paid to non-residents – annual report by 31 October 2016. For more information, phone 13 28 66.
Record keeping
Keep a record of the following:
- name and address of recipients
- amounts paid or credited
- nature of the benefit derived, for example, a copy of the royalty agreement
- details of tax withheld where applicable, and the date on which it was remitted to us.
For more information, see Appendix 2.
Depreciation expenses
If the partnership is an eligible small business entity and has chosen to use the simplified depreciation rules, see Small business entities and the information for All other partnerships below.
All other partnerships
Show at K the book depreciation expenses for depreciating assets other than for those assets allocated in a prior year to a general small business pool or the former long-life small business pool. For assets allocated to such a pool, include at this entry the amount of the pool deduction to be claimed for tax purposes. See Small business entities for information about small business entity depreciation deductions.
The amount at K does not include:
- profit on the sale of a depreciating asset, shown at G or H Other business income
- loss on the sale of a depreciating asset, shown at N All other expenses.
The accounting or book depreciation may differ from the deduction for the decline in value of depreciating assets. Reconcile the deduction for the decline in value of depreciating assets with accounting depreciation at B Expense reconciliation adjustments.
For more information about deductions for the decline in value of depreciating assets, see Appendix 6. You can also work out your decline in value by using the Depreciation and Capital Allowances Tool (DCAT) on ato.gov.au
Simplifying tax obligations for business
Our PS LA 2003/8 Practical approaches to low-cost business expenses guidance on two straightforward methods which 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 or capital.
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 that is revenue expenditure.
A deduction for expenditure incurred on low-cost tangible assets calculated in accordance with this practice statement will be accepted by us.
New laws have passed that allow small businesses to claim an immediate deduction for assets they first acquire and start to use, or have installed ready for use, 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 started 7.30pm (AEST) 12 May 2015 and will end on 30 June 2017.
The balance of the general small business pool is also immediately deductible if the balance is less than $20,000 at the end of an income year that ends on or after 12 May 2015 and on or before 30 June 2017 (including an existing general small business pool).
The 'lock out' laws have also been suspended for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they have opted out) until the end of 30 June 2017.
If the partnership is an eligible small business entity and has chosen to use the simplified depreciation rules, show at K the total depreciation deductions being claimed by the partnership under the simplified depreciation rules and the uniform capital allowances (UCA) rules.
Small business entities can claim an immediate deduction for most depreciating assets costing less than $20,000 (excluding input tax credit entitlements) and pool most of their other depreciating assets in a general small business pool
A small business entity choosing to use these simplified depreciation rules must use both the immediate write-off and the pooling, where applicable. You can’t choose to use one and not the other.
Some depreciating assets are excluded from these simplified depreciation rules, but you may be able to claim a deduction under the UCA rules. For example, horticultural plants (including grapevines) are excluded from the small business entity depreciation rules and are deducted under special UCA provisions as specified in Appendix 6.
Assets that are leased out, or will be leased out, by a small business entity for more than 50% of the time on a depreciating asset lease are specifically excluded from the simplified depreciation rules. You can generally claim a deduction under the UCA provisions.
This exclusion does not apply to depreciating assets a taxpayer leases out under a hire-purchase agreement or a short-term hire agreement.
For certain depreciating assets used by a small business entity in the course of carrying on a business of primary production, a taxpayer can choose whether to use these simplified depreciation provisions or specific UCA provisions. The specific UCA provisions are those applying to landcare operations, water facilities, fencing assets, fodder storage assets, electricity connections and telephone lines. For more information on these specific UCA provisions, see Appendix 6.
As the small business entity depreciation rules apply only to depreciating assets, certain capital expenditure incurred by a small business entity which does not form part of the cost of a depreciating asset may be deducted under the UCA provisions for deducting capital expenditure. This includes capital expenditure on certain business-related costs and amounts directly connected with a project. Do not include these amounts at K. Show the amount that you can claim as a deduction at B Expense reconciliation adjustments. For more information, see Appendix 6.
For more information about the small business entity depreciation rules, see Small business entity concessions, or phone 13 28 66.
Calculating depreciation deductions for small business entities
Only use steps 1 to 5 below to calculate the depreciation deductions if the partnership is an eligible small business entity and has chosen to use these simplified depreciation rules.
If the profit and loss statement of the partnership provides the amounts to complete Table 2, write these amounts in the table; otherwise, use steps 1 to 5 to calculate the depreciation deductions. You can also work out your decline in value by using the Depreciation and Capital Allowances Tool (DCAT) on ato.gov.au
The amounts you write in the table must be tax and not accounting values.
Table 1: Explanation of terms
Depreciating asset is an asset with a limited effective life which declines in value over that life.
Decline in value (previously ‘depreciation’) is the value that an asset loses over its effective life.
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.
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.
Assessable balancing adjustment amount arises where the termination value of the depreciating asset is more than the adjustable value.
Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.
Cost addition amounts include the costs 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 cosxts of demolishing the asset).
Step 1Deduction for certain assets costing less than $20,000
For each depreciating asset:
- which the partnership started to hold this income year and used (or installed ready for use) for a taxable purpose such as for producing assessable income
- whose cost at the end of this year is less than $20,000 (excluding input tax credit entitlements), and
- which qualifies for a deduction under the small business entity depreciation rules
- work out the extent it is used for the purpose of producing assessable income (taxable purpose proportion). Calculate the deduction for each eligible asset as follows
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Asset’s adjustable value X its taxable purpose proportion
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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 partnership 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.
Add up these results and write the total at (a) in Table 2.
Do not include in this calculation:
- amounts for depreciating assets the partnership started to hold prior to commencing to use the simplified depreciation rules and that cost less than $20,000. Allocate these assets to the general small business pool (see step 2 below).
- amounts for depreciating assets that cost $20,000 or more, Such assets must be allocated to the general small business pool (see step 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.
Step 2
General small business pool deductions
To calculate the deductions for the general small business pool, you must first calculate the opening pool balance of the pool.
The opening pool balance of the general small business pool is the closing pool balance for the previous income year, except where an adjustment is made to reflect the changed business use of a pooled asset.
For partnerships which have not previously used the simplified depreciation rules, the opening pool balance is the sum of the taxable purpose proportions of the adjustable values of those depreciating assets that are used, or held for use, just before the start of the 2015–16 income year, and that are not excluded from the simplified depreciation rules. When allocating each depreciating asset the partnership holds at the start of the income year to the general small business pool, only include 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 $14,140 to the pool.
The partnership can choose not to allocate an asset to the general small business pool if the asset was first used, or installed ready for use, for a taxable purpose before 1 July 2001. A partnership making this choice would depreciate such assets under the normal uniform capital allowance (UCA) rules.
Calculate the opening pool balance for the general small business pool by adding the value of all depreciating assets allocated to the pool.
Calculate the deduction for the general small business pool as follows:
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General small business pool deduction = opening pool balance ($) × 30%
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If necessary, make a reasonable apportionment for the general small business pool deduction between primary production and non-primary production activities.
Write the result of the general small business pool deduction at (b) in Table 2.
If the pool balance (after taking into account additions and disposals but before calculating the deductions in steps 2 and 3) is less than $20,000, calculate the deduction for the pool using Step 5(b).
Step 3
Depreciating assets including motor vehicles first used for a taxable purpose during the income year and cost addition amounts for assets already allocated to the pool
Calculate the deduction at half the pool rate for:
- depreciating assets that the partnership first used or installed ready for use for a taxable purpose during the year, and
- cost addition amounts for assets already allocated to the pool.
Calculate the deduction for the income year as follows:
- the taxable purpose proportion of the adjustable value of each depreciating asset first used for a taxable purpose this year × 15%, plus
- the taxable purpose proportion of cost addition amounts × 15% .
Write the total deduction at (c) in Table 2.
If the pool balance (after taking into account additions and disposals but before calculating the deductions in steps 2 and 3) is less than $20,000, calculate the deduction for these assets using Step 5(b).
Step 4
Other depreciating assets
Calculate the deduction for the decline in value of all other depreciating assets that are not included in steps 1 to 3. For more information, see Appendix 6 and the Guide to depreciating assets 2016. Write the total deduction at (d) in Table 2.
Step 5
Disposal of depreciating assets
(a) Certain assets (costing less than $20,000) and low-cost assets in previous years
If the partnership has disposed of a depreciating asset (costing less than $20,000) for which it has claimed an immediate deduction in Step 1 this year or a low-cost asset for which it claimed an immediate deduction in a prior year, include the taxable purpose proportion of the termination value at Reconciliation items item 5. For example, for a low-cost asset used only 50% for an income-producing purpose which was sold for $200 (excluding GST) only $100 will be assessable and included as a reconciliation adjustment.
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
If the partnership disposes of depreciating assets allocated to the general small business pool, the taxable purpose proportion of the termination value is deducted from the closing pool balance. For example, for a pooled depreciating asset used only 50% for an income-producing purpose which was sold for $3,000 (excluding GST) only $1,500 will be deducted from the closing pool balance.
If the balance of the pool (after taking into account any additions and disposals but before calculating the deductions in steps 2 and 3) is less than $20,000 but more than zero, the partnership can claim an immediate deduction for this amount. Write this deduction against the general small business pool at (b) Table 2.
If the closing pool balance is less than zero, the amount below zero is included in assessable income at Reconciliation items item 5. For more information about closing pool balances, see Closing pool balance.
If expenses are incurred in disposing of a depreciating asset, these expenses may be taken into account in Step 3.
(c) Other depreciating assets
See the Guide to depreciating assets 2016 for information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets. Include balancing adjustment amounts at Reconciliation items item 5, see Worksheet 1.
The closing balance of the general small business pool for an income year is:
- the opening pool balance (see Step 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 Step 3)
- plus
- the taxable purpose proportion of any cost addition amounts for assets in the pool during the year (see Step 3)
- minus
- the taxable purpose proportion of the termination value of any pooled assets disposed of during the year (see Step 5(b))
- minus
- the general small business pool deduction (see Step 2)
- minus
- the deduction for assets first used by the taxpayer during the year (see Step 3)
- minus
- the deduction for any cost addition amounts for pooled assets during the year (see Step 3).
If the closing pool balance is less than zero, see Step 5(b).
The closing pool balance for this year becomes the opening pool balance for the next income year, except if an adjustment is made to reflect the changed business use of a pooled asset.
The closing pool balance is needed to work out the pool deduction next year. Do not write the closing pool balance on the tax return.
Five-year restriction
The law has been changed to suspend the 5 year 'lock out' rule that applies to small business entities that have previously chosen to use these simplified depreciation rules but have then opted-out in a later year.
If the partnership is a small business entity that has previously chosen to use these simplified depreciation rules, but then, in a later year, has chosen to stop using this concession, the partnership can again choose to use the simplified depreciation rules.
Motor vehicle expenses
Show at L motor vehicle running expenses only. These expenses include fuel, repairs, registration fees and insurance premiums. They do not include the following expenses shown at:
- G Lease expenses
- I Total interest expenses
- K Depreciation expenses.
Special substantiation and calculation rules for car expenses apply to partnerships in which at least one partner is 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 less than one tonne and fewer than nine passengers. For an explanation of these methods, see question D1 in the Individual tax return instructions 2016.
Print N in the CODE box if there is an amount shown at L and this amount 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.
In all other cases, print in the CODE box the code from Table 3 that determines the method used to claim motor vehicle expenses applicable to the partnership.
If the partnership has more than one vehicle and uses a different method to claim motor vehicle expenses for each vehicle, use the code applicable to the largest claim.
|
Code |
Method used |
|
S |
Cents per km |
|
B |
Logbook |
Show any adjustment for tax purposes to the motor vehicle expenses included in the profit and loss statement at B Expense reconciliation adjustments item 5. To calculate the amount of the expense reconciliation adjustment, see Worksheet 1.
Repairs and maintenance
Show at M the expenditure on repairs and maintenance of plant, machinery, implements and premises.
Write back any non-deductible expenditure, such as items of a capital nature or amounts relating to private use of an item shown at M, at B Expense reconciliation adjustments. The following information will help you work out whether you should make an expense reconciliation adjustment.
Repairs
As long as it is not expenditure of a capital nature, you may deduct the cost of repairs to property, plant, machinery or equipment used solely for producing assessable income or in carrying on a business. You can only deduct expenditure on repairs to property used partially for business or income-producing purposes to an extent that is reasonable in the circumstances, for example, if the property is used for private purposes, or in the production of exempt income.
If items are newly acquired, including items acquired by way of a legacy or gift, the cost of remedying 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 TR 97/23 Income tax: deductions for repairs.
Record keeping
To support any claim for repairs, keep source records showing full details of the nature and cost of repairs to each item.
All other expenses
Show at N the total of all other business expenses for the income year which have not already been included at P to M, for example, travel expenses.
- Write back capital and other non-deductible items included at N at B Expense reconciliation adjustments.
- If you have included an amount for a loss on the sale of a depreciating asset at N, see Appendix 6.
- Calculation of some deductions may be affected by the commercial debt forgiveness provisions, see Appendix 4.
- Expenses that are costs associated with borrowing and servicing debt should only be included here if they relate to producing Australian income and have not already been included at I. These amounts may not be allowable under the thin capitalisation rules. For more information, see Appendix 3. Include the non-deductible amount at B Expense reconciliation adjustments.
- If what you show at N includes an amount which is brought to account under the TOFA rules, also complete item 31 Taxation of financial arrangements (TOFA).
Total expenses
Show at O the total of all expense items shown at P to N.
If there is a negative amount at E Cost of sales which exceeds the sum of expenses at shown at P to D and F to N, print L in the box at the right of the amount shown at O.
Reconciliation items
The reconciliation adjustments reconcile operating profit or loss as shown in the profit or loss account (the accounts) with the net income or loss for income tax purposes.
If the partnership has included any amounts such as exempt income or non-deductible expenses in the accounts, or has not included amounts which are assessable income or expenditure that is deductible, work out the reconciliation adjustments.
Income reconciliation adjustments
Show at A the net income-related reconciliation adjustments. The amounts included here are either:
- add backs that increase the net adjustment, or
- subtractions that reduce it.
Income add backs are amounts not shown in the accounts, but which are assessable income, including timing adjustments. These items increase the total shown at A. Examples include:
- any excess of the tax value of closing stock over the tax value of opening stock (other than small business entities using the simplified trading stock rules) see Opening stock and Closing stock
- assessable balancing adjustment amounts on depreciating assets, see Appendix 6
- limited recourse debt amounts, see Appendix 6
- other assessable income not included in the accounts, former STS taxpayers should see Former STS taxpayers.
Income subtractions are income shown in the accounts, but which are not assessable income, including timing adjustments. These items reduce the total shown at A. Examples include:
- exempt income, including income exempt from Australian tax under a Tax Treaty (also referred to as double tax agreement)
- profit on the sale of a depreciating asset, see Appendix 6
- personal services income included in the assessable income of an individual (attributed amount), see 30 Personal services income
- other income shown in the accounts which is not assessable for income tax purposes, former STS taxpayers should see Former STS taxpayers.
To calculate the net amount of the income reconciliation adjustments, see Worksheet 1.
If the income subtractions exceed the income add backs, the total is a negative amount. Print L in the box at the right of the amount shown at A.
Expense reconciliation adjustments
Show at B the net expense-related reconciliation adjustments. The amounts included here are either:
- add backs that increase the net adjustment, or
- subtractions that reduce it.
Expense add backs are expenses shown in the accounts which are either not tax deductible or are only partly tax deductible, including timing adjustments. These items increase the total shown at B. Examples include:
- additions to provisions and reserves
- capital expenditure
- certain expenses relating to personal services income that are not deductible, see item Personal services income
- debt deductions denied by the thin capitalisation provisions, see Appendix 3
- depreciation expenses*
- expenses relating to exempt income, including expenses relating to DTA exempt income
- hire-purchase payments, see Appendix 6
- income tax expense
- loss on the sale of a depreciating asset, see Appendix 6
- luxury car lease payments, see Appendix 6
- part of prepaid expenses not deductible this year, see Prepaid expenses
- penalties and fines
- amounts of capital expenditure incurred to terminate a lease or licence which were included as lease expenses
- other non-deductible expenses, former STS taxpayers should see Former STS taxpayers.
*Only add back amounts of depreciation expenses if the partnership is not a small business entity using the simplified depreciation rules. However, exclude any small business pool deductions shown at K Depreciation expenses.
Expense subtractions are amounts not shown as expenses in the accounts, but which are tax deductible, including timing adjustments. These items reduce the total amount shown at B. Examples include:
- any excess of the tax value of opening stock over the tax value of closing stock, see Trading stock on hand
- any expenditure incurred under Subdivision 40-J of the ITAA 1997 to establish trees in carbon sink forests
- deductible balancing adjustment amounts on depreciating assets, see Appendix 6
- deduction for decline in value of depreciating assets (other than partnerships using the small business entity depreciation rules), see Appendix 6
- deduction for environmental protection expenses, see Appendix 6
- deduction for project pool, see Appendix 6
- hire-purchase agreements, interest component, see Appendix 6
- luxury car leases, accrual amount, see Appendix 6
- part of prepaid expenses deductible this year, but not shown in accounts, see Prepaid expenses
- section 40–880 deduction, see Appendix 6
- TOFA rules deduction not shown in accounts
- that part of the capital expenditure incurred to terminate a lease or licence which is allowed as a tax deduction
- other deductible items, former STS taxpayers should see below.
If the expense subtractions exceed the expense add backs, the total is a negative amount. Print L in the box at the right of the amount shown at B.
To calculate the net amount of the expense reconciliation adjustments, see Worksheet 1.
Specific reconciliation adjustments
Former STS taxpayers
If the partnership is eligible and is continuing to use the STS accounting method, you may need to make additional adjustments, see continued use of the STS accounting method and Appendix 14.
You will need to make adjustments at Reconciliation items item 5 if:
- the partnership is using the STS accounting method, and the amounts shown at item 5 sections are not based on the STS accounting method, or
- the partnership stops using the STS accounting method.
These adjustments are explained in more detail below. Worksheet 1 will help with the calculations. See also Appendix 14.
Trade debtors and creditors as at 30 June 2016
If the partnership is eligible, has chosen to continue using the STS accounting method and has included at any income labels at item 5, amounts of ordinary income that have been derived but not received in 2015–16, the amounts not received are not assessable, for example, trade debtors as at 30 June 2016.
Show these amounts as income subtractions at A Income reconciliation adjustments.
If the partnership is eligible, has chosen to continue using the STS accounting method and has included at any expense labels at item 5 amounts of general deductions, repairs or tax-related expenses that have been incurred but not paid in 2015–16, then the amounts not paid are not deductible, for example, trade creditors as at 30 June 2016.
Show these amounts as expense add backs at B Expense reconciliation adjustments.
Adjustments when ceasing to use the STS accounting method
If the partnership has discontinued using the STS accounting method and changed to an accruals accounting method this year, read below.
If the partnership has previously not included at any income label at item 5 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.
Show these amounts as income add backs at A Income reconciliation adjustments.
If the partnership has previously not included at any expense labels at item 5 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.
Show these amounts as expense subtractions at B Expense reconciliation adjustments unless they are tax-related expenses. Include the deduction for tax-related expenses at item 18.
Disposal of depreciating assets
If the partnership has disposed of depreciating assets during the income year, the following amounts (if any) are income add backs at A Income reconciliation adjustments:
- taxable purpose proportion of the termination value of certain assets disposed of, for which an immediate deduction has been claimed
- if the closing pool balance of the general small business pool is less than zero, the amount below zero
- assessable balancing adjustment amounts on the disposal of depreciating assets not subject to the small business entity depreciation rules.
Show any deductible balancing adjustment amounts on the disposal of depreciating assets not subject to the small business entity depreciation rules as expense subtractions at B Expense reconciliation adjustments.
Prepaid expenses (immediate deduction)
Generally, prepaid expenses are deductible over the eligible service period or 10 years if that is less.
The eligible service period is broadly the period over which you will receive the goods or services.
Small business entities are entitled to an immediate deduction for prepaid expenses if the expenditure is incurred for a period of service not exceeding 12 months and the eligible service period ends on or before the last day of the next year of income. If the eligible service period is more than 12 months, or ends after the next year of income, you must apportion the deduction for the expenditure over the eligible service period or 10 years, whichever is less. For more information, see Deductions for prepaid expenses 2015–16 (NAT 4170). If expense labels include prepaid expenses that differ from the amounts allowable as deductions in the 2015–16 income year, make the reconciliation adjustment at B Expense reconciliation adjustments.
Prepaid expenses (apportionment)
The partnership’s total deduction for prepaid expenses in the 2015–16 income year may comprise two components:
- the part of prepaid expenses incurred in the 2015–16 income year which relates to that income year, and
- that part of the 2014–15 or earlier income year’s expenses not deductible in that income year, but which is deductible in the 2015–16 income year under the prepayment rules.
For more information, see Deductions for prepaid expenses 2015–16.
If any expenses labels include prepaid expenses which differ from the amounts allowable as deductions in the 2015–16 income year, make the reconciliation adjustment at B Expense reconciliation adjustments.
Trading stock on hand (other than small business entities using the simplified trading stock rules)
Reconciliation adjustments will be required where the tax values of trading stock on hand have not been used in calculating the amount shown at E Cost of sales item 5. Any excess of the tax value of closing stock over the tax value of opening stock would be an income add back. Any excess of the tax value of opening stock over the tax value of closing stock would be an expense subtraction. If you have used accounting values for trading stock on hand in calculating the amount shown at E Cost of sales, you will need to take further reconciliation adjustments from those amounts.
For more information on the tax value of trading stock, see item Opening stock and item Closing stock.
Net income or loss from business
The net income or loss from business is total business income minus total expenses incurred in producing that income, adjusted by any reconciliation items.
Show the net income or loss from business at:
- Q for primary production, and
- R for non-primary production.
If the amount at Q or R is a loss, print L in the box at the right of the amount.
Show at S:
- Total business income, minus
- O Total expenses, plus or minus
- A Income reconciliation adjustments and B Expense reconciliation adjustments.
The sum of the net income or loss from business at:
- Q for primary production, and
- R for non-primary production
equals the amount shown at S.
If the amount at S is an overall loss, print L in the box at the right of the amount.
If the partnership made a loss on a business activity, the non-commercial loss rules may affect an individual partner's share of a business loss, see Appendix 7: Partnership losses.
Net small business income
Is the partnership a small business entity?
No Go to item 6.
Yes Read on
The partnership needs to work out it's net small business income. Partners who are individuals need to know their share of net small business income so that they can claim the small business income tax offset in their own tax return if eligible.
An individual is only entitled to the offset in respect of a share of net small business income received from a small business entity partnership in which they are a partner.
Partners who are prescribed persons (under 18 years of age and not excepted persons) are entitled to the offset on their share provided they are actively carrying on the partnership business.
The net small business income is the partnership’s assessable income from carrying on a small business, less deductions to the extent that they are attributable to that assessable income. If the partnership carries on multiple businesses combine all the partnership's assessable income and attributable deductions to work out the net small business income.
If the partnership made a loss on a business activity, the non-commercial loss rules may affect an individual partner's share of net small business income, see Appendix 7: Deductions applicable to partners - Small business income tax offset and non-commercial losses.
To work out net small business income do not include:
- any personal services income that was attributed to another person
- any of the following deductions
- tax-related expenses
- gifts or contributions
Completing this item
Step 1 Did the partnership have business income or deductions shown at items other than S item 5?
No The amount at S item 5 is the partnership's net small business income. Show this amount at V item 5. You are finished with this item. Go to item 6.
Yes Go to step 2
Step 2 If the partnership had any of the following, use worksheet 1A to work out the net small business income:
- foreign source business income at item 23 or attributed foreign business income at item 22
- interest income earned in the course of carrying on the business shown at item 11
- dividend income earned in the course of carrying on the business shown at item 12, for example dividends earned in the course of carrying on a share trading business
- any business income not already shown at this item
- any business deductions not already shown at this item, for example debt deductions against foreign source business income claimed at item 18.
Show the net small business income at V item 5. Do not show cents.