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Expenses

Last updated 28 April 2003

Do not include the following expense items on your schedule:

  • interest and dividend income expenses-claim deductible expenses at item D6 on your tax return
  • farm management deposits-take them into account as required at item 16 on your tax return
  • rental expenses-claim deductible expenses at item 20 on your tax return
  • expenses and losses relating to foreign source income-take them into account as required at item 19 on your tax return.

If you are a primary producer you will need a primary production worksheet to help you work out some of the following. This worksheet is included in the publication Information for primary producers (NAT 1712-6.2001). Complete this worksheet before proceeding.

You need to complete all items that relate to your business or businesses. You can deduct business expenses if the expenses were necessary to carry on your business for the purpose of earning income.

If you are registered for GST, exclude from the deductions any input tax credit entitlements that arise in relation to outgoings.

Note: If you made a prepayment for things to be done within 13 months of the payment, your deduction may be affected by the rules relating to prepayments made by businesses (other than small business taxpayers) or by the prepayment rules relating to tax shelters. For more information, see P10 and the publication Deductions for prepaid expenses.

You must keep your business expenses records for 5 years after you prepared or obtained them or 5 years after you completed the transactions or acts to which they relate, whichever is the later.

Part A-What is the value of your opening stock?

What you need to know

This is the total value of all trading stock on hand at the start of the year. The opening value of an item of stock must equal its closing value in the previous year.

Include motor vehicle floor plan stock and work in progress of manufactured goods. Exclude any amounts representing opening stock of a business which commenced operations during the year. Include the purchase costs of these items in the relevant Purchases and other costs box.

If you are a primary producer, you must add the value of your opening stock from your livestock account at label P2 on your primary production worksheet to the value of your opening stock from your produce account at label P7 on your primary production worksheet.

Step 1

Work out the value of your primary production opening stock. If you have more than one business, add up all your primary production opening stock values.

Step 2

Write the total value of your primary production opening stock in Opening stock, Primary production column, item P8 on your schedule. Do not show cents.

Step 3

Work out the value of your non-primary production opening stock. If you have more than one business, add up all your non-primary production opening stock values.

Step 4

Write the total value of your non-primary production opening stock in Opening stock, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 5

Add up your primary production and non-primary production opening stock and write the total value at K item P8 on your schedule.

Part B-What is the value of your purchases and other costs?

This represents the direct cost of materials used for manufacture, sale or exchange in deriving the gross proceeds or earnings of the business. It includes inwards freight. It may also include some costs for labour and services provided under contract if these are recorded in the cost of sales account in your business books of account. If so, do not also include this amount as Contractor, sub-contractor and commission expenses.

Step 1

Work out the value of your primary production purchases and other costs. If you have more than one business, add up all your primary production purchases and costs.

Step 2

Write the total value of your primary production purchases and other costs in Purchases and other costs, Primary production column, item P8 on your schedule. Do not show cents.

Step 3

Work out the value of your non-primary production purchases and other costs. If you have more than one business, add up all your non-primary production purchases and other costs.

Step 4

Write the total value of your non-primary production purchases and other costs in Purchases and other costs, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 5

Add up your primary production and non-primary production purchases and other costs and write the total value at L item P8 on your schedule.

Part C-What is the value of your closing stock?

What you need to know

This is the total value of all trading stock on hand at the end of the year. The amount that is shown at Closing stock is the total of the value of each item of trading stock calculated for tax purposes under section 70-45 of ITAA 1997.

Trading stock is anything you have on hand which you produced, manufactured, acquired or purchased for the purpose of sale, manufacture or exchange. For example, trading stock includes livestock but not working animals-except those used by a primary producer-crops and timber when harvested and wool after it is removed from the sheep.

Manufacturers must include as trading stock partly manufactured goods and materials on hand. However, closing stock excludes any amount that represented closing stock of a business that ceased operations during the year. This amount is included in Other business income at I or J item P8 on your schedule. For more details about what constitutes trading stock, ring the ATO.

You can choose one of the following 3 methods to value your trading stock:

  • cost
  • market selling value
  • replacement price.

You may elect to value an item of trading stock below the lowest value calculated by any of these methods because of obsolescence or other special circumstances. The value you elect must be reasonable.

Where you elect to value an item of trading stock below cost, market selling value and replacement price, you must complete item P17 on your schedule.

You may use different methods to calculate each item of trading stock in different years or for different items in the same year. However, the opening value of each item in a particular year must be the same as the closing value for that item in the previous year.

If you are registered for GST, the value of closing stock should not include an amount equal to the input tax credit that would arise if you had acquired the item solely for business purposes at the end of the year of income. Input tax credits do not arise for some items of trading stock, such as shares.

If you are a primary producer, you must add the value of your closing stock from your livestock account at label P1 on your primary production worksheet to the value of your closing stock from your produce account at label P6 on your primary production worksheet.

As the tax value of stock on hand is to be shown at label P6 on your primary production worksheet, you cannot reduce its value by accounting entries. Keep records showing how each item was valued.

Step 1

Work out the value of your primary production closing stock. If you have more than one business, add up all your primary production closing stock values.

Step 2

Write the total value of your primary production closing stock in Closing stock, Primary production column, item P8 on your schedule. Do not show cents.

Step 3

Work out the value of your non-primary production closing stock. If you have more than one business, add up all your non-primary production closing stock values.

Step 4

Write the total value of your non-primary production closing stock in Closingstock, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 5

Add up your primary production and non-primary production closing stock and write the total value at M item P8 on your schedule.

Step 6

From the list below, find the letter that matches the method you used to value closing stock. If more than one method was used, select the letter that applies to the largest value.

  • C cost
  • M market selling value
  • R replacement price.

Step 7

Print the letter in the Type box at the right of the amount at M item P8 on your schedule.

Part D-Working out your cost of sales

What you need to know

Goods taken for your own use should not be accounted for as stock on hand at 30 June 2001. Include the cost of goods taken for your own use at the Other business income labels I and J item P8 on your schedule.

Step 1

Use the following table to work out your cost of sales.

Cost of sales

Code

Primary production

Non-primary production

Stock at 1 July 2000

(a)

$

$

Purchases at cost

(b)

$

$

Freight inwards

(c)

$

$

Other-for example, labour and services

(d)

$

$

Add (a), (b), (c) and (d).

(e)

$

$

Stock at 30 June 2001

(f)

$

$

Take (f ) away from (e).
This is your cost of sales.

-

$

$

For further information on stock on hand at 1 July 2000, readPart A-What is the value of your opening stock? For information on stock on hand at 30 June 2001, readPart C- What is the value of your closing stock?

Step 2

Write your total primary production cost of sales in Cost of sales, Primary production column, item P8 on your schedule. Do not show cents.

Step 3

If the cost of sales in the Primary production column-after taking (f) away from (e)-is a negative amount, print L in the box at the right of this amount.

Step 4

Write your total non-primary production cost of sales in Cost of sales, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 5

If the cost of sales in the Non-primary production column-after taking (f) away from (e)-is a negative amount, print L in the box at the right of this amount.

Step 6

Add up your primary production and non-primary production cost of sales and write the total amount in Cost of sales, Total column, item P8 on your schedule.

Step 7

If your total cost of sales is a negative amount, print L in the box at the right of this amount.

Part E-Did your business have any contractor, sub-contractor or commission expenses?

These are expenses for labour and services provided under contract-other than salaries or wages-for example:

  • payments to self-employed people such as consultants and contractors including payments subject to a PAYG voluntary agreement to withhold and payments made under a labour hire arrangement
  • commissions paid to people not receiving a retainer
  • agency fees-for example, advertising
  • service fees-for example, plant service
  • management fees
  • consultant fees.

No-Go to part F.

Yes-Read on.

What you need to know

Do not include the following at this item:

  • expenses for external labour which have been included in the business cost of sales account
  • expenses for accounting or legal services. Include these at All other expenses.

Step 1

Write your total primary production contractor, sub-contractor and commission expenses in Contractor, sub-contractor and commission expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production contractor, sub-contractor and commission expenses in Contractor, sub-contractor and commission expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production contractor, sub-contractor and commission expenses and write the total amount at F item P8 on your schedule.

Part F-Did your business make any superannuation contributions on behalf of eligible employees or their dependants?

No-Go to part G.

Yes-Read on.

What you need to know

Show superannuation expenses for the year of income. Employers are entitled to a deduction for contributions made to a complying superannuation, provident, benefit or retirement fund or retirement savings account (RSA), where the contribution is to provide superannuation benefits for eligible employees or to provide benefits to the employee's dependants on the employee's death. Superannuation benefits mean individual personal benefits, pensions or retiring allowances. A deduction is allowable in which the contributions are made.

Under Taxation Laws Amendment (Superannuation Contributions) Bill 2000, it is intended that a deduction will not be allowable for employer contributions to non-complying superannuation funds. This change, when enacted, is to apply to contributions made after 4.00pm (by legal time in the ACT) on 30 June 2000.

In addition, contributions made to a non-complying fund do not count towards superannuation guarantee obligations. The superannuation guarantee charge is a tax payable to the Commissioner. As such, it is not a superannuation contribution and is not tax deductible.

Contributions paid by an employer for eligible employees to a non-complying superannuation fund are fringe benefits-other than where the contributions are made for an exempt visitor- and may be subject to tax under the Fringe Benefits Tax Assessment Act 1986.

An employer contributing to a resident complying superannuation fund in respect of eligible employees may claim a deduction based on the age of each relevant employee.

For the year ended 30 June 2001 these limits are as follows:

Employee's deduction limit

Age in years

Deduction limit

under 35

$11,388

35 to 49

$31,631

50 and over

$78,445

The employee's age limit is determined at the end of the last day in the year of income when the employer or associate of the employer made a contribution for the benefit of the employee.

Employer contributions paid to the Superannuation Holding Accounts Reserve are allowable deductions up to a limit of $1,200 per employee.

Step 1

Write your total primary production superannuation contributions in Superannuation expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production superannuation contributions in Superannuation expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production superannuation contributions and write the total amount at G item P8 on your schedule.

Part G-Did your business write off any bad debts?

No-Go to part H.

Yes-Read on.

What you may need to know

Include income from the recovery of bad debts at IOther business income, Primary production column or at JOther business income, Non-primary production column, item P8 on your schedule. Do not show cents.

You are not allowed a deduction for bad debts unless you have previously included the amount of the bad debt in your assessable income or it is for money you lent in the ordinary course of a money lending business carried on by you.

Do not include accounting provisions for doubtful debts at this label. They can be shown under Expenses at All other expenses then added back at HExpense reconciliation adjustments.

Before you can claim a bad debt, it must be bad and not merely doubtful. The question of whether a debt is a bad debt will depend upon the facts in each case and, where applicable, the action taken for recovery. For more information refer to Taxation Ruling TR 92/18-Income tax: bad debts.

You can claim a deduction for:

  • partial debt write-offs-where only part of a debt is bad and is written off, you may claim a deduction for the amount written off
  • losses incurred in debt-for-equity swaps for debt written off after 26 February 1992. You are allowed a deduction for the difference between the amount of the debt and the greater of the market value of the equity or the value at which the equity is recorded in your books at the time of issue. The market value of the equity will be the price quoted on the stock exchange or, where the equity is not listed, the net asset backing of the equity.

Where you are not in the business of lending money, the deduction is limited to the amount of the debt that has been included in assessable income.

Records you need to keep

Keep a statement for all debtors whose bad debts you wrote off during the year, showing:

  • their name and address
  • the amount of the debt
  • the reason why the debt is regarded as bad
  • the year that the amount was returned as income.

Step 1

Write your total amount of primary production bad debts in Bad debts, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total amount of non-primary production bad debts in Bad debts, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up the amounts of your primary production and non-primary production bad debts and write the total amount at I item P8 on your schedule.

Part H-Did your business have lease expenses?

No-Go to part I.

Yes-Read on.

What you may need to know

This is expenditure incurred through both financial and operating leases on leasing motor vehicles, plant and equipment. Do not include the cost of leasing real estate.

Luxury car leasing

Luxury car finance leasing arrangements, excluding those for trading stock and genuine short-term hire arrangements, entered into after 7.30pm (by legal time in the ACT) on 20 August 1996, are treated as sale and loan transactions.

A leased car, either new or second hand, is a luxury car when its cost exceeds the luxury car depreciation limit that applies for the financial year in which a new or renegotiated lease commences. The luxury car depreciation limit for 2000-01 is $55,134.

Under these rules, the lessee is treated as the owner of the luxury car and is therefore entitled to claim a depreciation deduction limited to the luxury car depreciation limit. The actual lease payments made by the lessee for luxury cars will no longer be allowable deductions although they will be taken into account to calculate any deductible amounts. These deductions are calculated under the rules by dividing the lease payments into their underlying capital component and their finance charge component (accrual amount). As a result, a lessee will be entitled to a deduction for:

  • the accrual amount reduced to reflect non-business use, and
  • depreciation based on the luxury car depreciation limit applicable in the year of income reduced to reflect non-business use.

As a result of the application of these rules the effect of the depreciation limit on the after-tax cost of a leased luxury car to its end user will be comparable to the effect of the limit on the after-tax cost of buying or otherwise financing the car.

You should be aware that the rules set out different outcomes for the lessee if a lease expires, is terminated at the end of the lease or is terminated before the end of the lease. In each of these circumstances, outcomes are different where:

  • a lease term is extended or a lease is renewed
  • the lessee buys the car, or
  • the lessee ceases to have a right to use the car.

The following examples demonstrate 2 of the different outcomes.

Start of example

Example 1

Should the luxury car revert to the lessor because the term is not extended, the lease is not renewed and no amount is paid to the lessor, the rules treat the return of the car as a disposal by way of a sale by the lessee. In this case, the depreciation balancing charge provisions may need to be considered to determine any assessable or deductible amount for the lessee.

End of example

 

Start of example

Example 2

Should a lessee acquire the car and an amount be paid by or on behalf of the lessee to acquire the car, a deduction is not allowable to the lessee and the lessee will continue to be the owner of the car until it is disposed of. However subdivision 20-B of the ITAA 1997 may bring into assessable income at the time of disposal certain profits made on disposal of the previously leased car.

End of example

Records you need to keep

List the plant leased and keep full details of leasing expenses for each item-including motor vehicles-and details of any private use. Leasing expenses of certain cars fall under the substantiation rules

Step 1

Write your total primary production lease expenses in Lease expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production lease expenses in Lease expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production lease expenses and write the total amount at J item P8 on your schedule.

Part I-Did your business have rent expenses?

No-Go to part J.

Yes-Read on.

What you need to know

This is expenditure you incurred as a tenant for rental of land and buildings used in the production of income. Include the cost of leasing real estate.

Step 1

Write your total primary production rent expenses in Rent expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production rent expenses in Rent expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production rent expenses and write the total amount at K item P8 on your schedule.

Part J-Did your business incur interest expenses on money borrowed within Australia?

No-Go to part K.

Yes-Read on.

What you need to know

Include interest you incurred on money borrowed within Australia to acquire income-producing assets used in your business, to finance business operations or to meet current business expenses.

Do not include interest expenses incurred in deriving rental income. Claim these expenses at item 20 on your tax return.

Step 1

Write your total primary production interest expenses within Australia in Interest expenses within Australia, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production interest expenses within Australia in Interest expenses within Australia, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production interest expenses within Australia and write the total amount at Q item P8 on your schedule.

Part K-Did your business have overseas interest expenses?

No-Go to part L.

Yes-Read on.

What you need to know

Include any interest incurred on money borrowed from overseas sources to acquire income-producing assets used in your business, to finance business operations or to meet current business expenses.

Do not include interest expenses incurred in deriving rental income. Claim these expenses at item 20 on your tax return.

If you paid or credited any interest, or amounts in the nature of interest, to a non-resident of Australia, you will need to provide additional information. Print Schedule of Information-Item 14 on the top of a separate piece of paper. In general terms, an amount of non-resident withholding tax is required to be withheld from interest paid or payable to non-residents, and also interest derived by a resident through an overseas branch. These amounts must be sent to the ATO. Show the total amounts paid or credited to each non-resident and the amount of tax withheld. If no tax was withheld, please state the reason for this. Include your name, address and tax file number. Print X in the Yes box at Taxpayer's declaration question 2a on your tax return. Sign and attach your schedule to page 3 of your tax return.

For more information on the tax treatment of interest and dividends paid to non-residents, ring the Personal Tax Infoline on 13 28 61.

Step 1

Write your total primary production overseas interest expenses in Interest expenses overseas, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production overseas interest expenses in Interest expenses overseas, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production overseas interest expenses and write the total amount at R item P8 on your schedule.

Part L-Did your business have depreciation expenses?

No-Go to part M.

Yes-Read on.

What you need to know

You show at this item the depreciation claimed in your books of account. This amount should not include profit on the sale of depreciable assets as negative depreciation or loss on the sale of fixed assets. Profit on the sale of depreciable assets should be included in Other business income at I for primary production assets and J for non-primary production assets in the Income section. Loss on the sale of depreciable assets should be included in All other expenses at P in the Expenses section.

Tax depreciation may differ from accounts or book depreciation. The reconciliation between accounts and tax depreciation is included at either Income reconciliation adjustments at X or Expense reconciliation adjustments at H. See Part D-Working out your reconciliation adjustments for information on tax depreciation.

Step 1

Write your total primary production depreciation expenses in Depreciation expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production depreciation expenses in Depreciation expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production depreciation expenses and write the total amount at M item P8 on your schedule.

Note: If you have included an amount of more than $1,000 at M, and you are not a small business taxpayer, you will need to complete and attach a Depreciation schedule 2001 (NAT 3424- 5.2001) (PDF, 48.5KB)This link will download a file. This link will download a fileTo find out how to complete this schedule, use the Depreciation schedule 2001 instructions (NAT 4089-4.2001).

For the definition of a small business taxpayer, see Business and professional items 2001: schedule and instructions.

Part M-Did your business have motor vehicle expenses?

No-Go to part N.

Yes-Read on.

What you need to know

Questions D1 and D2 of TaxPack 2001 (NAT 0976-6.2001) tell you more about the expenses you can claim.

Do not include depreciation, finance leasing charges or interest paid. These should be included at M Depreciation expenses, J Lease expenses, Q Interest expenses within Australia and R Interest expenses overseas at item P8 on your schedule.

Step 1

Write your total primary production motor vehicle expenses in Motor vehicle expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production motor vehicle expenses in Motor vehicle expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production motor vehicle expenses and write the total amount at N item P8 on your schedule.

Step 4

If you are claiming motor vehicle expenses for a car under one of the 4 methods described at question D1 in TaxPack 2001, find the code letter that identifies the method you used to work out your expenses and print it in the Type box at the right of the amount at N item P8 on your schedule.

If you are claiming motor vehicle expenses other than for a car-see question D2 in TaxPack 2001-print the code letter N in the Type box at the right of the amount at N item P8 on your schedule.

If you have more than one code, print only the code that applies to the largest claim.

Part N-Did your business have repairs and maintenance expenses?

No-Go to part O.

Yes-Read on.

What you need to know

This is expenditure incurred for repairs and maintenance of premises, plant, machinery, implements, utensils, rolling stock or articles associated with the production of income. Any items of a capital nature included at this part should also be included at H Expense reconciliation adjustments, item P8 on your schedule.

Repairs

You may deduct the cost of repairs-not being expenditure of a capital nature-to property, plant, machinery or equipment used for producing assessable income, or in carrying on a business for that purpose.

Expenditure on repairs to property used partially for business or income-producing purposes-for example, where the property is also used for private purposes or in the production of exempt income-is deductible only to the extent that is reasonable, taking account of such use.

Where items are newly acquired, including by way of a legacy or gift, the cost of repairs to defects in existence at the time of acquisition is generally of a capital nature. Expenditure incurred in making alterations, additions or improvements is of a capital nature and is not deductible.

For further information on deductions for repairs, refer to Taxation Ruling TR 97/23- Income tax: deductions for repairs.

Records you need to keep

To support your claim for the cost of repairs, you must keep full details, including source documents, of the nature and cost of repairs to each item.

Step 1

Write your total primary production repairs and maintenance expenses in Repairs and maintenance, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production repairs and maintenance expenses in Repairs and maintenance, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production repairs and maintenance expenses and write the total amount at O item P8 on your schedule.

Part O-Did your business have any other expenses?

No-Go to part P.

Yes-Read on.

What you need to know

This is the total of all other expenses you incurred in deriving your profit or loss and which you have not already shown elsewhere at item P8. Other expenses include wages, accounting and professional fees, advertising and office supplies.

Home office expenses

If part of your home is specifically set aside and used solely for the purpose of conducting your business affairs and you have no other place from where they are mainly carried on, the following expenses are partly deductible:

  • occupancy expenses-including rent, mortgage interest, rates and house and contents insurance
  • running expenses-including electricity, cleaning, depreciation, leasing charges and repairs to furniture and furnishings in the office.

In most cases, you can apportion expenses on a floor area basis and, if the area of your home is a place of business for only part of the year, on a time basis.

Where part of your home is used as a home office but it does not qualify as a place of business, only part of the additional running expenses you incur may be deductible. For further details, refer to Taxation Ruling TR 93/30-Income tax: deductions for home office expenses and Practice Statement PS 2001/6- Home office expenses: diaries of use and calculation of home office expenses.

Capital and other non-deductible items included at this part should also be included in Expense reconciliation adjustments at H item P8 on your schedule. See Part D-Working out your reconciliation adjustments for more information.

You should keep records to show how you have calculated your home office expenses. The ATO may ask you for these at a later date.

Step 1

Write your total other primary production expenses in All other expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total other non-primary production expenses in All other expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your other primary production and other non-primary production expenses and write the total amount at P item P8 on your schedule.

Part P-Working out your total expenses

Step 1

Add up all the primary production expenses you have written in the Primary production column, from Cost of sales down to and including All other expenses, and write the total at S item P8 on your schedule. Do not show cents.

Step 2

If your total of primary production expenses is a negative amount, print L in the box at the right of the amount at S.

Step 3

Add up all the non-primary production expenses you have written in the Non-primary production column, from Cost of sales down to and including All other expenses, and write the total at T item P8 on your schedule. Do not show cents.

Step 4

If your total of non-primary production expenses is a negative amount, print L in the box at the right of the amount at T.

Step 5

Add up your primary production and non-primary production expenses and write the total amount at Total expenses, Total column, item P8 on your schedule.

Step 6

If your total of expenses is a negative amount, print L in the box at the right of this amount.

Reconciliation items

Part A-Are you entitled to claim a drought investment allowance?

No-Go to part B.

Yes-Read on.

What you need to know

The drought investment allowance provides for a deduction of 10 per cent of capital expenditure incurred in buying or building new items of drought mitigation property.

Drought mitigation property is:

  • a fodder storage facility-that is, a building or other structure used exclusively to store grain, hay or fodder
  • a water storage facility- that is, a dam, earth tank, underground tank or above-ground tank or a base, stand or cover for such a tank or any other structure or improvement that is used on particular land to store water predominantly for livestock. This facility must be part of an approved water conservation plan. Ring the ATO for details of your State authority or approved farm water resource consultant
  • a water transport facility-that is, a bore or well, a pump or windmill, a pipe, a water tower or header tank or any other structure or improvement that is used to transport water as part of an approved water conservation plan. Ring the ATO for details of your water conservation agency or approved farm water resource consultant
  • minimum tillage equipment-for example, trash tillage implements, boom sprays and markers, zero and reduced tillage planters, trash seeders, deep ploughs and seed drills-used in planting and cultivation that does not involve tillage of the soil or seriously affect soil structure and that retains a high degree of organic matter or surface cover. There are certain exclusions-examples of equipment that is not minimum tillage equipment are: one-way disc, offset disc and mould board ploughs; tined tillage implements and seeding implements with low capacity for trash clearance; rotary hoes; tined harrows; and rollers that cause significant compaction of soil.

You can claim the investment allowance if you incur the expenditure after 23 March 1995 and before 1 July 2000. If the item of drought mitigation property is built, construction must start between those dates. The item must be new and:

  • must cost $3,000 or more
  • must be used wholly and exclusively in Australia for producing assessable primary production income other than by leasing it, letting it on hire purchase or granting rights to other persons to use it
  • must be first used or installed ready for your use before 1 July 2001
  • must be retained for at least 12 months and not be leased, nor the right to use it transferred, to another person within this time.

The allowance will be lost where the property is disposed of after 12 months and it was bought or built with the intention of disposing of it.

You can claim 10 per cent of this expenditure as a deduction in the year you first used the item or installed it ready for use. The deduction is restricted to a maximum of $5,000 in any given income year. Excess expenditure, or any deduction based on it, does not carry over to other years.

If you receive a recoupment of deductible capital expenditure incurred in buying or building new items of drought mitigation property, it is assessable under Subdivision 20-A of the ITAA 1997. You are treated as receiving as recoupment only 10 per cent of the amount received. If a recoupment amount is assessable under another provision of the income tax law, Subdivision 20-A of ITAA 1997 does not apply.

Leasing companies that lease drought mitigation property to primary producers may qualify for drought investment allowance. Among other requirements, the lessee must use the drought mitigation property wholly and exclusively in Australia to produce assessable primary production income in the course of carrying on a business in Australia. The lease term must be for at least 4 years. You must have entered into the lease with the other person at arm's length. The leasing company deduction is limited to $5,000 per item. The leasing company can transfer its deduction for drought mitigation property to a primary producer lessee provided certain criteria are met.

Step 1

Work out 10 per cent of the capital cost of acquiring or constructing qualifying new items of property.

Step 2

Write your total primary production drought investment allowance in Drought investment allowance, Primary production column, item P8 on your schedule. Do not show cents.

Step 3

Write your primary production drought investment allowance amount at U item P8 on your schedule.

Part B-Did your business have environmental impact assessment and environmental protection expenditure?

No-Go to part C.

Yes-Read on.

What you need to know

Show at this part the amount of allowable environmental impact assessment and environmental protection expenditure.

Expenditure on environmental impact assessment

You can deduct the costs incurred in carrying out an activity for the sole or dominant purpose of evaluating the impact on the environment of a project relating to the production of assessable income-other than net capital gain. The period for write-off shall be the lesser of:

  • 10 years, or
  • the life of the project to which the evaluation relates.

Note:

  • The cost of depreciable plant or articles used for environmental impact assessments are not written off under this provision, but are written off under the ordinary depreciation provisions.
  • A deduction under this provision is not available where the cost of an environmental impact assessment is allowable under any other provision-for example, mining and quarrying companies can claim an outright deduction for many environmental impact assessments under the exploration or prospecting provisions.
  • The deduction cannot be transferred to another taxpayer if the project to which the assessment relates is sold or ceases. The deduction remains with the taxpayer who incurs the expenses.
  • Any grant or recoupment that you receive is an assessable recoupment and is to be included in assessable income under Subdivision 20-A of ITAA 1997. Where the expenditure is deductible over a number of years there is a formula contained in section 20- 40 of ITAA 1997 to be applied to determine the amount of the assessable recoupment.
  • Where the deduction arises from a non-arm's length transaction and the amount of the expenditure is greater or less than the market value of what the expenditure is for, the amount of the expenditure is instead taken to be that market value.

Expenditure on environmental protection activities

You can deduct expenditure to the extent that you incur it for the sole or dominant purpose of carrying on environmental protection activities. Environmental protection activities are activities which are related to the production of assessable income-other than assessable income attributable to capital gains and losses-and which are undertaken to prevent, fight or remedy environmental pollution or to treat, clean up, remove or store waste.

You can claim a deduction if pollution or waste has resulted, or is likely to result, from an income-producing activity, or is on the site or proposed site of that activity. You may also claim a deduction for cleaning up a site on which a predecessor carried on substantially the same business activity.

The deduction is not available for:

  • bonds and security deposits
  • the cost of depreciable expenditure on plant
  • the cost of acquiring land
  • the capital cost of constructing or altering buildings, structures or structural improvements
  • costs to the extent that you can deduct them under another provision.

Repairs to plant or equipment used in an eligible environmental protection activity will be deductible in the year of income in which the cost is incurred. However, where the replacement amounts to an improvement to the plant or equipment, it will be depreciable at the relevant rate.

Expenditure on an environmental protection activity that is also environmental impact assessment expenditure is not deductible as expenditure on environmental protection activities. Instead, it will be deductible as expenditure on environmental impact assessment. An example would be a study to determine the quantity and type of pollutants which will be produced from a process used in a proposed business that qualifies as an environmental protection activity. Such expenditure also may be environmental impact assessment expenditure. In this case, it will be deductible over 10 years or the life of the project, whichever is the lesser, and will be excluded from deduction as expenditure on environmental protection activities.

A recoupment of the expenditure that you have claimed as a deduction is included in your assessable income for the year in which you receive the recoupment. A recoupment includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described, and a grant in respect of the loss or outgoing.

Where the deduction arises from a non-arm's length transaction and the amount of the expenditure is greater or less than the market value of what the expenditure is for, the amount of the expenditure is instead taken to be that market value.

Expenditure incurred on or after 19 August 1992 on an eligible environmental protection earthwork can be written off at the rate of 2.5 per cent per annum under the provisions for capital works expenditure. This deduction is available provided the earthwork can be economically maintained in reasonably good order and condition for an indefinite period and the earthwork is not integral to the construction of capital works.

Step 1

Write your total primary production environmental expenses in Environmental impact assessment and environmental protection expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write your total non-primary production environmental expenses in Environmental impact assessment and environmental protection expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production environmental impact assessment and environmental protection expenses and write the total amount at V item P8 on your schedule.

Part C-Did your business have landcare operations and/or water conservation/conveying expenses?

No-Go to part D.

Yes-Read on.

What you need to know

Landcare operations expenses

Landcare operations cover what were previously known as land degradation measures. You can claim a deduction in the year you incur capital expenditure on landcare measures for land in Australia provided you incur it in any one of the following operations:

  • eradicating or exterminating animal or plant pests from the land
  • destroying weed or plant growth detrimental to the land
  • preventing or combating land degradation other than by the use of fences
  • erecting fences to keep out livestock or vermin from areas affected by land degradation to prevent or limit further damage and assist in reclaiming the areas
  • erecting fences to separate different land classes in accordance with an approved land management plan
  • constructing levee banks or similar improvements
  • constructing surface or subsurface drainage works-other than the draining of swamps or low-lying areas-to control salinity or assist in drainage control.

In each case, apart from the construction of levee banks, the operation must be carried out primarily and principally for the purpose stated. This is to ensure that the outright deduction for landcare measures and the 3-year write-off for facilities to conserve or convey water cannot both be claimed for the same item of expenditure. Where levee banks are constructed primarily and principally for water conservation, the cost is an allowable deduction under the water conservation provisions- see Water conservation and conveyance.

If you are carrying on a primary production business on the land, you may claim the deduction even if you are a lessee.

The deduction for landcare operations expenses is reduced when the land is not used wholly for either:

  • a primary production business, or
  • a business for the purpose of producing assessable income from the use of rural land-except a business of mining or quarrying.

If you receive a recoupment of deductible landcare operations expenditure it is assessable under Subdivision 20-A of ITAA 1997. This subdivision does not apply if the recoupment is assessable under another provision of the income tax law. Ring the landcare hotline on 1800 060 425 for further information.

These deductions are not available to a partnership. Landcare operations expenses incurred by a partnership are allocated to each partner and deducted from the partner's income.

Certain other capital expenditure

You can claim a deduction over 10 years for certain other capital expenditure. The deduction is allowable in equal instalments over 10 years if it was incurred in connecting:

  • mains electricity to land on which a business is carried on or in upgrading an existing connection to that land
  • a telephone line to land being used to carry on a primary production business.

These deductions are not available to a partnership. Costs incurred by a partnership for mains electricity supply or telephone lines are allocated to each partner and deducted from the partner's income.

Water conservation and conveyance

Capital expenditure incurred on water storage and farm reticulation systems is deductible if incurred primarily and principally in carrying on a primary production business on land in Australia. The deduction can be claimed in equal instalments over 3 years. Items include dams, earth tanks, underground tanks, concrete or metal tanks, tank stands, bores, wells, irrigation channels or similar improvements, pipes, pumps, water towers, windmills and extensions or improvements to any of these items. The cost of constructing a power line from an existing mains electricity connection to any plant used for conserving or conveying water is also included.

If you are carrying on a business of primary production on the land, you may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction.

The deduction for facilities to conserve or convey water is reduced where the facility is not used wholly for either:

  • carrying on a primary production business on land in Australia, or
  • producing assessable income.

If you receive a recoupment of deductible water conservation and conveyance expenditure it is assessable under Subdivision 20-A of ITAA 1997. As the expenditure on water facilities is deductible over 3 income years, special rules apply to determine the amount of any recoupment to be included in assessable income. If the recoupment is assessable under another provision of the income tax law, Subdivision 20-A of ITAA 1997 does not apply. Ring the landcare hotline on 1800 060 425 for further information.

These deductions are not available to a partnership. Costs incurred by a partnership for facilities to conserve or convey water are allocated to each partner and deducted from the partner's income.

Step 1

Write the deductible amount of any landcare operations expenses and water conservation/conveying expenses in Landcare operations and water conservation/conveying expenses, Primary production column, item P8 on your schedule. Do not show cents.

Step 2

Write the amount of any non-primary production landcare operations expenses in Landcare operations and water conservation/conveying expenses, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 3

Add up your primary production and non-primary production landcare operations and water conservation/conveying deductible amounts and write the total amount at W item P8 on your schedule.

Part D-Working out your reconciliation adjustments

You may need to make income reconciliation adjustments or expense reconciliation adjustments. These adjustments reconcile your business operating profit or loss with the business taxable income.

Do not complete any income reconciliation adjustments or expense reconciliation adjustments if all the amounts you have written at C Gross payments where Australian Business Number not quoted to W Landcare operations and water conservation/conveying expenses, item P8 on your schedule, are assessable income or allowable tax deductions for income tax purposes.

If you have included any amounts such as exempt income, capital and other non-deductible expenses at these labels, you must work out your reconciliation adjustments.

If you have not included any of these amounts, go to Part E-Working out your net income or loss from business.

What are reconciliation adjustments?

Income reconciliation adjustments include:

  • income add backs- income not shown in the accounts which is assessable income for tax purposes, such as:
    • 1 assessable balancing adjustment charged on sale of fixed assets
    • 2 other assessable income not included in the profit and loss statement
     
  • income subtractions-income shown in the accounts which is not assessable income, such as:
    • 3 profit on sale of fixed assets shown in the accounts
    • 4 other income shown in the profit and loss statement that is not assessable for income tax purposes-for example, gross exempt income.
     

Note: You need to subtract the total of items 3 and 4 from the total of items 1 and 2 to work out the net income reconciliation adjustment. The amount calculated is written at X item P8 on your schedule.

The net total of the primary production and non-primary production income reconciliation adjustments must agree with the amount shown at X on your schedule.

Where the net total is a negative amount, printL in the box at the right of the amount at X

Expense reconciliation adjustments include:

  • expense add backs-expenses shown in the accounts which are not tax deductible, such as:
    • 5 depreciation charged in accounts
    • 6 loss on sale of fixed assets shown in accounts
    • 7 other items not allowable as a deduction-for example, capital expenditure, additions to provisions and reserves, income tax expense, expenses relating to exempt income, other non-deductible expenses
     
  • expense subtractions-items not shown as expenses which are deductible for tax purposes, such as:
    • 8 depreciation deducted for tax purposes
    • 9 tax loss on disposal of depreciable assets
    • 10 other deductible items for tax purposes.
     

Note: You need to subtract the total of items 8, 9 and 10 from the total of items 5, 6 and 7 to work out the net expense reconciliation adjustment. The amount calculated is written at H item P8 on your schedule.

The net total of the primary production and non-primary production expense reconciliation adjustments must agree with the amount shown at H on your schedule.

Where the net total is a negative amount, printL in the box at the right of the amount at H.

Depreciation deducted

Depreciation calculated under the income tax law may differ from the accounting or book calculation. Different rules regarding such things as effective life rates, the calculation of balancing adjustments and the treatment of debt forgiveness amounts can produce a discrepancy between the 2 calculations.

Under the income tax law you can deduct an amount for depreciation of a unit of plant in the 2000-01 income year, if you are its owner or quasi-owner and you use it, or have it installed ready for use, for the purpose of producing assessable income.

Some of the features of the current income tax law relating to depreciation are:

  • accelerated depreciation has been retained for small business taxpayers who meet certain qualifying conditions. For all other taxpayers the general rule is that depreciation on plant acquired after 21 September 1999 is determined solely by reference to effective life
  • taxpayers who qualify as small business taxpayers can continue to claim the immediate deduction for plant costing $300 or less
  • for business taxpayers other than small business taxpayers, the immediate deduction for plant costing $300 or less has been repealed and replaced with an option to depreciate plant through a low-value pool
  • the option to offset any assessable balancing adjustments against the cost of replacement plant has been removed except for small business taxpayers and certain involuntary disposals
  • for the definition see small business taxpayers
  • taxpayers other than small business taxpayers who included an amount of more than $1,000 at M Depreciation expenses, item P8, must complete a Depreciation schedule 2001.

To assist you in calculating your depreciation claim for taxation purposes you should refer to the publication Guide to depreciation 2001.

The Reconciliation statement contains reference to Balancing adjustment on disposal of depreciable assets, Depreciation deductible for tax purposes and Tax loss on disposal of depreciable assets, all these terms are explained in the Guide to depreciation 2001.

Step 1

Fill in the Reconciliation statement

Step 2

Write your total primary production reconciliation adjustments in Income reconciliation adjustments and Expense reconciliation adjustments, Primary production column, item P8 on your schedule. Do not show cents.

Step 3

If any total primary production reconciliation adjustment is a negative amount, printL in the box at the right of this amount.

Step 4

Write your total non-primary production reconciliation adjustments in Income reconciliation adjustments and Expense reconciliation adjustments, Non-primary production column, item P8 on your schedule. Do not show cents.

Step 5

If any total non-primary production reconciliation adjustment is a negative amount, printL in the small box at the right of this amount.

Step 6

Add up your income reconciliation adjustments and expense reconciliation adjustments and write the total amounts at X and H item P8 on your schedule.

Step 7

If your total reconciliation adjustment is a negative amount, printL in the box at the right of the amount at X or H item P8 on your schedule.

Do not include in Subtractions-Other deductible items for tax purposes not included in the PLS at (o):

  • drought investment allowance
  • environmental impact assessment and environmental protection expenditure
  • landcare operations and water conservation/conveying expenses.

Reconciliation adjustments for these amounts are shown separately at U, V and W item P8 on your schedule.

Reconciliation statement

Income reconciliantion adjustments – Additions

Row

Calculation elements

Primary production

Non-primary production

(a)

Assessable business income not included in the profit and loss statement (PLS)

$

$

(b)

Balancing adjustment on disposal of depreciable assets

$

$

(c)

Subtotal-add amounts at (a) and (b)

$

$

Income reconciliantion adjustments – Subtractions

Row

Calculation elements

Primary production

Non-primary production

(d)

Net exempt income-gross income less expenses relating to that exempt income

$

$

(e)

Profit on sale of fixed assets included in accounts

$

$

(f)

Subtotal-add amounts at (d) and (e)

$

$

-

Income reconciliation adjustments-take (f) away from (c)

$

$

Expense reconciliation adjustments – Adjustments

Row

Calculation elements

Primary production

Non-primary production

(g)

Depreciation charged in accounts

$

$

(h)

Loss on sale of fixed assets included in accounts

$

$

(i)

Items not allowable as deductions:

  • capital expenditure

 

$

$

(j)

  • additions to provisions and reserves

 

$

$

(k)

  • other items, including income tax and non-deductible expenses

 

$

$

(l)

Subtotal-add all amounts from (g) to (k)

$

$

Expense reconciliation adjustments – Subtractions

Row

Calculation elements

Primary production

Non-primary production

(m)

Depreciation deductible for tax purposes

$

$

(n)

Tax loss on disposal of depreciable assets

$

$

-

Other deductible items for tax purposes not included in the PLS

$

$

(p)

Subtotal-add all amounts from (m) to (o)

$

$

-

Expense reconciliation adjustment-take (p) from (l)

$

$

Part E-Working out your net income or loss from business

Step 1

Work out your net primary production and non-primary production income by using the tables below.

If any of the amounts is a loss printL in the box at the right amount.

Working out your net income or loss from primary production business this year

Row

Calculation elements

Amount

(a)

Write your primary production total business income shown at Total business income, Primary production column, item P8

$

(b)

Write your total primary production business expense shown at S item P8

$

(c)

Write the total of any primary production drought investment allowance, environmental protection expenses, landcare operations and water conservation/conveying expenses.

$

(d)

Add the amount at (b) to the amount at (c)

$

(e)

Take the amount at (d) from the amount at (a). If the amount at (d) is more than the amount at (a), the amount at (e) is a loss

$

(f)

Write any primary production income reconciliation adjustment

$

(g)

Write any primary production expense reconciliation adjustment

$

(h)

Add the amounts at (f) and (g) to the amount at (e). This is your net income or loss from primary production business

Note: If the amount at (m) is a loss, the examples below will help you work out your net loss from primary production business.

$

Working out your net income or loss from non-primary production business

Row

Calculation elements

Amount

(i)

Write your primary production total business income shown at Total business income, Primary production column, item P8

$

(j)

Write your total non-primary production business expense shown at T item P8

$

(k)

Write the total of any non-primary production environmental impact assessment and environmental protection expenses and landcare operations expenses.

$

(l)

Add the amount at (j) to the amount at (k)

$

(m)

Take the amount at (l) from the amount at (i). If the amount at (l) is more than the amount at (i), the amount at (m) is a loss

$

(n)

Write any non-primary production income reconciliation adjustment

$

(o)

Write any non-primary production expense reconciliation adjustment

$

(p)

Add the amounts at (n) and (o) to the amount at (m). This is your net income or loss from primary production business.

$

Note: If the amount at (m) is a loss, the examples below will help you work out your net loss from primary production business.

Start of example

Examples

If the amount at (e) is a $5,000 loss, the amount at (f) is $12,000 income, and the amount at (g) is a $1,000 loss, the net income from the primary production business is $6,000 (h).

If the amount at (e) is a $5,000 loss, the amount at (f) is $2,000 income, and the amount at (g) is a $6,000 loss, the net loss from the primary production business is $9,000 (h).

If the amount at (m) is a $5,000 loss, the amount at (n) is a $4,000 loss, and the amount at (o) is a $1,000 loss, the net loss from the non-primary production business is $10,000 (p).

End of example

Step 2

Write the amount of your net income or loss from your primary production business at Y item P8 on your schedule. Do not show cents. If you made a net loss from primary production business, print L in the box at the right of this amount.

Step 3

Write the amount of your net income or loss from your non-primary production business at Z item P8 on your schedule. Do not show cents. If you made a net loss from non-primary production business, print L in the small box at the right of this amount.

Step 4

Add up your primary production and non-primary production net income or loss from business and write the total amount at Net income or loss from business, Total column, item P8 on your schedule.

If you made a net loss from your business, printL in the small box at the right of this amount.

Make sure the amounts you write at Y and Z are the same as the amounts you have written at B and C item 14 on your tax return.

Other business and professional items

Items P9 TO P17

You need to fill in all items relating to your business expenses. If you have more than one business, you must add the figures for all businesses, irrespective of whether they are primary or non-primary production, and write only one figure at each item.

If you are a primary producer, you will need a primary production worksheet to work out some of the following items. This worksheet is in the publication Information for primary producers.

QC83562