Income tax, BAS and
accounting fundamentals
Modules 1 - 5: Extracts
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Module 1:
Income tax returns
for individuals
Contents
1. Module overview........................................................................................................................................... 1
1.1 Reference materials.........................................................................................................................................................1
1.2 Learning features..............................................................................................................................................................2
1.3 Application of taxation knowledge....................................................................................................................................3
1.4 Learning objectives...........................................................................................................................................................3
2. Completing the individual tax return.......................................................................................................... 9
2.1 The individual income tax return.......................................................................................................................................9
2.2 Calculating taxable income for individuals......................................................................................................................10
2.3 The individual tax return form.........................................................................................................................................11
2.4 Commencing the return: completing the personal details..............................................................................................11
2.5 Income concepts............................................................................................................................................................15
2.6 Calculation of assessable income..................................................................................................................................17
2.7 Allowable deductions......................................................................................................................................................34
2.8 Key learning points.........................................................................................................................................................51
2.9 Self-assessment questions.............................................................................................................................................52
Suggested answers..............................................................................................................................................................53
3. Rental income and expenses.................................................................................................................... 59
3.1 Overview.........................................................................................................................................................................59
3.2 Rental income issues.....................................................................................................................................................60
3.3 Expenses incurred in earning rental income..................................................................................................................61
3.4 Key learning points.........................................................................................................................................................68
3.5 Self-assessment questions ............................................................................................................................................69
Suggested answers..............................................................................................................................................................70
4. Calculating tax payable ............................................................................................................................. 75
4.1 Calculating tax on taxable income..................................................................................................................................76
4.2 Tax offsets......................................................................................................................................................................77
4.3 Medicare levy.................................................................................................................................................................90
4.4 Other tax return items.....................................................................................................................................................90
4.5 Higher Education Loan Programme (HELP) .................................................................................................................97
4.6 Student Financial Supplement Scheme (SFSS).............................................................................................................98
4.7 Key learning points.........................................................................................................................................................99
4.8 Self-assessment questions...........................................................................................................................................100
Suggested answers ...........................................................................................................................................................101
5. Finalising returns: for Tom Sparks and all your clients....................................................................... 107
5.1 Recap...........................................................................................................................................................................107
5.2 Completing and submitting the return...........................................................................................................................108
5.3 Individual tax return checklist ......................................................................................................................................122
5.4 Key learning points.......................................................................................................................................................123
5.5 Self-assessment questions...........................................................................................................................................124
Suggested answers............................................................................................................................................................125
Appendices................................................................................................................................................... 131
Appendix 1: 2011 individual tax return................................................................................................................................131
Appendix 2: 2011 Individual tax return checklist.................................................................................................................144
Income tax, BAS and accounting fundamentals: Extract
2. Completing the individual tax return
2.1 The individual income tax return
Individual taxpayers are required to submit a tax return based on the financial year; that is, from
1 July to 30 June of the next year. The tax year is referred to by the year in which it ends; for
example, the 2011 taxation year is the period 1 July 2010 to 30 June 2011.
All income tax returns are to:
• Be made and submitted on the applicable forms provided by the Commissioner ; for
example, Tax Pack or Electronic Lodgement Services or via the internet on ATO-approved
software such as ’E-Tax’.
• Contain the information and particulars mentioned or referred to in the form.
• Be verified by declaration by the taxpayer.
• Be accompanied by all schedules and other documents as required; for example, rental
property schedule. Other schedules, such as depreciation and capital gains, are often
prepared in the course of doing a tax return for a client. However, they are not usually
required to be lodged with the tax return. If the client is subsequently audited, these
schedules may be required by the ATO.
Taxation returns are due for lodgement as soon as practicable after 30 June and before
31 October (last day for lodgement). Extensions may be granted if written notice is forwarded
to the Commissioner before 31 October. Tax agents are normally granted extensions of time
beyond 31 October for taxpayers listed with the ATO as their clients (that is, tax returns are
lodged according to the tax agent’s lodgement program).
Details of the Lodgement Program 2011–12, including due dates:
<http://www.ato.gov.au/content/00283288.htm>.
FURTHER
INFORMATION
Section 161 of the Income Tax Assessment Act 1936 (ITAA36) gives the Commissioner
power to require that certain taxpayers lodge a tax return. The Commissioner prepares a
Commonwealth Government Gazette notice, on an annual basis, which stipulates who is
required to submit a return.
© CPA Australia Ltd 2011
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Income tax, BAS and accounting fundamentals: Extract
Who is required to submit a return for the 2011 income year?
• Every individual carrying on a business or profession regardless of profit or loss.
• Every individual with a rental property, regardless of profit or loss.
• A taxpayer earning $6,000 or less who has had tax withheld from that income (if he or she
wishes to recover the tax).
• A taxpayer who earns more than the tax-free threshold of $6,000. Note that the tax-free
threshold is less in certain circumstances, such as:
– An individual who became, or stopped being, a resident during the year (as his or her
threshold is adjusted for the number of months he or she has been a resident).
– A non-resident with certain income that is taxable in Australia (as non-residents are taxed
from the first dollar).
• A taxpayer who is under 18 years of age at 30 June 2011 and their taxable income exceeds
$3,334 (where this income is not from salary or wages).
A more detailed guide to determine whether a taxpayer must lodge a tax
return:
FURTHER
INFORMATION
<http://www.ato.gov.au/individuals/content.asp?doc=/Content/16131.htm>.
• Only one taxation return can be lodged by an individual in any one year. If an error has been
made in the original return, an amendment must be sent to the ATO.
2.2 Calculating taxable income for individuals
The basic legislative framework for calculating taxable income is set out in the Income Tax
Assessment Act 1936 (ITAA36) and the Income Tax Assessment Act 1997 (ITAA97).
The calculation of taxable income follows a simple conceptual formula. Assessable income
less allowable deductions provides us with taxable income, which is used to calculate the tax
payable.
The concepts of assessable income, allowable deductions and taxable income are akin to the
business concepts of revenue, expenses and profit. However, these concepts are adapted
by the legislation to allow for differences between the accounting and tax concepts. These
variances exist for various compliance and policy reasons.
Assessable income is the income earned by the taxpayer that is potentially taxable. It excludes
exempt income. Receipts that are included in assessable income are determined by the
legislation and case law.
Allowable deductions are expenses that are generally related to the earning of assessable
income, usually in connection with the taxpayer’s principal vocation or occupation. Outgoings
that are allowed as deductions can be ascertained by reference to the legislation and case law.
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Income tax, BAS and accounting fundamentals: Extract
Taxable income is simply the difference between assessable income and
allowable deductions (like taxable profit, but such a term is inappropriate
when applied to individual taxpayers). Taxable income is the basis on
which tax is levied, after it has been adjusted for other aspects of taxation
including levies, offsets and other charges.
2.3 The individual tax return form
Each year, the Australian Taxation Office (ATO) issues an individual tax
return form, enabling taxpayers to disclose all information relevant to
determine the taxable income and tax payable for the taxpayer for that
income year.
The form varies from year to year as the tax laws change.
The individual tax return form is divided into the following main areas:
Items used to calculate taxable income and tax payable
• Income
• Deductions
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• Tax offsets
• Supplementary section (the less common income, deduction and offset
items are listed separately at the rear of the return form).
Other items used to calculate tax payable include:
• Personal details – contained on the first page of the return
• Medicare related items
• Adjustments and credits
• Spouse details
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• Other schedules
2.4 Commencing the return: completing the personal
details
This ongoing scenario will be used in successive worked examples to progressively illustrate
the process by which a CPA practitioner (who is a registered as, or is supervised by, a
registered tax agent) may collect the data that is required to complete an income tax return.
Refer to the 2011 Individual tax return supplied in the Appendices.
APPENDIX
© CPA Australia Ltd 2011
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Income tax, BAS and accounting fundamentals: Extract
A new client, Tom Sparks, has arrived in your office. Your front office staff
have greeted him, provided him with a cup of coffee and shown him into the
interview room.
SCENARIO
Tasks
Determine:
1.What type of taxpayer is being dealt with: an individual, company,
partnership and/or trust?
2. How often and when do the returns have to be supplied to the ATO?
3. What forms are to be used to submit the return?
4. Complete the first page of the return.
Principles illustrated
Your ongoing interview with Tom Sparks illustrates some general principles
of interviewing and record-keeping. While these techniques and questions
represent good practice, they are not the only practices that are acceptable.
2011 Individual Tax Return
For all these worked examples, ensure you have a blank 2011 Individual Tax
Return form to use. You can use your firm’s tax software or download your
own copy of the form from the ATO website at the link below:
<http://www.ato.gov.au/content/downloads/TP00277522nat13712011.pdf>.
Note how the interview questions follow the basic sequence required to
complete one of these forms.
Interview and calculations
Q:Tell me about your job.
A: I work for Quickie Constructions as a specialist welder. I am based at
their Adelaide workshop.
Q:How long have you worked there?
A: For nearly 20 years. I am going to take long-service leave next year.
Q:Are they good to work for?
A: Yes, the people are good: I get paid overtime if I work out-of-hours and
at weekends, and there is a good superannuation scheme and sick leave
arrangements.
Q:How have you done your taxation returns before coming to us?
A: I have done them for years. Over the past few years I have used the
Tax Pack, but I am finding it more and more difficult to understand with
all these changes in tax. Last year I had a tax agent around the corner
from home do the return, but I was unhappy with the outcome. So I have
brought all my papers with me in this box for you to do it for me.
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Income tax, BAS and accounting fundamentals: Extract
You have deduced what you need to know. That is, Tom is an individual taxpayer with no
complications (on the face of it) and will need to complete a 2011 Individual Tax Return form.
You will start by filling out the personal details on the form. You may as well do this first, and fill
out any records required by your practice at the same time.
Q:Tom, we need to start at the beginning of the form. What is your tax
file number? We need this to be able to lodge electronically.
SCENARIO
A: On my previous return, the number provided was 999 999 507.
You now enter the details on the 2011 Individual Tax Return form, completing the box at the top
of the page for the tax file number. Ensure it is accurate, and compare it with any documentation
that Tom is able to provide.
Tax File Number (TFN): 999 999 507
Complete the remainder of the front page of the return as you gain the
answers from the interview.
SCENARIO
Q:I take it that you are an Australian resident?
A:Yes.
Q:What are your given names (not your surname)?
A: Thomas John.
Q:Have you changed your surname during the year?
A:No.
Q:Where do you live? Do you have a postal address that is different to
where you live?
A: My postal address is the same as where I live.
Q:What is your date of birth?
A: What do I have to give that for? It seems that the government gets to
know everything about us.
Q:It is one of the common identifiers of people. Very few, if any,
people have the same name and birth date.
A: Okay, there it is on the sheet.
Q:Would you like your refund to be paid electronically? If so, I will use
the details on your bank statement.
A: Yes please.
© CPA Australia Ltd 2011
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Income tax, BAS and accounting fundamentals: Extract
You now need to copy into the appropriate boxes the bank account details from the bank
statement:
• The BSB number is the first six digits and identifies the bank, the state and the branch
number.
• The remaining numbers (often eight, but not always) are the account number.
You have now completed the front page of the 2011 Individual Tax Return form. Compare your
completed form against the following:
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© CPA Australia Ltd 2011
Income tax, BAS and accounting fundamentals: Extract
TIP
Ask open-ended questions to gain information from clients. The tax law
is too technical for most non-accountants. The general prompt of ‘Tell me
about your job,’ is much less threatening than ‘Are you a contractor who has
carried forward a loss?’
Another example is the concept of tax residence. Most taxpayers would not
understand this concept. However, you could ask the client if he or she has
been overseas in the last few years. If he or she has been, you may have to
question further to determine if the person is an Australian resident for tax
purposes.
2.5 Income concepts
The income tax legislation does not contain a definition of the word income. However, it
provides the following guides:
• Gross income is total income from all sources, irrespective of whether or not it is exempt or
non-assessable. It is total income.
• Exempt income is income specifically exempted under the ITAA97.
• Non-assessable – non-exempt income is ordinary income or statutory income that a
provision of an Act expressly states is neither assessable income nor exempt income
and is not assessable by operation of law (this income has often been the subject of an
administrative ruling or a legal decision).
• Assessable income is defined under the ITAA97 as ordinary income (according to ordinary
concepts) or statutory income. Assessable income is defined as having the meaning given
by Division 6 of the ITAA97.
• An Australian resident includes in his or her tax return income derived from all sources,
(inside and outside Australia) whilst a non-resident includes only that income having a
source in Australia.
Generally, a taxpayer is an Australian resident for tax purposes if that person has:
– always lived in Australia
– moved to Australia to live here permanently, or
– been in Australia continuously for six months or more, has settled in a home and/or has
taken up employment.
The issue is less clear where a taxpayer’s usual home is overseas, or is living overseas for
an extended period, albeit temporarily.
To determine whether your client is a resident or a non-resident for tax
purposes, consult the ATO publication ‘Residency – what you need to know’:
<http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/64131.
FURTHER
htm>.
INFORMATION
• Taxable income is assessable income minus allowable deductions.
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Income tax, BAS and accounting fundamentals: Extract
Other concepts that help us determine what is income include:
• Ordinary income has generally been held to include income from:
– rendering personal services
– property (investment income)
– carrying on a business (sale of goods/sale of services).
• Statutory income includes amounts that are not ordinary income but are included in
assessable income by provisions about assessable income included in the ITAA97 and
ITAA36 (such as capital gains).
Income that may be caught under both of the above is only counted once
in assessable income.
WARNING
• The ITAA36 distinguishes between income from personal exertion and income from property:
– Personal exertion includes personal earnings (salary/wages), superannuation payouts,
termination payments, certain prizes, back pay, pensions, benefits, allowances, income
from illegal activities and can include business income.
– Property includes interest from money invested, dividends, rents and royalties
• Non-assessable receipts include income from hobbies, bequests under a will, gambling
wins, gifts unrelated to services, lottery wins and one-off game-show prizes (that is, windfall
gains).
• Exempt income refers to income specifically exempted by the Income Tax Assessment Acts.
The three main classes of exempt income (both ordinary and statutory income) are:
– income of entities that is exempt irrespective of the type of income (for example, religious
and charitable organisations)
– income that is exempt no matter who derives it (for example, pooled development fund
company dividend)
– income that is exempt if derived by a particular entity (for example, family tax benefit,
defence force member allowances and disability service payments).
WARNING
Capital receipts are not ordinary income; so the rent from an investment
property is assessable as income, while the sale proceeds, if the property
is sold, are capital and are subject to the capital gains tax (CGT) rules (see
Module 3).
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Income tax, BAS and accounting fundamentals: Extract
2.6 Calculation of assessable income
2.6.1 Income items for the 2011 income year
The following are the income items as they appear in the 2011 income tax return used to
calculate taxable income (not including the supplementary income items). Also listed are some
tips in dealing with these items:
Item
Description
Item 1 – Salary
and wages
This relates to salary and wage income only. Your client should provide you with one
or more PAYG payment summaries – individuals non-business.
Where this item is completed, the occupation description and code must be present.
If your client has lost or has not received any PAYG Payment
Summaries:
TIP
• the relevant information may be available on the ATO Tax
Agents Portal – after entering your client’s tax file number,
select ‘Client reports’, then ‘Pre-filling report 2011’
• if the information is not available on the portal, your client
should attempt to recover the payment summary from the
employer
• If the above options fail, a statutory declaration can be
completed by your client in place of the payment summary.
The declaration can be sourced at the following link to the
ATO website:
<http://www.ato.gov.au/content/downloads/ind22733n4135.pdf>.
Item 2 –
Allowances,
earnings, tips,
directors fees
etc.
This includes any other income from working in addition to salary and wages. It
includes fees received for Jury Duty.
Allowances listed on the PAYG Payment Summary are always in addition to any
wages or salary at Item 1.
WARNING
TIP
Where the allowance is to compensate the employee for
a deductible expense, a corresponding deduction may be
allowable. However, receipt of an allowance does not
automatically entitle the employee to a corresponding
deduction. The usual deductibility rules should be applied.
Where a travel allowance is not shown on your client’s
PAYG payment summary and the rate was less than or equal
to the ‘reasonable allowance’ amount, there is no need to
disclose the allowance at Item 2 where the allowance has been
fully expended on deductible travel expenses. However, no
claim should be made at Item D2.
TD 2010/19 provides the Commissioner’s reasonable travel
allowance expense amounts for 2010–11 (the Commissioner
publishes these amounts each year):
<http://law.ato.gov.au/pdf/pbr/td2010-019.pdf>.
FURTHER
INFORMATION
© CPA Australia Ltd 2011
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Module 2:
Income tax issues for
sole traders, partnerships, trusts
and companies
Contents
1. Module overview........................................................................................................................................... 1
1.1 Reference materials.........................................................................................................................................................1
1.2 Learning features..............................................................................................................................................................2
1.3 Application of taxation knowledge....................................................................................................................................3
1.4 Introduction.......................................................................................................................................................................3
1.5 Learning objectives...........................................................................................................................................................4
2 Taxation aspects of business entities......................................................................................................... 9
2.1 Overview ..........................................................................................................................................................................9
2.2 Is my client in business?...................................................................................................................................................9
2.3 Australian Business Number (ABN)................................................................................................................................10
2.4 The goods and services tax (GST).................................................................................................................................10
2.5 Employing staff...............................................................................................................................................................12
2.6 The ‘personal services income’ rules..............................................................................................................................17
2.7 Small business entities...................................................................................................................................................27
2.8 Key learning points.........................................................................................................................................................36
2.9 Self-assessment questions.............................................................................................................................................37
Suggested answers..............................................................................................................................................................38
3 Individuals in business............................................................................................................................... 43
3.1 Overview ........................................................................................................................................................................43
3.2 Advantages and disadvantages of being an individual in business................................................................................43
3.3 Taxation of an individual’s business income...................................................................................................................43
3.4 The ‘non-commercial loss’ rules ....................................................................................................................................44
3.5 Individuals in business summary....................................................................................................................................49
3.6 Questions to ask clients..................................................................................................................................................50
3.7 Key learning points.........................................................................................................................................................51
3.8 Self-assessment questions.............................................................................................................................................52
Suggested answers..............................................................................................................................................................53
Chapter 4: Partnerships................................................................................................................................. 59
4.1 Overview.........................................................................................................................................................................59
4.2 Advantages and disadvantages of partnerships.............................................................................................................61
4.3 Taxation of partnership income.......................................................................................................................................61
4.4 Salaries to partners........................................................................................................................................................62
4.5 Non-commercial losses and partnerships......................................................................................................................63
4.6 Entry and retirement of partners.....................................................................................................................................64
4.7 Partnerships summary....................................................................................................................................................65
4.8 Questions to ask clients..................................................................................................................................................84
4.9 Key learning points.........................................................................................................................................................84
4.10 Self-assessment questions...........................................................................................................................................85
Suggested answers..............................................................................................................................................................86
Chapter 5: Discretionary trusts..................................................................................................................... 91
5.1 Overview.........................................................................................................................................................................91
5.2 Advantages and disadvantages of discretionary trusts..................................................................................................92
5.3 Key terms, concepts and requirements..........................................................................................................................93
5.4 Payments to principals...................................................................................................................................................99
5.5 The trust loss recoupment rules...................................................................................................................................100
5.6 Family trust elections ...................................................................................................................................................101
5.7 Making distributions......................................................................................................................................................105
5.8 Discretionary trusts summary.......................................................................................................................................107
5.9 Questions to ask clients................................................................................................................................................133
5.10 Key learning points.....................................................................................................................................................133
5.11 Self-assessment questions.........................................................................................................................................135
Suggested answers............................................................................................................................................................136
Chapter 6: Private companies..................................................................................................................... 141
6.1 Overview.......................................................................................................................................................................141
6.2 Advantages and disadvantages of private companies.................................................................................................141
6.3 Taxation of company income .......................................................................................................................................142
6.4 Payments to directors or shareholders.........................................................................................................................142
6.5 The imputation system.................................................................................................................................................143
6.6 The company loss recoupment rules............................................................................................................................145
6.7 Loans, payments and debts forgiven to shareholders and associates (Division 7A)...................................................146
6.8 Private companies summary........................................................................................................................................150
6.9 Questions to ask clients................................................................................................................................................166
6.10 Key learning points.....................................................................................................................................................167
6.11 Self-assessment questions.........................................................................................................................................168
Suggested answers............................................................................................................................................................169
Appendices................................................................................................................................................... 175
Appendix 1: Partnership tax return.....................................................................................................................................175
Appendix 2: Trust tax return...............................................................................................................................................187
Appendix 3: Company tax return........................................................................................................................................203
Appendix 4: Trust tax return preparation checklist.............................................................................................................213
Appendix 5: Company tax return preparation checklist......................................................................................................224
Income tax, BAS and accounting fundamentals: Extract
2 Taxation aspects of business entities
2.1 Overview
Often, clients are carrying on activities on their own account, rather than working as an
employee. When this is the case, there is more that needs to be considered than income tax
alone. The business will need an Australian Business Number (ABN) and will need to register
for GST where business turnover exceeds $75,000. If your client employs staff, there are other
obligations that need to be considered.
Aside from the obligations of our business clients, there are also concessions that small
businesses enjoy that we, as advisers, must be aware of. These concessions, discussed later
in this chapter, are available to businesses that qualify as ‘small business entities’, and include
favourable treatment for income tax, capital gains tax, GST, PAYG, and FBT purposes.
2.2 Is my client in business?
If your client’s activities are a hobby, any receipts are not assessable, and any expenses are
not deductible. Further, your client will not be entitled to an ABN or required to register for GST.
On examination of client activities, it is often obvious whether activities constitute a business or
hobby. However, where the activity is smaller, or is just starting out, it can be less clear.
The factors that the ATO consider when determining whether particular
activities are a business or hobby are outlined below:
TIP
• Does the activity have a significant commercial purpose or character?
• Is there more than just an intention to engage in business?
• Is there a purpose of profit as well as a prospect of profit?
• Is there repetition and regularity to the activity?
• Is the activity carried on in a similar manner to other businesses in the
industry?
• Is the activity planned, organised and carried on in a business-like
manner?
• Does the activity have characteristics of size, scale and permanency?
‘Am I in business?’:
<http://www.ato.gov.au/youth/content.asp?doc=/content/66884.htm>.
FURTHER
INFORMATION
© CPA Australia Ltd 2011
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Income tax, BAS and accounting fundamentals: Extract
2.3 Australian Business Number (ABN)
A key element of our tax system is the identification of businesses through the issue of an
Australian Business Number (ABN). Applying for an ABN is necessary for all enterprises,
including businesses. An ABN is an 11-digit identifier used for all dealings with the ATO and
for future dealings with government departments and agencies at all levels. It has already
supplanted the Australian Company Number system for companies in many areas.
To apply for an ABN, you must be either a company or an entity carrying on an enterprise.
Employees, hobbyists and individuals who are conducting activities without a reasonable
expectation of profit are not eligible for an ABN.
WARNING
If a business does not have (or does not provide) an ABN for goods and
services it supplies, then all payments made to it by a registered entity
may be subject to a withholding tax of 46.5%. For this reason, the ABN
should appear on all business stationery.
Each entity receives one ABN, regardless of the number of activities it
undertakes.
TIP
2.4 The goods and services tax (GST)
Business clients must also consider whether it is necessary to register for GST. It is necessary
to register for GST if the taxpayer is carrying on a business or enterprise, and:
• Its’ current or projected annual GST turnover is $75,000 or more ($150,000 or more for nonprofit organisations)
• it provides taxi travel, or
• it wishes to claim fuel tax credits.
Otherwise, a taxpayer can choose to register for GST.
GST is a tax of 10% on most goods and services sold in Australia. The tax is collected by
entities that are registered for GST purposes at each step in the supply chain. Such registered
entities remit the GST (less any credits they are entitled to) to the tax office either monthly,
quarterly or annually on the business activity statement (BAS).
Generally, where a business makes a purchase with GST in the price, it may claim a ‘credit’
from the ATO for the GST if eligible. This is called an input tax credit.
There are 3 different types of supplies for GST purposes – taxable supplies, GST-free supplies
and input taxed supplies.
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Income tax, BAS and accounting fundamentals: Extract
Taxable supplies
Most goods and services supplied in Australia are taxable supplies. A registered supplier must
charge GST on such supplies and is entitled to claim input tax credits on acquisitions in relation
to making those supplies.
GST-free supplies
The GST legislation sets out which supplies are GST-free. They include:
• basic food for human consumption, for example, fruit, vegetables, plain milk and bread
• exports
• some health services and education courses
• some activities of charitable institutions
• childcare
• religious services
• water and sewerage services
• the sale of a going concern (such as a business).
A registered supplier does not charge GST on such supplies. However, the registered supplier is
entitled to claim input tax credits on acquisitions in relation to making those supplies.
Input taxed supplies
The GST legislation sets out which supplies are input taxed. Input taxed sales include:
• financial supplies (for example, bank loans)
• residential rent.
A registered supplier does not charge GST on such supplies, and is generally not entitled to
claim input tax credits on acquisitions in relation to making those supplies.
TIP
GST is not a part of taxable income or the cost of tax deductible acquisitions
if the business is registered for GST. However, where the business is not
registered for GST, the whole of the supply price is included in assessable
income for taxation purposes, and GST forms part of the cost of tax
deductible acquisitions.
See Module 4 for a detailed discussion on the GST.
FURTHER
INFORMATION
© CPA Australia Ltd 2011
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Income tax, BAS and accounting fundamentals: Extract
2.5 Employing staff
When business clients employ staff, it is also necessary to consider the obligations this imposes
on our clients. When the business owner is an employee of the business, this can also provide
some opportunities.
‘Employees’ can include principals where the relevant business structure is
a company or trust.
TIP
2.5.1 PAYG withholding
A business will be required to register for PAYG withholding if it makes certain payments,
including payments of salary, wages, commissions, bonuses or allowances to an individual as
an employee (this can include the business owner where the business is operated through a
company or trust). PAYG is generally reported and paid to the ATO via the activity statement.
‘PAYG withholding’:
<http://www.ato.gov.au/businesses/content.asp?doc=/content/31962.htm>.
FURTHER
INFORMATION
2.5.2 Superannuation contributions
Employers must provide superannuation guarantee contributions for eligible employees and
certain contractors. The minimum contribution for employees is currently equivalent to 9% of
each employee’s ordinary time earnings. The contributions must be made at least quarterly and
should be paid to a superannuation fund.
PROPOSED
LEGISLATIVE
CHANGES
In the 2010–11 Federal Budget, the Government announced that it proposes
to increase the superannuation guarantee rate to 12 per cent. If enacted,
this increase will occur in increments between 1 July 2013 to 1 July 2019 (at
the time of writing, these amendments were not yet law).
An employer also has the obligation to report ‘reportable employer
superannuation contributions’ (RESC) on the employee’s payment summary
for the year (from the 2010 income year). This is the amount of employer
superannuation contributions over the compulsory employer contributions
that are influenced or able to be influenced by the employee (for example,
the contribution is negotiated as part of employee remuneration).
RESC does not include the 9% superannuation guarantee contribution.
TIP
Page 18
© CPA Australia Ltd 2011
Income tax, BAS and accounting fundamentals: Extract
‘Guide to superannuation for employers’:
<http://www.ato.gov.au/content/00249857.htm>.
FURTHER
INFORMATION
2.5.3 Fringe benefits tax
Fringe benefits tax (FBT) is paid on certain benefits provided to employees or their associates
(such as family members) in relation to their employment. The tax is based on the taxable value
of the various fringe benefits provided. The Fringe Benefits Tax Assessment Act 1986 (FBTAA)
sets out how the taxable value should be calculated for each type of benefit.
Fringe benefits may include any of the following:
• use of a work car by an employee or associate for private purposes
• providing an employee with a low interest or interest free loan
• paying an employee’s private expenses, such as school fees, or mortgage repayments
• providing services to an employee (such as legal advice by a law firm)
• reimbursing private expenses of an employee, or
• providing entertainment to an employee by way of food, drink or recreation.
This may include benefits provided to the business owner where the
business is conducted in a company or trust.
WARNING
FBT is paid by the employer. Fringe benefits and FBT payable are reported to the ATO
by lodgement of a Fringe Benefits Tax return form. Employers who are liable to pay FBT
instalments make those payments on the activity statement quarterly.
An employer also has an obligation to report the grossed-up taxable value of certain fringe
benefits with a total taxable value of more than $2,000 to an employee in an FBT year (1 April
to 31 March) on the employee’s payment summary for the corresponding income year (1 July to
30 June).
‘Fringe benefits tax – what you need to know’:
<http://www.ato.gov.au/businesses/content.asp?doc=/Content/950.htm>.
FURTHER
INFORMATION
© CPA Australia Ltd 2011
Page 19
Income tax, BAS and accounting fundamentals: Extract
Refer to CPA Australia’s ‘Fringe benefits tax essentials’ program – you can
access a brochure at the following link:
FURTHER
INFORMATION
<http://www.cpaaustralia.com.au/cpd/FBT_110101EL.pdf>.
2.5.4 Salary packaging
Salary packaging involves an agreement between an employer and an employee where the
employee agrees to forgo cash salary in lieu of fringe benefits. This means that the employee
does not pay tax on the salary forgone. However, the employer may have a FBT liability in
respect of the benefit. The employer usually costs the FBT to the salary packaging so that it is
ultimately borne by the employee.
Despite the existence of FBT, there are still a number of fringe benefits that can be packaged
tax-effectively. This is because some benefits are taxed concessionally under the FBT rules so
the effective rate of tax on the benefit is less that the tax that would be paid on the equivalent
salary (that is, the salary forgone to receive the fringe benefit). Such benefits can include:
• Cars.
• Exempt property benefits such as in-house lunches.
• Eligible work related items such as a laptop computer, portable electronic device, computer
software, protective clothing, briefcase and tools of trade (note the item is only exempt
where it is primarily for use in the employee’s employment and is limited to one item per year
(unless the item replaces another).
• Superannuation.
• Exempt benefits such as:
– a subscription to a trade or professional journal
– an entitlement to use a corporate credit card
– an entitlement to use an airport lounge membership.
– exempt taxi travel.
Further, some employers are exempt from FBT or pay a reduced rate of FBT. In those
circumstances, it can be most beneficial to salary package.
WARNING
For salary sacrifice arrangements to have the desired tax effect, the
agreement between the employee and employer should be entered into
before the work is performed by the employee. That is, the agreement
must be prospective (TR 2001/10).
Page 20
© CPA Australia Ltd 2011
Income tax, BAS and accounting fundamentals: Extract
‘Salary sacrifice arrangements for employees’:
<http://www.ato.gov.au/businesses/content.asp?doc=/content/24632.htm>.
FURTHER
INFORMATION
2.5.5 Travel allowances
To claim a deduction for travel expenses, the taxpayer is generally subject to rigorous
substantiation requirements. This means obtaining written evidence of all expenses incurred.
For travel that involves being away for six or more consecutive nights a travel diary must also
be kept. Many taxpayers have deductions disallowed in an audit because they are unable to
comply with the stringent substantiation rules. In addition to having the deduction disallowed,
penalties are also generally applied.
However, where an employer pays a ‘reasonable travel allowance’ for work related travel to
an employee, the exception from substantiation provided for domestic and overseas travel
allowance expenses can be utilised. A reasonable travel allowance is an allowance paid to
an employee for meals, accommodation and incidental expenses incurred while travelling on
business where the allowance is within the Commissioner’s published guidelines. Where a
reasonable travel allowance is paid:
• The employee will not be required to substantiate a deduction for travel expenses if the
amount claimed as a deduction is not greater than the reasonable amount’
• The employer is not required to show the allowance on the employee’s payment summary
• When the reasonable allowance is not shown on the payment summary, and the allowance
has been fully spent on deductible travel expenses, neither the allowance nor the expenses
need to be disclosed on the employee’s income tax return
• Where the employee spends less than the allowance received on deductible travel
expenses, the employee’s income tax return must include the allowance and the expense
claimed.
The Commissioner’s reasonable travel allowance expense amounts for
2010–11 income year are set out in TR 2010/19. These amounts are
changed annually:
FURTHER
<http://law.ato.gov.au/pdf/pbr/td2010-019.pdf>.
INFORMATION
TIP
A significant opportunity arises in relation to travel by the principal where a
company or trust structure is being used to operate the business and the
principal is an employee of the business. Where a sole trader or a partner
in a partnership travels for business purposes, that person is subject to
the substantiation requirements and cannot enjoy the exception from the
substantiation requirements.
© CPA Australia Ltd 2011
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Income tax, BAS and accounting fundamentals: Extract
WARNING
For overseas travel allowance expenses, the employee is still required to
give written evidence for accommodation expenses and is still required to
keep travel records if the travel involves the employee being away for six
or more nights in a row.
‘Keeping your tax records – travel expenses’:
FURTHER
INFORMATION
<http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/
content/30327.htm&page=9&H9>.
2.5.6 Living away from home allowances
A living away from home allowance (LAFHA) is the only cash allowance that is subject to the
FBT provisions and not assessable to the employee. The benefit of paying a LAFHA is that the
whole or a part of it may not be subject to tax depending on the particular circumstances.
A LAFHA is an allowance paid by an employer to an employee to compensate for additional
expenses incurred and any disadvantages suffered because the employee is required to live
away from their usual place of residence in order to do their job. To receive a genuine LAFHA,
it is necessary that the employee has moved to a new locality with an intention to return to
their previous locality at the end of a finite term (for example, moving interstate for 6 months to
establish a new branch office).
The ‘additional expenses’ for these purposes are non-deductible expenses such as meals and
accommodation while living away from home. Whilst meals and accommodation expenses are
deductible where an employee is travelling on business, these expenses are instead private in
nature and non-deductible when an employee is living away from home.
A LAFHA will not be subject to income tax or FBT where the allowance is solely compensation
for the reasonable accommodation costs and additional food costs incurred as a result of living
away from home.
The receipt of a tax-free living away from home allowance is an opportunity
available to principals that are employees (of a company or trust) that is not
available to sole traders or partners in partnerships.
TIP
‘Living-away-from-home allowance fringe benefits’:
<http://www.ato.gov.au/businesses/content.asp?doc=/content/52023.htm>.
FURTHER
INFORMATION
2.5.7 Wages to associated persons
Under section 26-35 of the ITAA97 and (section 65 of the ITAA36) the Commissioner may
disallow the whole or part of the deduction for a salary or other payment paid to a related entity
of the business owner if the amount of the payment is deemed to be unreasonable.
Page 22
© CPA Australia Ltd 2011
Income tax, BAS and accounting fundamentals: Extract
‘Related entity’ includes a relative (for example, spouse, child) or a partnership in which the
relative is a partner.
‘Reasonable’ is not defined but the ATO will interpret it to mean the amount that would have
been paid had that entity not been a related entity, and the payment was at arm’s length.
Keep records of your calculations
TIP
To avoid the Commissioner applying section 26-35, your clients should keep
records confirming how any payments to related entities were calculated
and evidencing that they are reasonable.
For example, details of the hours worked and the type of work undertaken
should be kept, together with written advice from an independent agency as
to the amount that would need to be paid had an independent entity been
employed instead.
© CPA Australia Ltd 2011
Page 23
Module 3:
Other business issues:
Depreciating assets,
capital gains and accounting
Contents
1. Module overview........................................................................................................................................... 1
1.1 Learning features..............................................................................................................................................................1
1.2 Learning objectives...........................................................................................................................................................2
2. Decline in value and other capital allowances.......................................................................................... 7
2.1 Overview...........................................................................................................................................................................7
2.2 The uniform capital allowance provisions.........................................................................................................................7
2.3 Decline in value of software............................................................................................................................................17
2.4 Low-value pooling...........................................................................................................................................................18
2.5 The simplified depreciation rules for small business entities..........................................................................................23
2.6 Business related capital costs (‘blackhole expenditure’)................................................................................................26
2.7 Small business and general tax break............................................................................................................................27
2.8 Questions to ask clients..................................................................................................................................................29
2.9 Key learning points.........................................................................................................................................................30
2.10 Self-assessment questions...........................................................................................................................................31
Suggested answers..............................................................................................................................................................32
3. Capital gains and losses............................................................................................................................ 37
3.1 Overview.........................................................................................................................................................................37
3.2 CGT events....................................................................................................................................................................38
3.3 What is a CGT asset?....................................................................................................................................................45
3.4 What are ‘capital proceeds’?..........................................................................................................................................47
3.5 What is the cost base?...................................................................................................................................................48
3.6 Reduced cost base.........................................................................................................................................................50
3.7 Methods for calculating the capital gain or loss..............................................................................................................50
3.8 Date of acquisition or disposal of assets........................................................................................................................51
3.9 CGT exemptions.............................................................................................................................................................54
3.10 CGT rollovers...............................................................................................................................................................56
3.11 Small business CGT concessions................................................................................................................................57
3.12 Record-keeping for CGT..............................................................................................................................................66
3.13 Questions to ask clients................................................................................................................................................67
3.14 Key learning points.......................................................................................................................................................68
3.15 Self-assessment questions...........................................................................................................................................69
Suggested answers..............................................................................................................................................................70
4. From client records to financial statements............................................................................................ 75
4.1 Examining the trial balance............................................................................................................................................75
4.2 Bank reconciliation.........................................................................................................................................................75
4.3 General journal entries...................................................................................................................................................79
4.4 Bookkeeping procedures and journal entries required...................................................................................................80
4.5 Identifying client errors...................................................................................................................................................84
4.6 Profit distributions...........................................................................................................................................................93
4.7 Assets transactions.........................................................................................................................................................96
4.8 Bad and doubtful debts................................................................................................................................................. 111
4.9 Amortisation of intangible assets..................................................................................................................................113
4.10 Key learning points ....................................................................................................................................................116
4.11 Self-assessment questions.........................................................................................................................................117
Suggested answers............................................................................................................................................................118
Appendices................................................................................................................................................... 119
Appendix 1: Sample journal pro forma...............................................................................................................................119
Appendix 2: Procedural checklist.......................................................................................................................................120
Income tax, BAS and accounting fundamentals: Extract
2. Decline in value and other capital
allowances
2.1 Overview
Some business outlays (such as the cost of acquiring capital assets) are not immediately
allowable as deductions. Capital assets are those that provide a benefit over a number of years,
for example, motor cars and machinery.
The value of such assets usually reduces over time as they approach the end of their effective
lives. Assets that lose value in this way are said to decline in value. In recognition of this, the
cost of capital assets used in producing assessable income can be written off over a period of
time as tax deductions.
The capital allowances regime, contained in Division 40 of the Income Tax Assessment Act
1997 (ITAA97), enables taxpayers to ‘depreciate’ or ‘write off’ various kinds of expenditure
relating to various income-producing capital assets over a number of years. In this way,
Australian tax legislation recognises the economic loss to a business resulting from the
deterioration in the condition of certain business assets through wear and tear which would
otherwise not be recognised by the general deduction provision contained in section 8-1 of
ITAA97.
The law relating to decline in value (depreciation) and capital works
deductions is contained in Division 40, Division 43 and Division 328 (for
taxpayers who are small business entities) of the ITAA97.
TIP
The principles of decline in value (or depreciation) for tax purposes differ somewhat to
depreciation principles for accounting purposes (discussed in Chapter 4). This reflects Division
40’s role as a tool for encouraging and/or discouraging certain expenditure in accordance with
government policy and simplifying and streamlining the calculation of the decline in value on
depreciating assets. It is therefore common for entities to report different decline in value or
depreciation expense amounts for accounting and tax purposes.
‘Guide to depreciating assets 2010–11’:
<http://www.ato.gov.au/content/00270218.htm
FURTHER
INFORMATION
2.2 The uniform capital allowance provisions
The uniform capital allowance (UCA) provisions allow decline in value deductions on most
depreciating assets, which range from cars and machinery to expenditure on computer software
(including the licence to use that software).
© CPA Australia Ltd 2011
Page 29
Income tax, BAS and accounting fundamentals: Extract
TIP
Prior to 1 July 2001, the term depreciation was used in place of decline
in value. Whilst the current terminology has been in place for many years,
both tax practitioners and taxpayers often still refer to decline in value
deductions as depreciation.
2.2.1 Items which can be depreciated
The capital allowance provisions apply to assets that:
• are used to produce assessable income, or
• are installed ready for use to produce assessable income but are held in reserve.
Assets are considered depreciating assets if they:
• have a limited effective life, and
• can reasonably be expected to decline in value over the time they are used.
In addition to manufacturing machinery, motor vehicles and computer
software, depreciable assets can include computers, electric tools, furniture
and fittings (including carpets and curtains).
EXAMPLE
TIP
Land, trading stock and most intangible assets are not deemed to be
depreciating assets. Buildings are also not generally depreciating assets,
but a deduction (similar to a decline in value deduction) may be available
under the separate deduction provisions for capital works.
2.2.2 Claiming decline in value deductions
Only the holders of depreciating assets can claim a deduction for the decline in value of
depreciating assets. The holder of a depreciating asset is determined in accordance with
section 40-40. Generally, the holder of a depreciating asset will be the owner or quasi-owner1 of
the asset.
A person will be treated as the owner of a depreciating asset for the purposes of claiming
a decline in value deduction, if they are the legal owner, or hold sufficient rights over the
depreciating asset to characterise them as the owner in preference to any other person who
also holds rights over the depreciating asset.
When assets are acquired, whether the taxpayer is the ‘holder’ of the asset, and therefore
entitled to the decline in value deduction, is dependent upon the method of finance.
1 Quasi-ownership covers the situation where a depreciating asset is attached to land that a particular person did not
own but has a right to use. An example of quasi-ownership is a Crown lease with attached depreciating assets to that
land after the lease was acquired.
Page 30
© CPA Australia Ltd 2011
Income tax, BAS and accounting fundamentals: Extract
Eligibility for decline in value deductions – various asset financing methods
Finance method
Decline in value deduction*
Other deductions
Loan finance/Chattel mortgage
✓
Interest portion of repayments
Hire purchase
✓
Interest portion of repayments
Lease
✗
Lease payments
Luxury car lease (see below)
✓
Interest portion of repayments
*subject to the car limit (see below)
WARNING
Decline in value deductions are not allowable for leased assets. However,
special rules apply to the leasing of luxury cars. These rules apply to
luxury cars other than for short-term hiring agreements or cars that are
trading stock of the lessee.
Under these rules, the lessee is treated as the owner of the luxury car. The
actual lease payments made by the lessee are not allowable deductions.
The lease payments are divided into their underlying capital component
and their finance charge component. The lessee can then claim:
• The finance charge component reduced to reflect non-business use.
• Decline in value based on the car limit (refer below), reduced to reflect
non-business use.
2.2.3 Calculation of cost and effective life of depreciating assets
The calculation of the decline in value deduction is generally based on the cost of the
depreciating asset (calculated under Subdivision 40-C) and its effective life:
2.2.3.1 Cost of a depreciating asset
Cost includes the original purchase price or cost of construction, transport, installation, customs
duty or relocation.
Cost includes both the amounts paid or payable for an asset and any additional amounts
incurred in improving it.
If a taxpayer is entitled to claim a GST input tax credit on the purchase of an
asset, the cost of the item for decline in value deduction purposes excludes
the amount of input tax credits entitled to be claimed.
TIP
TIP
If a taxpayer is not entitled to claim an input tax credit, the cost of the item
for decline in value deduction purposes includes the GST.
Motor cars and station wagons (including four-wheel-drive versions) are
subject to a car limit. This means an entity cannot claim decline in value
deductions for any part of the cost of such a vehicle that is more than the
limit for the year in which it was first used (section 40-180). The cost of the
car is reduced by the amount of GST input tax credit before the car limit is
applied.
The car limit for 2010–11 is $57,466.
© CPA Australia Ltd 2011
Page 31
Income tax, BAS and accounting fundamentals: Extract
Tom is a contract carpenter and is registered for GST. During the 2011 year
he purchased a new car for $66,000 including GST and a new compressor
for $1,045 including GST.
SCENARIO
Question
What is the cost of these items for decline in value purposes?
Answer
If Tom is registered for GST then he can claim an input tax credit on the
purchase of these items, so the cost for decline in value purposes must take
this into account and the GST is excluded from the cost base.
The GST paid on the new car is $6,000 so the cost for decline in value
purposes is $60,000. This is above the car limit of $57,466 so the cost
for decline in value purposes is limited to the car limit of $57,466 (further,
for GST purposes, Tom is entitled to an input tax credit of $5,224 – that is
$57,466/11).
The input tax credit on the compressor is $95 so the cost for decline in value
purposes is $950.
2.2.3.2 Effective life
The current legislation (with the exception of the simplified depreciation rules for SBEs and
certain specific items) does not provide for a ‘decline in value rate’. Rather, deductions are
calculated using a statutory formula. Effective life is part of the formula for both the diminishing
value method and the prime cost method (see below) and affects the rate of decline in value.
Effective life, in general accounting terms, means the productive life of the asset. Taxpayers
have the option of relying on the Commissioner’s determinations of effective life (see below) or
they may estimate the effective life of an asset themselves, considering such matters as:
• the physical life of the asset
• engineering information
• the manufacturer’s specifications
• the way in which the asset is used by an industry
• the past experience of users of the asset
• the level of repairs and maintenance adopted by users of the asset
• industry standards
• the use of the asset by different industries
• retention periods
• obsolescence
• scrapping or abandonment practices
• the period of the lease (if the asset is leased)
• economic or financial analysis indicating the period over which that asset is intended for use
• where the asset is actively traded in a secondary market, conditions in that market.
Page 32
© CPA Australia Ltd 2011
Income tax, BAS and accounting fundamentals: Extract
The Commissioner’s determinations of effective life are contained in
Taxation Ruling TR 2010/2 applicable from 1 July 2010. These are updated
annually.
TIP
The ruling applies if the taxpayer chooses to use the Commissioner’s
determinations of effective life to work out the amount of deduction. If
not, the taxpayer must make their own estimate of effective life (see
section 40-105). The explanation of the Commissioner’s methodology may
assist taxpayers who choose to make their own estimate of effective life.
If the taxpayer concludes that they would be likely to scrap the depreciating asset, sell it for
scrap or abandon it before the end of the period, then its effective life will end at that earlier
time.
If the taxpayer is eligible and has decided to use the simplified depreciation
rules for small business entities (see below) then the taxpayer only has to
determine whether the effective life is more or less than 25 years.
TIP
2.2.3.3 Change of effective life
A taxpayer can change the effective life for a depreciating asset (unless they are a small
business entity (SBE) using the simplified depreciation rules discussed below). The change
can be made whether the previous effective life was self-assessed or adopted the effective life
determined by the Commissioner. A new effective life for a depreciating asset can be chosen if
both of the following occur:
• there are changed circumstances that make an earlier estimate no longer accurate, and
• the taxpayer:
– became the owner of the depreciating asset under a contract entered into after 11.45 am
(by legal time in the ACT) on 21 September 1999
– constructed the depreciating asset and the construction started after that time, or
– acquired the depreciating asset in some other way after that time.
Examples of circumstances that would make an earlier estimate of effective life no longer
accurate are:
• use of the depreciating asset turns out to be more or less rigorous than either the
taxpayer or the Commissioner anticipated
• there is a downturn in the demand for the goods or services that the depreciating asset is
being used to produce that will result in the depreciating asset being scrapped
• government legislation prevents the depreciating asset’s continued use
• changes in technology make the depreciating asset redundant.
The new estimate of effective life is used in the formula for calculating the decline in value
deduction for the income year for which the estimate is made.
© CPA Australia Ltd 2011
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Income tax, BAS and accounting fundamentals: Extract
‘Uniform capital allowance system: changing a depreciating asset’s
effective life’:
FURTHER
INFORMATION
<http://www.ato.gov.au/businesses/content.asp?doc=/content/15898.htm>.
A business acquires a car solely for business purposes. The car cost
$30,000 and will be sold after two years. On the basis of experience, the
business estimates that it will receive $20,000 on disposal.
SCENARIO
Question
a) What is the effective life of the car?
b) What is the effective life of the car as determined by the Commissioner?
c) Explain how the two concepts differ in this case.
Answer
a) Two years, which is the time that the business uses the car for business
purposes.
b) Eight years if acquired on or after 1 July 2006. This is determined from
TR 2010/2.
c) The estimated life calculated in (a) takes into account the time the
vehicle will be used until it is sold. The Commissioner’s concept of
effective life is an estimate of the period of time over which the asset
can be used for the specified purpose (that is, the purpose of producing
assessable or exempt income, exploration or prospecting, mine site
rehabilitation or environmental protection activities), assuming that the
asset will be subject to wear and tear at a reasonable rate, that it will be
maintained in reasonably good order and condition, and having regard to
the period within which it is likely to be scrapped, sold for no more than
scrap value or abandoned.
Page 34
© CPA Australia Ltd 2011
Module 4:
Activity statements:
GST, PAYG and more
Contents
1. Module overview........................................................................................................................................... 1
1.1 Learning features..............................................................................................................................................................1
1.2 Learning objectives...........................................................................................................................................................3
1.3 Tax manual.......................................................................................................................................................................3
2. Introduction to the activity statement form............................................................................................... 9
2.1 Overview of the forms.......................................................................................................................................................9
2.2 Lodgment and payment..................................................................................................................................................11
2.3 Running Balance Account..............................................................................................................................................12
2.4 Information required to complete the activity statement ................................................................................................12
2.5 Key learning points.........................................................................................................................................................14
2.6 Self-assessment questions.............................................................................................................................................15
Suggested answers..............................................................................................................................................................16
3. GST basics.................................................................................................................................................. 21
3.1 What is GST?.................................................................................................................................................................21
3.2 Registration for GST.......................................................................................................................................................22
3.3 Taxable supplies.............................................................................................................................................................23
3.4 GST-free supplies...........................................................................................................................................................28
3.5 Input taxed supplies........................................................................................................................................................29
3.6 Summary table of supplies.............................................................................................................................................29
3.7 Input tax credits..............................................................................................................................................................30
3.8 Accounting for GST........................................................................................................................................................32
3.9 Due dates for business activity statements....................................................................................................................35
3.10 Calculating the GST liability..........................................................................................................................................36
3.11 Branches, groups and joint ventures............................................................................................................................40
3.12 Key learning points.......................................................................................................................................................42
4. Calculation and reporting options for GST.............................................................................................. 47
4.1 Taxpayers who pay GST monthly...................................................................................................................................47
4.2 Quarterly taxpayer reporting quarterly............................................................................................................................57
4.3 Quarterly taxpayer reporting annually............................................................................................................................65
4.4 Quarterly taxpayer paying GST instalments...................................................................................................................72
4.5 Taxpayers who report and pay GST annually.................................................................................................................81
4.6 Corrections to GST amounts..........................................................................................................................................82
4.7 Key learning points ........................................................................................................................................................84
4.8 Self-assessment questions.............................................................................................................................................85
Suggested answers..............................................................................................................................................................86
5. PAYG withholding system......................................................................................................................... 91
5.1 Introduction to PAYG......................................................................................................................................................91
5.2 Operation of the PAYG withholding system....................................................................................................................91
5.3 Obligations of the payer..................................................................................................................................................98
5.4 Information to be provided to recipients of withholding payments................................................................................105
5.5 Recipient’s entitlements and obligations......................................................................................................................107
5.6 Key learning points.......................................................................................................................................................108
5.7 Self-assessment questions...........................................................................................................................................109
Suggested answers............................................................................................................................................................110
6. PAYG instalments system........................................................................................................................ 115
6.1 Objective of the PAYG instalment system....................................................................................................................115
6.2 Operation of the PAYG instalment system...................................................................................................................115
6.3 Due dates for payments of instalments .......................................................................................................................117
6.4 Calculation of instalment amounts ...............................................................................................................................118
6.5 Special rules for certain other entities..........................................................................................................................133
6.6 Key learning points.......................................................................................................................................................136
6.7 Self-assessment questions...........................................................................................................................................137
Suggested answers............................................................................................................................................................138
7. Other labels on the activity statement.................................................................................................... 143
7.1 Fringe benefits tax instalment.......................................................................................................................................143
7.2 Deferred GST on imports.............................................................................................................................................146
7.3 Luxury car tax ..............................................................................................................................................................148
7.4 Wine equalisation tax...................................................................................................................................................148
7.5 Fuel tax credits.............................................................................................................................................................150
7.6 Key learning points ......................................................................................................................................................152
7.7 Self-assessment question............................................................................................................................................153
Suggested answers............................................................................................................................................................154
8. Completing the activity statement.......................................................................................................... 159
8.1 Steps to calculate net liability.......................................................................................................................................159
8.2 Complete the BAS form................................................................................................................................................161
8.3 Steps to complete the BAS form using the cash or non-cash accounting method.......................................................165
Suggested answer..............................................................................................................................................................166
8.4 Key learning points ......................................................................................................................................................173
Income tax, BAS and accounting fundamentals: Extract
2. Introduction to the activity statement form
When your clients have liabilities that include GST, PAYG withholding or instalments, FBT
instalments, etc, they will receive an activity statement from the tax office that is tailored to
their situation. Understanding the activity statements of your client’s is vital in assisting them to
attend to their obligations in a timely manner. It is important to note:
• which obligations are relevant to your client
• what is the reporting cycle of your client with respect to that liability (monthly, quarterly or
annually), and
• what is the payment cycle of your client (monthly, quarterly or annually).
2.1 Overview of the forms
There are two types of activity statements:
• the business activity statement, and
• the instalment activity statement.
These forms (in paper or electronic form) are sent out each reporting period by the ATO to any
taxpayer that is recorded by the ATO as having a liability for that period.
The form comes pre-printed with the taxpayer details, the period to which it relates, a document
ID and other information relevant to the taxpayer. As each form has a unique document ID,
the taxpayer cannot create a form or obtain a blank form from the ATO or newsagent. If a BAS
or IAS form is lost or spoiled, the taxpayer must contact the ATO to arrange for a form to be
reissued.
Alternatively, tax agents can obtain the document ID from the Tax Agent
Portal and then lodge the activity statement through practice software or
online on the portal.
TIP
2.1.1 The business activity statement
The ‘business activity statement’ (usually referred to as the BAS) is the form on which a GST
registered entity notifies the ATO of its liability for:
• Goods and services tax (GST) – see Chapter 3
• PAYG withholding
• PAYG instalments
• FBT instalments
• Wine equalisation tax (WET)
• Luxury car tax (LCT)
(or combinations of these). It is also used to claim fuel tax credits. It can be paper-based or
electronic.
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Income tax, BAS and accounting fundamentals: Extract
2.1.2 The instalment activity statement
Those who have a PAYG withholding, PAYG instalments and/or FBT instalments liability for a
period, but who have not incurred a GST liability for that period, will need to lodge an ‘instalment
activity statement’ (IAS) instead of a BAS.
A taxpayer that is not registered or required to be registered for GST will not
have a liability for LCT or WET, nor will it be entitled to claim fuel tax credits.
TIP
2.1.3 Which activity statement is relevant?
There are a number of different BAS, IAS and annual report forms. Each one contains
varying labels relating to the taxpayer’s different mix of tax liabilities. Consequently, the
activity statement received by your client should only ask for information that is relevant to its
circumstances in the period. However, if a taxpayer has a liability for one or more of WET, LCT
or FBT, the form will contain labels for all three of these taxes.
For a sample of each activity statement form, see ‘Activity statements
– home’ and under the heading ‘Calculators, rates and forms’, click on
‘sample activity statements’:
FURTHER
<http://www.ato.gov.au/businesses/pathway.asp?pc=001/003/099>.
INFORMATION
A taxpayer may receive different forms throughout the year. For example, taxpayers that pay
GST quarterly, but must make monthly payments of PAYG withholding, will receive an IAS for
the first two months of each quarter and a BAS for the last month of the quarter. Which BAS
form they will receive depends on whether they have a PAYG instalment liability and/or FBT
instalment liability. Other than this exception, those who are registered for GST will receive a
BAS, and never an IAS.
TIP
A partnership is not a taxable entity for income tax purposes and so will
never have a PAYG instalments liability. The individual partners may
receive an IAS with respect to a PAYG instalment liability on partnership
distributions.
‘FAQs activity statements’:
<http://www.ato.gov.au/businesses/content.asp?doc=/content/17420.htm>.
FURTHER
INFORMATION
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Income tax, BAS and accounting fundamentals: Extract
2.2 Lodgment and payment
The due date for lodgment and payment of the BAS or IAS will be pre-printed on the form.
Activity statements can be lodged in any of the following ways:
• Electronic lodgment with approved activity statement preparation software
• Online lodgment through the Business Portal or Tax Agents Portal, or
• mail the form to the correct address as shown on the form.
Where lodging by paper, the paper form must be mailed to the ATO at the address printed on
the bottom of the back of the activity statement so that it is received by the due date.
Where lodging electronically or online, the electronic BAS must be lodged by the due date.
If the due date for any BAS or IAS falls on a weekend or public holiday, it
must be lodged by the next working day after the normal due date.
TIP
When received, the paper BAS or IAS is scanned by electronic readers and processed
electronically.
Payments can be made by the following means:
• Direct credit to the ATO bank account
• Direct debit from the taxpayer’s nominated account
• BPAY®
• Mail payments to the ATO mail payments address, or
• In person at the post office
• Credit card (in certain circumstances).
Entities with a turnover greater than $20 million must lodge and pay
electronically.
WARNING
To learn more about lodging online using the Business Portal, see
‘Business Portal’:
<http://www.ato.gov.au/onlineservices/content.asp?doc=/content/42589.
FURTHER
htm>.
INFORMATION
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Income tax, BAS and accounting fundamentals: Extract
Tips for completing the paper BAS
• Only use a black pen – this helps the scanning process.
TIP
• Mistakes can be corrected with liquid paper, but care should be taken in
doing so such that the sides of the boxes in which figures are entered
remain intact.
• Characters such as $, 0, +, – or N/A should not be entered as they make
scanning difficult.
• Cents should not be included but there is no need to ’round-up’ – the
cents should simply be dropped off.
• The paper BAS should be photocopied before completion, then after
ensuring the figures are correct, the figures can be transferred onto the
original.
2.3 Running Balance Account
Once a business reports its tax entitlements and obligations via the BAS or IAS, these as well
as any associated payments and credit entitlements, are recorded on a single running balance
account (RBA) established by the ATO for that entity.
TIP
This can be viewed on the Tax Agents Portal by accessing the ‘Integrated
client account’ for the particular taxpayer. It separately shows liabilities or
credits for each obligation, and the net amount owing or refundable on all
activity statement obligations.
2.4 Information required to complete the activity
statement
For each of the taxes recorded on the BAS/IAS, information will be required from your client.
This may come from various sources, depending on the type and size of an entity and the
accounting system used. Let’s look at each of the taxes in turn.
2.4.1 GST
Generally to prepare the GST portion of a BAS for your client, you will need the following for the
relevant period:
• Total sales, including exports, GST-free sales and input-taxed sales
• Total GST collected on sales, and
• Total GST paid on purchases (that is allowable as a credit).
While this could be done (and might have to be) by totalling individual invoices, most entities
use an accounting package, such as MYOB, which can produce reports containing the required
GST information.
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Income tax, BAS and accounting fundamentals: Extract
Where statistical information is required on the BAS, you will also need:
• Total exports
• Total GST-free sales
• Total capital acquisitions, and
• Total of other acquisitions.
Whether this information is required on a particular BAS is dependent upon the method the
taxpayer uses to calculate and report its GST.
In some cases, a taxpayer can pay GST by instalments. If that is the case, you will not need any
GST information to prepare the quarterly BAS, except possibly an estimate (or a rough idea) of
total GST for the year. This helps the taxpayer to decide whether to vary the GST instalment if
the amount of the instalment is inappropriate in the circumstances. If the taxpayer does not vary
its GST instalment, it does not need to consider this estimate.
The basics of GST and the GST calculation and reporting methods are discussed further in
Chapters 3 and 4.
2.4.2 PAYG withholding
When preparing the PAYG withholding portion of an activity statement, the information required
will depend on whether or not the taxpayer is a large, medium or small withholder.
All PAYG withholders will need the total of the gross wages paid for the month or quarter. In
addition, small and medium payers will require the total of the tax amounts deducted from
wages. Large PAYG withholders pay their liability electronically within a few days of paying
wages and do not include any details of withholding deductions on the BAS or IAS.
The information will usually be taken from a payroll report produced from the accounting
system.
Note that the period for which the PAYG withholding information must be
provided might be different from the period for which GST is reported.
TIP
PAYG withholding is discussed further in Chapter 5.
2.4.3 PAYG instalments
Generally, when preparing the PAYG instalment portion of an activity statement, it is necessary
to calculate ‘instalment income’ for the BAS. This includes all ordinary income. For most entities,
it can be calculated from total sales and other income.
In some cases, a taxpayer can pay a GDP-adjusted PAYG instalment calculated by the ATO. If
that is the case, the taxpayer will not need instalment income information.
Regardless of which method is used, the taxpayer should have some idea of its expected tax
liability for the year, to determine whether it should vary its instalment rate or GDP-adjusted
instalment.
PAYG instalments are discussed further in Chapter 6.
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Income tax, BAS and accounting fundamentals: Extract
2.4.4 FBT
No information is required to calculate an entity’s FBT instalment liability. It would be helpful,
however, to have an idea of the estimated total FBT liability for the year, to allow the taxpayer to
decide whether or not to vary its instalment.
FBT instalments are discussed further in Chapter 7.
2.4.5 LCT, WET and fuel tax credits
Where an entity has an obligation for LCT or WET or an entitlement to fuel tax credits, the
entity’s accounting software is normally setup to allow the extraction of reports with information
relevant to calculate the obligation or entitlement.
LCT, WET and fuel tax credits are discussed further in Chapter 7.
2.5 Key learning points
Congratulations, you have completed chapter 2!
As you read through the following key learning points for chapter 2, mark any that you are not
completely sure about. Then look back to the part of the chapter where it was covered and see
if it clarifies the point.
Finally, discuss with colleagues at work any points that you still have lingering doubts about.
• The difference between a BAS and an IAS.
• Methods of lodgment and payment.
SUMMARY
• The purpose of the running balance account.
• Information required to prepare an activity statement.
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Module 5:
Activities and solutions
Contents
Activities............................................................................................................................................................ 1
Module 1: Income tax returns for individuals..........................................................................................................................1
Activity 1.1: Calculating residential rent.........................................................................................................................1
Module 2: Income tax issues for sole traders, partnerships, trusts and companies...............................................................4
Activity 2.1: Partnership.................................................................................................................................................4
Activity 2.2: Biff and Boff’s discretionary trust................................................................................................................6
Activity 2.3: Biff and Boff’s company.............................................................................................................................7
Module 3: Other business issues...........................................................................................................................................8
Activity 3.1(a): Calculating diminishing value................................................................................................................8
Activity 3.1(b): Calculating prime cost...........................................................................................................................9
Activity 3.1(c): Depreciation calculations.....................................................................................................................11
Activity 3.2: Capital gains tax.......................................................................................................................................14
Activity 3.3(a): Bank reconciliation...............................................................................................................................15
Activity 3.3(b): Historical balancing account................................................................................................................16
Activity 3.3(c): Petty cash............................................................................................................................................17
Activity 3.3(d): Trial balance........................................................................................................................................18
Activity 3.3(e): PAYG withholding................................................................................................................................19
Activity 3.3(f): Improper GST treatment.......................................................................................................................20
Activity 3.3(g): Shareholders’ capital...........................................................................................................................22
Activity 3.3(h): Directors’ loans....................................................................................................................................23
Activity 3.3(i): Principal, interest and borrowing expenses..........................................................................................24
Activity 3.3(j): Repairs and maintenance.....................................................................................................................25
Activity 3.3(k): Distribution of income (partnership).....................................................................................................27
Activity 3.3(l): Trust income and distribution................................................................................................................28
Activity 3.3(m): Cash acquisition of an asset...............................................................................................................30
Activity 3.3(n): Hire purchase acquisition of an asset..................................................................................................30
Activity 3.3(o): Disposal of an asset............................................................................................................................32
Activity 3.3(p): Disposal of an asset acquired by hire purchase..................................................................................33
Activity 3.3(q): Bad and doubtful debts........................................................................................................................34
Activity 3.3(r): Amortisation of borrowing costs............................................................................................................35
Module 4: Activity Statements: GST, PAYG and more..........................................................................................................37
Activity 4.1: Cash or non-cash.....................................................................................................................................37
Activity 4.2: PAYG withholding.....................................................................................................................................39
Activity 4.3: PAYG instalments....................................................................................................................................41
Activity 4.4: PAYG instalments....................................................................................................................................42
Solutions......................................................................................................................................................... 44
Module 1: Income tax returns for individuals........................................................................................................................44
Activity 1.1: Calculating residential rent.......................................................................................................................44
Module 2: Income tax issues for partnerships, trusts and companies..................................................................................46
Activity 2.1: Partnership...............................................................................................................................................46
Activity 2.2: Biff and Boff’s discretionary trust..............................................................................................................58
Activity 2.3: Biff and Boff’s company...........................................................................................................................74
Module 3: Other Business Issues.........................................................................................................................................85
Activity 3.1(a): Calculating diminishing value..............................................................................................................85
Activity 3.1(b): Calculating prime cost.........................................................................................................................86
Activity 3.1(c): Depreciation calculations.....................................................................................................................86
Activity 3.2: Capital gains............................................................................................................................................87
Activity 3.3(a): Bank reconciliation...............................................................................................................................88
Activity 3.3(b): Historical balancing account................................................................................................................89
Activity 3.3(c): Petty cash............................................................................................................................................89
Activity 3.3(d): Trial balance........................................................................................................................................89
Activity 3.3(e): PAYG withholding................................................................................................................................90
Activity 3.3(f): Improper GST treatment.......................................................................................................................90
Activity 3.3(g): Shareholders’ capital...........................................................................................................................91
Activity 3.3(h): Directors’ loans....................................................................................................................................91
Activity 3.3(i): Principal, interest and borrowing expenses..........................................................................................93
Activity 3.3(j): Repairs and maintenance.....................................................................................................................94
Activity 3.3(k): Distribution of income (partnership).....................................................................................................95
Activity 3.3(l): Trust income and distribution................................................................................................................95
Activity 3.3(m): Cash acquisition of an asset...............................................................................................................96
Activity 3.3(n): Hire purchase acquisition of an asset..................................................................................................96
Activity 3.3(o): Disposal of an asset............................................................................................................................97
Activity 3.3(p): Disposal of an asset acquired by hire purchase..................................................................................98
Activity 3.3(q): Bad and doubtful debts........................................................................................................................99
Activity 3.3(r): Amortisation of borrowing costs..........................................................................................................100
Module 4: Activity statements: GST, PAYG and more........................................................................................................101
Activity 4.1: Cash or non-cash...................................................................................................................................101
Activity 4.2: PAYG withholding...................................................................................................................................102
Activity 4.3: PAYG instalments..................................................................................................................................104
Activity 4.4: PAYG instalments..................................................................................................................................104
Income tax, BAS and accounting fundamentals: Extract
Module 2: Income tax issues for sole traders,
partnerships, trusts and companies
Activity 2.1: Partnership
(This activity relates to Chapter 4: Partnerships.)
Instructions
Calculate the distributable income of the partnership for the individual partners Biff and Boff,
using the blank Partnership tax return in the Appendices.
The 2011 Partnership tax return form is attached as Appendix 1 of the
Appendices.
APPENDIX
Facts
The following data has been extracted from the records of Biff and Boff, trading as the
partnership ‘Tyson Enterprises’ which provides the following services:
• Boxing ring design and construction for two clients.
• Sale of boxing-related gym equipment as part of their main business.
The financial data is scheduled as:
Income: TYSON
Design fees
$300,000
Sale of gym equipment
$18,000
Gain on sale of memorabilia
$10,800
Total revenue
$328,800
Expenses: TYSON
Accounting
$14,000
Advertising
$30,000
Bank fees
$3,000
Couriers
$3,000
Depreciation
Loss on sale of computer
Motor vehicle expenses
$41,000
$500
$45,000
Interest on partner’s capital:
Biff
$2,500
Boff
$1,000
Interest on advance from Biff
$2,300
Salary to Biff
$10,000
Salary to Boff
$20,000
Secretarial salary to Biff’s wife Jane Other salaries
© CPA Australia Ltd 2011
$6,000
$103,450
Page 49
Income tax, BAS and accounting fundamentals: Extract
Superannuation for Biff
Superannuation for Boff
Total expenses
Residual net profit to be split equally
$12,000
$10,000
$303,750
$25,050
Biff and Boff also had drawings during the year of $5,000 each.
The loss on sale of the computer arose when they sold a computer on which decline in value
deductions had been claimed. The original purchase price of the computer was $2,000 and they
had claimed decline in value deductions of $800. However, they had only claimed 50% ($400)
for business use, with the other 50% being for private use. They sold it for $700.
Biff and Boff also owned a major item of boxing memorabilia that they purchased in 1999 for
$1,200. They sold it in June 2011 for $12,000.
All figures are GST-exclusive and the partnership agreement states that Biff and Boff are equal
partners.
Extension question
Biff and Boff are concerned about the potential liability problems associated with their business.
Explain how a different structure could provide them with better asset protection.
When you have completed this activity, check your work against the
Solutions at the back of this booklet.
SUGGESTED
ANSWERS
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