Reconciliation items

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

Reconcile operating profit or loss

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

Print at label A Income reconciliation adjustments the net income-related reconciliation adjustments. The amounts included here fall into 2 classes, which either increase or reduce the net adjustment, 'income add backs' and 'income subtractions'.

• Income add backs are amounts not shown in the accounts, but 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)
  • 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 items shown in the accounts, which are not assessable income, including timing adjustments. These items reduce the total shown at label 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 Personal services income – item 30
  • other income shown in the accounts which is not assessable for income tax purposes; former STS taxpayers should 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. Print L in the box at the right of the amounts shown at label A.

Expense reconciliation adjustments

Print at label B Expense reconciliation adjustments the net expense related reconciliation adjustments. The amounts included here fall into 2 classes that either increase or reduce the net adjustment, 'expense add backs' and 'expense subtractions'.

• 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 label B. Examples include    
  • additions to provisions and reserves
  • capital expenditure
  • certain expenses relating to personal services income that are not deductible; see Personal services income – item 30
  • debt deductions denied by the thin capitalisation provisions; see Appendix 3
  • depreciation expenses; see Note
  • 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 Former STS taxpayers.

Note: 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 included at label 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 label 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 phone lines; see Appendix 6
  • hire purchase agreements, interest component; see Appendix 6
  • deductions for landcare operations and decline in value of water facility, fencing asset and fodder storage asset; 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
  • bonus deduction for small business skills and training boost; see Appendix 14.
  • bonus deduction for small business technology investment boost; see Appendix 14.
  • other deductible items; former STS taxpayers should see Former STS taxpayers.

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

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 13.

You will need to make adjustments at Reconciliation items if the trust:

• uses the STS accounting method, and the amounts shown at Income 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 2023

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 2022–23, the amounts not received (for example, trade debtors at 30 June 2023) are not assessable in 2022–23.

Print these amounts as income subtractions at label 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 2022–23, then the amounts not paid (for example, trade creditors at 30 June 2023) are not deductible in 2022–23.

Print these amounts as expense add-backs at label 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 2022) these amounts are assessable this year.

Print these amounts as income add backs at label 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 2022) these amounts are deductible this year.

Include 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 Other deductions.

Disposal of depreciating assets

If the trust has disposed of (ceases to hold) 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, amount below zero, and
• assessable balancing adjustment amounts on the disposal (or deemed disposal) of depreciating assets not subject to the small business entity depreciation rules.

Print 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 businesses 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 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 2023. If expense amounts include prepaid expenses that differ from the amounts allowable as deductions in 2022–23, make the reconciliation adjustment at label B Expense reconciliation adjustments.

Prepaid expenses (apportionment)

The trust’s total deduction for prepaid expenses in 2022–23 may comprise 2 components:

• the part of prepaid expenses incurred in 2022–23 that relates to that income year
• that part of the 2021–22 or earlier income year’s expenses was not deductible in that income year, but is deductible in 2022–23 under the prepayment rules.

For more information, see Deductions for prepaid expenses 2023.

If expense amounts include prepaid expenses that differ from the amounts allowable as deductions in 2022–23, make the reconciliation adjustment at label 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 included at label E Cost of sales. 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 included at label E, 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.

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.

Print at label S Net income or loss from business in the totals column:

• total business income, minus
• label O Total expenses, plus or minus
• label A Income reconciliation adjustments and label B Expense reconciliation adjustments.

If the amount at label S is an overall loss, print L in the box at the right of the amount.

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

• label Q for primary production, and
• label 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.

Net small business income

Is the trust a small business entity?

• No – Go to item 6 Tax withheld.
• Yes – Read on.

The trust must work out the net small business income. Beneficiaries who are individuals need to know their share of net small business income to claim the small business income tax offset in their own tax return if they are entitled to it.

An individual is only entitled to the offset in respect of a share of net small business income received from a small business entity trust in which they are a beneficiary, where the business income was derived by that trust from carrying on its own business activities.

Trustees and beneficiaries who are prescribed persons (under 18 years of age and not excepted persons) are not entitled to the offset.

The net small business income is the trust’s assessable income from carrying on a small business, less any deductions to the extent that they are attributable to that assessable income. If the trust carries on multiple businesses, combine the trust's assessable income and attributable deductions to work out the net small business income.

Do not include:

• any net capital gains from assets used in carrying on the business
• any personal services income that was attributed to another person
• any of the following deductions    
  • tax-related expenses
  • gifts or contributions
  • tax losses from prior years.

Completing 5V Net small business income

Step 1

Did the trust have any business income or deductions at items other than at label S Net income or loss from business?

• No – The amount at label S Net income or loss from business is your net small business income. Print this amount at label V Net small business income. You have completed this section. Go to item 6 Tax withheld.
• Yes – Read on.

Step 2

If you had any of the following, use Worksheet 1A to work out your net small business income:

• foreign source business income at item 23 Other assessable foreign source income
• attributed foreign business income at item 22 Attributed foreign income
• interest income earned in the course of carrying on the business included at item 11 Gross interest
• dividend income earned in the course of carrying on the business included at item 12 Dividends; for example, dividends earned in the course of carrying on a share trading business
• any business income not already included at Income – label C to G and label D to H
• any business deductions not already included at Expenses – label P to N; for example, debt deductions against foreign source business income claimed at item 18 Other deductions.

For more information, see Small business income tax offset.

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