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 (which may require specific adjustment, for example to exclude GST) subject to two exceptions for small business entities.
Small business entities choosing to use:
- the simplified trading stock rules should use tax values for their closing stock in calculating their cost of sales shown at E
- the simplified depreciation rules should use tax values for their depreciation expenses at K.
For more information on small business entities, see appendix 14.
The accounting system amounts are shown or included on the business profit and loss statements and form the basis of the calculation of the trust's business net income or loss for tax purposes. 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 (occurring, for example, 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 trust - include distributions received from other trusts and partnerships 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 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 trust is eligible and is continuing to use the simplified tax system (STS) accounting method, see Specific reconciliation adjustments - Former STS taxpayers.
Ceasing use of the STS accounting method
If the trust 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) are accounted for in this year. You may need to make additional reconciliation adjustments.
Income
All trusts
Gross payments where ABN not quoted
Show at C and D item 5, as appropriate, gross income received by the trust that was subject to withholding where an Australian business number (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 2012 and attach the completed schedule to the trust tax return. For instructions on completing this schedule see Non-individual PAYG payment summary schedule 2012.
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
Show at B item 5 gross payments to the trust that was regulated foreign resident income. Gross payments include amounts withheld.
Complete this entry only if the trust is a non-resident trust. For a resident trust, do not include an amount, such as foreign sourced income, at this entry.
'Regulated foreign resident income' refers to payments that are prescribed in the Tax Administration Regulations 1976External Link 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.
If an amount is shown at B, complete a Non-individual PAYG payment summary schedule 2012 and attach the completed schedule to the trust tax return. For instructions on completing this schedule, see Non-individual PAYG payment summary schedule 2012 (NAT 3422).
Show gross distributions of regulated foreign resident income from partnerships and other trusts at item 8. A Non-individual PAYG payment summary schedule 2012 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. Leave A blank.
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 in relation to, 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 grant under the energy grants credits scheme
- 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 or a fuel grant under the energy grants credits scheme, 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 arising 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. Even if the TOFA rules apply to the trust's financial arrangement, show at G or H amounts that would be brought to account under the TOFA rules.
Do not include amounts that are shown at C, B, D, E and F.
If the amount at G or H is a loss, print L in the box to 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 appendix 6.
If what you show at G or H includes an amount which is brought to account under the TOFA rules, also complete item 31Taxation of financial arrangements (TOFA).
For more information, see Guide to the taxation of financial arrangements (TOFA).
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 trust. 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.
If the amount at E is a loss, print L in the box to the right of the loss amount.
Small business entities using the simplified depreciation rules should use tax values for their depreciation expenses at K.
If the trust 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 trust 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 as expenses at item 5 differ from the amount allowable as deductions in the 2011–12 income year, make a reconciliation adjustment at B item 5.
For more information, see Deductions for prepaid expenses 2012
Foreign resident withholding expenses
Show at P item 5 all expenses directly relating to gaining the income shown at BGross payments subject to foreign resident withholding, item 5. These amounts should not be shown at any other expense entry in item 5. Do not include any expenses incurred in gaining income not assessable in Australia.
Complete this entry only if the trust is a non-resident trust. For a resident trust do 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 5.
Contractor, subcontractor 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 eligible contributions made to a complying superannuation, provident, benefit or retirement fund, or retirement savings account (RSA), where the contribution is to provide superannuation benefits for employees or to provide benefits to the employee's dependants on the employee's death.
Employers can claim a deduction for eligible superannuation contributions made in respect of a former employee within four months of the employee ceasing employment and at any time after the employee ceases employment for defined benefit interests. Contributions are deductible in the financial year they were made.
Superannuation benefits mean payments for superannuation member benefits or superannuation death benefits.
You can claim a deduction in the income year in which the contributions are made.
Contributions made to a non-complying fund:
- are not allowable as a deduction
- do not count towards superannuation guarantee obligations.
Under the superannuation guarantee legislation, an employer needs to provide a minimum level of superannuation for employees or pay the superannuation guarantee charge (SGC) that is payable on the superannuation guarantee shortfall.
The SGC is not a superannuation contribution and is not tax deductible. Employers may not claim a tax deduction for any late contribution that they make to reduce the amount of SGC that they have to pay under the superannuation guarantee late payment measures.
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 1986.
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 subject to excess concessional contributions tax at the rate of 31.5% on excess concessional contributions in a financial year if their concessional contributions exceed the concessional contributions cap of $25,000. A transitional arrangement allows a higher cap of $50,000 on concessional contributions for the 2011-12 income year for individuals aged 50 years or over on the last day of the income year.
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 amount of the contribution required under an industry award, determination or notional agreement preserving state awards.
Cost of sales
Small business entities
If the trust 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 trust does not need to account for the change in value of closing stock, its closing stock will equal its opening stock value. If the trust does need to account for the change in value of closing stock, or chooses to do so, see item 41 Closing stock for information about how to calculate the closing stock value.
All trusts
Show at E item 5 the 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) then 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 (i.e. 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 that is bad has previously been included in assessable income, or is for money lent in the ordinary course of the business of the lending of money by a trust carrying on that business.
- Under the Trust losses provisions of Schedule 2F to the ITAA 1936, certain rules have to be satisfied by a trust before the trustee can deduct bad debts or debt equity swap amounts, for more information about the trust loss provisions, see appendix 8.
- 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 trust 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 trust is not in the business of lending money, the deduction is limited to the amount of the debt that has been included in assessable income.
Even if the TOFA rules apply to the trust, show at F item 5 all the trust's bad debts, - this includes amounts from financial arrangements subject to the TOFA rules.
If what you show at F includes an amount that is brought to account under the TOFA rules, also complete item 31 Taxation of financial arrangements (TOFA).
For more information, see Guide to the taxation of financial arrangements (TOFA).
Record keeping
If the trust writes off bad debts during the income year, keep a statement for all debtors in respect of which a write-off occurred, showing:
- 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 or capital expenditure incurred to terminate a lease or licence.
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 the ATO. This is also subject to the operation of any relevant tax treaties (treaties). 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 2012, 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, 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 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 to acquire income-producing assets, to finance business operations or to meet current business expenses.
Even if the TOFA rules apply to the trust, show at I 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, this includes interest from financial arrangements subject to the TOFA rules.
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 the ATO. 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 2012, 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.
- Distributions made by the issuer of a non-share equity interest are not deductible.
- You may not be able to claim interest in certain situations, for example, if it has been incurred for private or domestic purposes.
If what you show at I includes an amount which is brought to account under the TOFA rules, also complete item 31 Taxation of financial arrangements (TOFA).
Show the amount of interest not allowable as a deduction at B Expense reconciliation adjustments.
For more information, see Guide to the taxation of financial arrangements (TOFA).
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 the ATO.
Total royalty expenses
Show at J the royalty expenses for the income year, include royalties paid to residents and non-residents.
An amount of tax, 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 form interest dividend and royalty payments paid to non-residents - annual report by 31 October 2012.
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 the ATO.
For more information, see appendix 2.
Depreciation expenses
If the trust 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 trusts below.
All other trusts
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 a long life small business pool. For assets allocated to such a pool, include at K the amount of the pool deduction to be claimed for tax purposes. For information about small business entity depreciation deductions, see Small business entities.
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.
If there is an amount greater than $100,000 at K complete and attach a Capital allowances schedule 2012 unless the trust is still claiming a deduction in respect of assets in a continuing small business pool, and the amount K relates entirely to that pool.
For more information, see the Capital allowances schedule instructions 2012.
Simplifying tax obligations for business
Our PS LA 2003/8 Taxation treatment of expenditure on low cost items for taxpayers carrying on a business provides 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.
Small business entities
If the trust 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 trust under the simplified depreciation rules and the uniform capital allowances (UCA) rules. You do not need to complete a capital allowances schedule.
Small business entities can claim an immediate deduction for most depreciating assets costing less than $1,000 (excluding input tax credit entitlements) and pool most of their other depreciating assets. There are two small business pools:
- a general small business pool for depreciating assets with an effective life of less than 25 years, and
- a long life small business pool for depreciating assets with an effective life of 25 years or more.
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 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, 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 that 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.
Calculating depreciation deductions for small business entities
Only use steps 1 to 5 to calculate the depreciation deductions if the trust is an eligible small business entity and has chosen to use these simplified depreciation rules.
If the profit and loss statement of the trust provides the amounts to complete table 4, write these amounts in the table. Otherwise, use steps 1 to 5 to calculate the depreciation deductions.
The amounts you write in the table must be tax and not accounting values.
Table 3: 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 costs of demolishing the asset). |
Step 1
Low-cost assets
For each depreciating asset:
- which the trust started to hold this income year and used (or installed ready for use) for a taxable purpose such as for producing assessable income
- for which the cost at the end of 2011-12 is less than $1,000 (excluding input tax credit entitlements), and
- which qualifies for a deduction under the small business entity depreciation rules
then 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:
Asset's adjustable value X its taxable purpose proportion
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 trust solely for private purposes. For example, for a tool set bought on 1 December at a cost of $800 (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 $800 x 70% = $560.
Add up these results and write the total at (a) in table 4.
Do not include in this calculation amounts for depreciating assets the trust started to hold prior to commencing to use the simplified depreciation rules and that cost less than $1,000. Allocate these assets to a small business pool (see step 2).
Step 2
Small business pool deductions
To calculate the deductions for both the general and long life small business pools you must first calculate the opening pool balance of each pool.
The opening pool balance of each 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.
Allocate each depreciating asset the trust holds at the start of the income year to the appropriate pool according to the asset's effective life. Only include the taxable purpose proportion of the adjustable value of each depreciating asset. For example, for an asset with an adjustable value of $10,000, which is used only 50% for an income-producing purpose, add only $5,000 to the pool.
The trust can choose not to allocate an asset to the long life small business pool if the asset was first used, or installed ready for use, for a taxable purpose before 1 July 2001. A trust making this choice would depreciate such assets under the normal uniform capital allowance (UCA) rules.
Calculate the opening pool balance for each small business pool by adding the value of all depreciating assets allocated to the relevant pool.
Calculate the deduction for each small business pool as follows:
General small business pool deduction = opening pool balance ($) X 30%
Long life small business pool deduction = opening pool balance ($) X 5%
If necessary, make a reasonable apportionment for each 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 4.
Write the result of the long life small business pool deduction at (c) in table 4.
If either pool balance (after taking into account additions and disposals but before calculating the deductions in steps 2 and 3) is less than $1,000, calculate the deduction for the pool using step 5(b).
Step 3
Depreciating assets first used for a taxable purpose during the income year and cost addition amounts for assets already allocated to a pool
Calculate the deduction at half the relevant pool rate for:
- depreciating assets that the trust first used or installed ready for use for a taxable purpose during the year, and
- cost addition amounts for assets already allocated to a 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 X 15% (general small business pool assets) or 2.5% (long-life pool assets), plus
- the taxable purpose proportion of cost addition amounts X 15% (general pool assets) or 2.5% (long-life pool assets).
Write the total deduction for general small business pool assets at (d) in table 4.
Write the total deduction for long life small business pool assets at (e) in table 4.
If either pool balance (after taking into account additions and disposals but before calculating the deductions in steps 2 and 3) is less than $1,000, 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 2012. Write the total deduction at (f) in table 4.
Step 5
Disposal of depreciating assets
(a) Low-cost assets
If the trust has disposed of a low-cost asset for which it has claimed an immediate deduction in step 1 this year or 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.
(b) Assets allocated to small business pools
If the trust disposes of depreciating assets allocated to either the general or long life small business pools, 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 a pool (after taking into account any additions and disposals but before calculating the deductions in steps 2 and 3) is less than $1,000 but more than zero, the trust can claim an immediate deduction for this amount. Write this deduction against the appropriate pool at (b) or (c) in table 4.
If the closing pool balance is less than zero, the amount below zero is included in assessable income at Reconciliation items, 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 2012 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.
Closing pool balance
The closing balance of each 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 cost addition amounts for assets in the pool during the year (see step 3), less
- the taxable purpose proportion of the termination value of any pooled assets disposed of during the year (see step 5(b)), less
- the small business pool deduction (see step 2), less
- the deduction for assets first used by the taxpayer during the year (see step 3), less
- the deduction for 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
If the trust is a small business entity and has chosen to use these simplified depreciation rules but then, in a later year, it chooses to stop using this concession, the trust cannot again choose to use the simplified depreciation rules until at least five years after the income year in which it chose to stop using the 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.
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 (for example, if the property is used for private purposes or in the production of exempt income) to an extent that is reasonable in the circumstances.
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 that has 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.
- The calculation of some deductions may be affected by the commercial debt forgiveness provisions, see appendix 4.
- Expenses listed here that are costs associated with borrowing and servicing debt may not be allowable under the thin capitalisation rules, see appendix 3. Include the non-deductible amount at B Expense reconciliation adjustments.
- If what you show at N includes an amount that is brought to account under the TOFA rules, also complete item 31Taxation of financial arrangements (TOFA).
For more information, see Guide to the 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 ECost of sales, which exceeds the total of all other expenses, print L in the box at the right of the amount.
Reconciliation items
The reconciliation adjustments reconcile operating profit or loss as shown in the profit or loss account (the accounts) with the trust's net income or loss from business for income tax purposes.
If the trust 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 fall into two classes, which either increase or reduce the net adjustment:
- income add backs are amounts not shown in the accounts, but 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)
- 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, small business entities should see appendix 6
- income subtractions are income shown in the accounts, 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 double-tax treaty
- profit on the sale of a depreciating asset, see appendix 6
- personal services income (PSI) included in the assessable income of an individual (attributed amount), see item 30 Personal services income
- other income shown in the accounts which is not assessable for income tax purposes - former STS taxpayers should see below.
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 amounts shown at A.
Expense reconciliation adjustments
Show at B the net expense related reconciliation adjustments. The amounts included here fall into two classes that either increase or reduce the net adjustment:
- 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 30 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 tax treaty exempt income
- hire-purchase payments, see appendix 6
- income tax expense
- loss on the sale of a depreciating asset
- luxury car lease payments
- part of prepaid expenses not deductible this year
- penalties and fines
- other non-deductible expenses - former STS taxpayers should see below.
* Only add back amounts of depreciation expenses if the trust 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 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
- 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 trusts 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
- deduction for electricity connections and telephone lines, see appendix 6
- hire purchase agreements, interest component, see appendix 6
- deductions for landcare operations, see appendix 6
- luxury car leases, accrual amount, see appendix 6
- part of prepaid expenses deductible this year, but not shown in accounts
- section 40-880 deduction, see appendix 6
- 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.
To calculate the net amount of the expense reconciliation adjustments, see worksheet 1.
Specific reconciliation adjustments
Former STS taxpayers
If the trust is eligible and is continuing to use the STS accounting method, you may need to make additional adjustments, see appendix 14.
You will need to make adjustments at Reconciliation items item 5 if the trust:
- uses the STS accounting method, and the amounts shown at item 5Income and Expenses are not based on the STS accounting method, or
- stops using the STS accounting method.
These adjustments are explained in more detail below, worksheet 1 will help with the calculations.
Trade debtors and creditors as at 30 June 2012
If the trust is eligible, has chosen to continue using the STS accounting method and has included, as income at item 5, amounts of ordinary income that have been derived but not received in 2011-12, the amounts not received (for example, trade debtors at 30 June 2012) are not assessable in 2011-12.
Show these amounts as income subtractions at A Income reconciliation adjustments.
If the trust is eligible, has chosen to continue using the STS accounting method and has included, as expenses at item 5, amounts of general deductions, repairs or tax-related expenses that have been incurred but not paid in 2011-12, then the amounts not paid (for example, trade creditors at 30 June 2012) are not deductible in 2011-12.
Show these amounts as expense add-backs at B Expense reconciliation adjustments.
Adjustments when ceasing to use the STS accounting method
If the trust has discontinued using the STS accounting method and changed to an accruals accounting method this year, read below.
If the trust has previously not included, as income at item 5, amounts of ordinary income that were derived but not received while using the STS accounting method (for example, trade debtors at 30 June 2011) these amounts are assessable this year.
Show these amounts as income add backs at A Income reconciliation adjustments.
If the trust has previously not included as expenses at item 5, amounts of general deductions, repairs or tax-related expenses that were incurred but not paid while using the STS accounting method (for example, trade creditors at 30 June 2011) these amounts are deductible this year.
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 trust 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 low-cost assets disposed of for which an immediate deduction has been claimed
- if the closing pool balance of a small business pool is less than zero, the amount below zero, and
- 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)
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 2012. If expense amounts include prepaid expenses that differ from the amounts allowable as deductions in the 2011-12 income year, make the reconciliation adjustment at B Expense reconciliation adjustments.
Prepaid expenses (apportionment)
The trust's total deduction for prepaid expenses in the 2011–12 income year may comprise two components:
- the part of prepaid expenses incurred in the 2011–12 income year that relates to that income year, and
- that part of the 2010–11 or earlier income year's expenses was not deductible in that income year, but is deductible in the 2011–12 income year under the prepayment rules.
For more information, see Deductions for prepaid expenses 2012.
If expense amounts include prepaid expenses differ from the amounts allowable as deductions in the 2011-12 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 39 Opening stock and item 41 Closing stock.
Taxation of financial arrangements (TOFA)
- If what you show at A Income reconciliation adjustments or B Expense reconciliation adjustments includes an amount that is brought to account under the TOFA rules, also complete item
- 31Taxation of financial arrangements (TOFA).
For more information, see Guide to the taxation of financial arrangements (TOFA).
Net income or loss from business
The trust's net income or loss from business is the amount of the trust's net income or loss for tax purposes that is from business. It is the total business income less total expenses incurred in producing that income according to the accounting systems, adjusted by any tax 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.