Reconciliation items and net income or loss – item 5

Instructions to complete item 5 business reconciliation items and adjustments and the net income or loss from business.

Reconciliation items

The reconciliation adjustments reconcile accounting profit or loss as shown in the profit or loss account (the accounts) with the net income or loss for income tax purposes.

Work out the reconciliation adjustments if the partnership:

• has included any amount 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.

Income reconciliation adjustments

Show at label A the net income-related reconciliation adjustments. The amount included here is the net amount of:

• any add backs that increase the net adjustment, or
• any 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 label 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, 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, see Former STS taxpayers
• cash flow boost payments if they have been included in other business income.

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. Show L in the box at the right of the amount shown at label A.

Expense reconciliation adjustments

Show at label B the net expense-related reconciliation adjustments. The amount included here is the net amount of:

• any add backs that increase the net adjustment, and
• any 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 you show at label B. Examples include:

• additions to provisions and reserves
• capital expenditure
• certain expenses relating to personal services income that are not deductible; see 30. Personal services income
• debt deductions denied by the thin capitalisation provisions, see Appendix 3
• deductions for vacant land
• depreciation expenses (see depreciation expenses below)
• 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, see Former STS taxpayers.

Depreciation expenses: Add back amounts of depreciation expenses only 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, see below.

For information on which new depreciation measure applies to an asset, see Interaction of tax depreciation measures.

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 label B.

To calculate the net amount of the expense reconciliation adjustments, see Worksheet 1.

Former STS taxpayers

If you are eligible and are 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 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 on 30 June 2022

If the partnership is eligible, has chosen to continue using the STS accounting method and has included at item 5 amounts of ordinary income that have been derived but not received in 2021–22, the amounts not received are not assessable, for example, trade debtors on 30 June 2022.

Show these amounts as income subtractions at label A Income reconciliation adjustments.

If the partnership is eligible, has chosen to continue using the STS accounting method and has included at item 5 amounts of general deductions, repairs or tax-related expenses that have been incurred but not paid in 2021–22, then the amounts not paid are not deductible, for example, trade creditors on 30 June 2022.

Show these amounts as expense add backs at label 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 in 2021–22, for example, trade debtors on 30 June 2021.

Show these amounts as income add backs at label 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 in 2021–22, for example, trade creditors on 30 June 2021.

Show these amounts as expense subtractions at label 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 label 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 label B Expense reconciliation adjustments.

Prepaid expenses (immediate deduction)

Small business entities, and entities that would be small business entities if the aggregated turnover threshold was $50 million, 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 2022–23, you must apportion the deduction for the expenditure over the eligible service period or 10 years, whichever is less.

The eligible service period is broadly the period over which you will receive the goods or services.

For more information, see Deductions for prepaid expenses 2022. If expense items include prepaid expenses that differ from the amounts allowable as deductions in 2021–22, make the reconciliation adjustment at B Expense reconciliation adjustments.

Prepaid expenses (apportionment)

The partnership’s total deduction for prepaid expenses in 2021–22 may comprise two components:

• the part of prepaid expenses incurred in 2021–22 which relates to 2021–22, and
• that part of the 2020–21 or earlier income year’s expenses not deductible in that income year, but which is deductible in 2021–22 under the prepayment rules.

For more information, see Deductions for prepaid expenses 2022.

If any expense items include prepaid expenses which differ from the amounts allowable as deductions in 2021–22, 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 label 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 39. Opening stock and 41. 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 label:

• Q for primary production, and
• R for non-primary production.

If the amount at label Q or R is a loss, print L in the box at the right of the amount.

Show at label S:

• Total business income, minus
• label O Total expenses      
  • plus label A Income reconciliation adjustments and label B Expense reconciliation adjustments amounts which are positive, and
  • minus label A Income reconciliation adjustments and label B Expense reconciliation adjustments amounts which are negative

The sum of the net income or loss from business at label:

• Q for primary production, and
• R for non-primary production

equals the amount shown at label S.

If the amount at label 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.

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 its 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, where the business income was derived by that partnership from carrying on its own business activities.

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, then combine all the partnership's assessable income and attributable deductions relating to those businesses 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.

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 item 5 – label S?

• No – The amount at S item 5 is the partnership's net small business income. Show this amount at V item 5. You have finished 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
• 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 item 5 – label V. Do not show cents.

Continue to: Income excluding foreign income – items 6 to 9