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  • P8-Business income and expenses

    Income

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The business income to be shown at item P8 is divided into:

    • income from which tax has been withheld because you did not quote your ABN to one of your payers
    • income that was subject to a PAYG voluntary agreement to withhold tax
    • income received under a labour hire arrangement or from a specified payment
    • assessable government industry payments
    • other business income.

    Note

    Except for:

    • the values of opening and closing stock-which are to be shown at tax values.
    • depreciation expense for STS taxpayers only-which is to be shown at tax value.
     

    the amounts to be included in the Income and expenses sections item P8 are amounts derived from your accounting system or financial statements. They should form part of your profit and loss statement, and the basis for calculating your net profit or loss. Any adjustments to these amounts for tax purposes should be dealt with in the reconciliation items section item P8. However, if you are an STS taxpayer also read the note on STS taxpayers below for information on how to complete item P8.

    If you are registered or required to be registered for GST, the following apply:

    • For income tax purposes, GST should be excluded from assessable income, exempt income and amounts received or receivable that are taken into account in calculating income and deductions.
    • Deductible losses and outgoings should be reduced by the amount of input tax credit entitlement.
    • In certain circumstances (for example, there is a change in how much you use an asset for business purposes) an adjustment for GST purposes results in an amount being included in assessable income (if the adjustment is a GST decreasing adjustment) or being deductible (if the adjustment is a GST increasing adjustment).
    • GST components are also to be excluded under other specific rules including capital gains tax (cost base, reduced cost base, capital proceeds) and termination values.

    If you are not registered or required to be registered for GST, or not entitled to claim input tax credits, your income and deductions do not need to be adjusted for GST. You can claim the GST inclusive amount incurred on deductible outgoings.

    STOP

    Do not show the following types of income at item P8:

    • gross interest-show the amount of income at item 10 on your tax return
    • dividends and imputation/ franking credits-show the amounts at item 11 on your tax return
    • distributions from partnerships and trusts-show these at item 12 on your tax return
    • gross rental or similar income, such as agistment or hire fees-show the amount at item 20 on your tax return
    • net capital gains-show the amount at item 17 on your tax return
    • PSI shown at P1
    • farm management withdrawals-show the amount at item 16 on your tax return
    • attributed foreign income-show the amount at item 18 on your tax return
    • foreign source income-show the amount at item 19 on your tax return.
     

    STOP

    If you received PSI as a sole trader, you must complete item P1 of the 2003 business and professional items schedule. PSI is income that is mainly a reward for an individual's personal efforts or skills. Where you have net PSI at A item P1, do not include the PSI or claim deductions relating to that income at item P8.

    If you are eligible to enter or continue in the STS and you have chosen to do so at item S1, read on.

    Otherwise go to Did you have amounts withheld from your business income other than PSI included at item P1?

    Note-STS taxpayers

    STS taxpayers must use the STS accounting method. This accounting method recognises most income only when it is received. This type of income is called ordinary income (for example, sales of goods and/ or services, professional fees and commissions).

    If you are registered or required to be registered for GST, income amounts should exclude GST payable.

    An STS taxpayer can claim deductions for the following expenses only when they are paid:

    • general deductions (for example, stock purchases, wages and rent of business premises)
    • tax-related expenses
    • expenses for repairs.
     

    If you are registered or required to be registered for GST, expense amounts should exclude input tax credit entitlements.

    The STS accounting method does not apply to income or deductions that receive specific treatment in the income tax law (for example, net capital gains, dividends, depreciation expenses, bad debts and borrowing expenses).

    In addition, if another provision of the income tax law apportions or alters the assessability or deductibility of a particular type of ordinary income or general deduction, the timing rule in the specific provision overrides the received or paid rule for STS taxpayers (for example, double wool clips or prepayment of a business expense for a period greater than 12 months). Because of these specific provisions you may need to make adjustments at the reconciliation items section.

    For more information about the STS accounting method, phone the Small Business Infoline on 13 28 66 or visit the ATO website at www.ato.gov.au

    The amounts you include at item P8 should be based on the STS accounting method. If your accounting system or financial statements do not reflect the STS accounting rules, you may need to make additional adjustments at the reconciliation items section. For more information about these adjustments see below.

    In addition to the STS accounting method there are also specific STS rules for depreciation, and for trading stock.

    Did you have amounts withheld from your business income other than PSI included at item P1?

    No

    Go to part D

    Yes

    Read on

    If tax has been withheld from business income you should have received a payment summary.

    If you received any of these payment summaries:

    • Payment summary-withholding where ABN not quoted
    • Payment summary-voluntary agreement
    • Payment summary-labour hire and other specified payments

    you will need to complete the Individual PAYG payment summary schedule 2003 before completing item P8.

    A payer may issue a receipt, remittance or similar document in place of the ATO's Payment summary-withholding where ABN not quoted.

    If you received income from which tax was withheld and you did not receive or have lost your payment summary, contact your payer and ask for a copy.

    How to complete the Individual PAYG payment summary schedule 2003

    Step 1

    Write your TFN and name in the appropriate boxes at the top of the schedule.

    Step 2

    Nature of income-Print X in the Business income box.

    Note

    Where you have both business income (item P8) and PSI (item P1) you will need to complete two separate individual PAYG payment summary schedules.

    Step 3

    For each payment summary, transfer the following information to the schedule:

    • the type of withholding-look at your payment summary carefully to determine its type and complete the TYPE box, using the following key:

    V = voluntary agreement

    N = withholding where ABN not quoted

    S = labour hire or other specified payments

    • the payer's ABN or WPN and the payer's name in the appropriate boxes
    • the total tax withheld at the Tax withheld box
    • the gross payments in the Gross payment box.
     

    Step 4

    Check that you have recorded details from all relevant payment summaries on your Individual PAYG payment summary schedule 2003 and attached the schedule to page 3 of your tax return.

    Do not attach the payment summaries to your tax return. You are required to keep them for a period of five years.

    Payers are required to report to the ATO details of payments where amounts of tax have been withheld. This information will be cross-checked with that on your tax return to ensure that you have declared the correct amount of income and the correct amount of tax withheld.

    Part A-Gross payments where Australian business number (ABN) not quoted

    Did your business have any amounts of tax withheld for failure to quote an ABN?

    No

    Go to part B

    Yes

    Read on.

    You need to know

    Gross payments where Australian business number not quoted item P8 is the total income you received from which your payers have withheld an amount because you did not quote your ABN. It includes the amounts of tax withheld. You will be able to calculate this amount from your completed Individual PAYG payment summary schedule 2003.

    Completing this part

    Step 1

    Add up all amounts on your completed payment summary schedule at Gross payment boxes with an N in the TYPE box, derived from primary production activities. Write this amount at C item P8. Do not show cents.

    Step 2

    Add up all amounts on your completed payment summary schedule at Gross payment boxes with an N in the TYPE box, derived from non-primary production activities. Write this amount at D item P8. Do not show cents.

    Step 3

    Add up the amounts you have written at C and D item P8 and write this amount in the adjacent Totals box item P8.

    If you complete these labels you must complete W item 14 on your tax return.

    Part B Gross payments-voluntary agreement

    Did you receive any income that was subject to a PAYG voluntary agreement to withhold?

    No

    Go to part C

    Yes

    Read on.

    You need to know

    Gross payments-voluntary agreement item P8 is the total income you received that was subject to a voluntary agreement to withhold tax and includes amounts of tax withheld. You will be able to calculate this amount from your completed payment summary schedule.

    Completing this part

    Step 1

    Add up all amounts on your completed payment summary schedule at Gross payment boxes with a V in the TYPE box, derived from primary production activities. Write this amount at E item P8. Do not show cents.

    Step 2

    Add up all amounts on your completed payment summary schedule at Gross payment boxes with a V in the TYPE box, derived from non-primary production activities. Write this amount at F item P8. Do not show cents.

    Step 3

    Add up the amounts you have written at E and F item P8 and write this amount in the adjacent Totals box item P8.

    If you complete these labels you must complete D item 14 on your tax return.

    Part C-Gross payments-labour hire or other specified payments

    Did you receive:

    • income under a labour hire arrangement or
    • a specified payment, including
      • income from tutorial services provided for the Aboriginal Tutorial Assistance Scheme of the Department of Education, Science and Training
      • income from translation and interpretation services for the Translating and Interpreting Service of the Department of Immigration and Multicultural and Indigenous Affairs
      • income as a performing artist in a promotional activity?
       

    No

    Go to part D

    Yes

    Read on.

    You need to know

    Gross payments-labour hire or other specified payments item P8 is the total income you received from labour hire or other specified payments and includes amounts of tax withheld. You will be able to calculate this amount from your completed payment summary schedule.

    Do not include income received as an employee of a labour hire business. These amounts will appear on your PAYG payment summary-individual non business and should be shown at item 1 on your tax return.

    Completing this part

    Step 1

    Add up all amounts from the payment summary schedule at the Gross payment boxes with an S in the TYPE box. These amounts are non-primary production income. Write your total at O item P8. Do not show cents. Leave N blank.

    Step 2

    Transfer the amount at O to the Totals box item P8 on your schedule.

    If you complete these labels you must complete F item 14 on your tax return.

    Part D-Assessable government industry payments

    Did your business receive assessable government industry assistance?

    No

    Go to part E

    Yes

    Read on.

    You need to know

    Generally, government grants, rebates, bounties and subsidies are assessable income in the hands of the recipient if they are received in or in relation to the carrying on of a business. This generally includes amounts of a capital nature. However, amounts relating to the commencement or cessation of a business may not be assessable.

    Examples of assessable government industry assistance are:

    • bounties
    • diesel fuel rebate
    • diesel and alternative fuels grants
    • drought relief
    • employee subsidies
    • export incentive grants
    • fuel sales grants
    • industry restructuring and adjustment payments
    • Medicare payments received by medical practices.

    Completing this part

    Step 1

    Write your total primary production government industry payments received by each business at G item P8 on your schedule. Do not show cents.

    Step 2

    If your assessable primary production government industry payments include a diesel fuel rebate and/or diesel and alternative fuels grant, print D in the TYPE box at the right of the amount at G.

    Step 3

    Write your total non-primary production government industry payments received by each business at H item P8 on your schedule. Do not show cents.

    Step 4

    If your assessable non-primary production government industry payments include a diesel fuel rebate and/ or diesel and alternative fuels grant, print D in the TYPE box at the right of the amount at H.

    Step 5

    Add up your primary production and non-primary production government industry payments and write the total amount in the box item P8 on your schedule

    Part E-Other business income

    Did you receive any other business income?

    No

    Go to part F

    Yes

    Read on.

    You need to know

    Other business income includes:

    • gross sales of trading stock
    • goods taken for own use from stock
    • gross earnings from services
    • taxi driver earnings (income you earned as a non-employee taxi driver if it is not shown at item P1)
    • bad debts recovered
    • profit on sale of depreciating assets
    • royalties
    • insurance recoveries
    • subsidies
    • employee contributions for fringe benefits
    • non-assessable government assistance from all sources.

    It excludes amounts shown at C, D, E, F, O, G and H on your schedule.

    Completing this part

    Step 1

    Write your total amount of other primary production business income or loss at I item P8 on your schedule. Do not show cents.

    Step 2

    If you made a loss, print L in the box at the right of the amount at I.

    Step 3

    Write your total amount of other non-primary production business income or loss at J item P8 on your schedule. Do not show cents.

    Step 4

    If you made a loss, print L in the box at the right of the amount at J.

    Step 5

    Add up your other primary production and non-primary production income or loss and write the total amount in the Totals box item P8 on your schedule.

    Step 6

    If you made a loss, print L in the box at the right of the Totals box.

    Part F-Total business income

    Completing this part

    Step 1

    Add up the primary production amounts shown at C, E, N, G and I item P8 on your schedule. Write the total at TOTAL BUSINESS INCOME, Primary production column.

    Step 2

    If you made a loss, print L in the box at the right of the amount at TOTAL BUSINESS INCOME, Primary production column.

    Step 3

    Add up the non-primary production amounts shown at D, F, O, H and J item P8 on your schedule. Write the total at TOTAL BUSINESS INCOME, Non-primary production column.

    Step 4

    If you made a loss, print L in the box at the right of the amount at TOTAL BUSINESS INCOME, Non-primary production column.

    Step 5

    Add up the amounts at TOTAL BUSINESS INCOME, Primary production and Non-primary production columns and write the total at TOTAL BUSINESS INCOME, Totals column. If you made a loss, print L in the box at the right of this amount.

    Expenses

    STOP

    Do not include the following expense items on your schedule:

    • interest and dividend income expenses-claim deductible expenses at item D7 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 or, in the case of certain debt deductions, claim them at item D15 on your tax return.
    • expenses relating to your personal services income shown at item P1 on your schedule
    • low-value pool deduction where the pool contains assets used for work related, self-education or rental purposes-read question D6 in TaxPack 2003.
     

    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 assessable income.

    If you are a primary producer you will need a primary production worksheet to help you work out some of the amounts in this section. This worksheet is included in the publication Information for primary producers (NAT 1712-6.2003). Complete the worksheet before proceeding.

    Note

    Except for:

    • the values of opening and closing stock-which are to be shown at tax values.
    • depreciation expense for STS taxpayers only-which is to be shown at tax values.
     

    the amounts to be included in the Income and expenses sections item P8 are amounts derived from your accounting system or financial statements. Any adjustments to these amounts for tax purposes should be dealt with in the reconciliation items section item P8.

    If you are registered or required to be registered for GST, exclude from the deductions any input tax credit entitlements that arise in relation to outgoings. If you pay GST by instalments and incurred a penalty for underestimating a varied GST instalment, you can claim a deduction for the penalty at item D10 on your tax return. Do not show the penalty on your 2003 business and professional items schedule. For more information, see page 61 in TaxPack 2003.

    Note

    If you made a prepayment of $1,000 or more for something to be done (in whole or in part) in a future income year, the timing of your deduction may be affected by the rules relating to prepayments. Generally, you will need to apportion your deduction for prepaid business expenditure over the service period or 10 years, whichever is less. There are some exceptions under the 12-month rule for STS taxpayers, the special rules relating to plantation forestry managed agreements, and certain transitional provisions. For more information, see the publication Deductions for prepaid expenses (NAT 4170-6.2003).

    Where expense labels at item P8 include prepaid expenses which differ from the amounts allowable as deductions in the 2002-03 income year, make an expense reconciliation adjustment at H item P8.

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

    Thin capitalisation

    The thin capitalisation provisions apply to entities (including individuals) to reduce certain deductions (called 'debt deductions') for costs incurred in obtaining and servicing debt finance where the debt applicable to Australian operations exceeds the limits set out in Division 820 of ITAA 1997.

    Do the thin capitalisation provisions apply to you?

    The thin capitalisation rules will apply to you if:

    • you are an Australian resident and you or any of your associate entities is an Australian controller of a foreign entity or carry on business overseas at or through a permanent establishment, or
    • you are a foreign resident and you carry on business in Australia at or through a permanent establishment or otherwise have Australian income-producing assets.

    The thin capitalisation rules will not apply to you if:

    • your debt deductions (combined with the debt deductions of your associate entities) do not exceed $250,000 in the income year or
    • you are an Australian resident and the combined value of your and your associates' Australian assets is not less than 90% of the value of your and your associates' total assets.

    What if the thin capitalisation rules apply to you?

    If the thin capitalisation rules apply to you, you must complete the Thin capitalisation schedule 2003. The amount of any debt deductions you can claim may be reduced by these rules. For more information, see the publication Guide to thin capitalisation.

    Complete the thin capitalisation schedule and post it to:

    Australian Taxation Office
    PO Box 1365
    ALBURY  NSW  2640

    Part A-Opening stock

    Did you have trading stock on hand at the start of the year?

    No

    Go to part B

    Yes

    Read on.

    You need to know

    The opening value of an item of stock must equal its closing value in the previous year. The total value of all stock on hand at the start of the year is equal to the amount shown as closing stock on your 2002 schedule.

    Do not include 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.

    Completing this part

    Step 1

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

    Step 2

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

    Step 3

    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-Purchases and other costs

    Did you have purchases and other costs?

    No

    Go to part C

    Yes

    Read on.

    You need to know

    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 also includes the cost of stock acquired when starting or acquiring a business during the year. 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.

    Completing this part

    Step 1

    Work out the value of your primary production purchases and other costs directly related to trading stock. 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 directly related to trading stock at 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 directly related to trading stock. 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 directly related to trading stock at 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 directly related to trading stock and write the total value at L item P8 on your schedule.

    Note

    STS taxpayers-only show purchases and other costs that you have paid.

    Part C-Closing stock

    Did you have trading stock on hand at the end of the year?

    No

    Go to part D

    Yes

    Read on.

    If you are eligible to enter or continue in the STS and have chosen to do so at item S1, read on. Otherwise go to the section on Other businesses.

    STS taxpayers

    You need to know

    You only need to account for changes in the value of your trading stock if there is a difference of more than $5,000 in the value of all your stock on hand at the start of the income year and a reasonable estimate of the value of all your stock on hand at the end of the income year. The value of your stock on hand at the start of the income year is the same value as the closing value shown on your schedule in the previous year. This may not necessarily reflect the actual value of your stock if you did not account for the change in value of your stock in the previous year. For more information on a reasonable estimate of the value of stock, refer to the publication Simplified tax system: simplified trading stock rules: reasonable estimate (NAT 7170) or phone the Small Business Infoline on 13 28 66 or visit the ATO website at www.ato.gov.au

    You can still choose to conduct a stocktake and account for changes in the value of trading stock, if you wish.

    Is the difference between the value of your opening stock and a reasonable estimate of your closing stock more than $5,000?

    No

    You must account for changes in the value of your trading stock. Go to step 2

    Yes

    If you choose not to account for changes in the value of your trading stock, go to step 1. Otherwise, go to step 2.

    Completing this part

    Step 1

    If the difference referred to above is $5,000 or less and you choose not to account for this difference, the closing stock values you put in both the Primary production and Non-primary production columns are the same as the values you put at Opening stock, item P8 on your schedule. Do not put your reasonable estimate.

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

    Write in the TYPE box at the right of M the code letter you used last year to value closing stock:

    C cost

    M market selling value

    R replacement price

    If this is your first year in business the value of your closing stock will be zero. Write C in the TYPE box.

    Go to part D below.

    Step 2

    If the difference referred to above is more than $5,000 or you choose to account for the difference in trading stock, the closing stock values must be brought to account under section 70-35 of ITAA 1997. Read the section on Other businesses for information on how to complete this part.

    You must include in your closing stock value at M item P8 the value of all stock on hand, regardless of whether you have paid for the stock.

    Other businesses

    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 in the INCOME section item P8 on your schedule. For more details about what constitutes trading stock, phone the ATO.

    You can choose one of the following three 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 P19 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 P1 on your primary production worksheet to the value of your closing stock from your produce account at P6 on your primary production worksheet.

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

    Completing this part

    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 at 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 at Closing 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 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-Cost of sales

    Did you have any cost of sales?

    No

    Go to part E

    Yes

    Read on

    You need to know

    Goods taken for your own use should not be accounted for as stock on hand at 30 June 2003. Include the cost of goods taken for your own use at I and JOther business income in the INCOME section item P8 on your schedule.

    Use the following table to work out your cost of sales

    Cost of sales

    Primary
    production

    Non-primary production

    Stock at 1 July 2002

    (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 2003

    (f)

    $

    $

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

     

    $

    $

    For further information on stock on hand at 1 July 2002, read Part A Opening stock. For information on stock on hand at 30 June 2003, read Part C Closing stock.

    Completing this part

    Step 1

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

    Step 2

    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 3

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

    Step 4

    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 5

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

    Step 6

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

    Part E-Contractor, sub-contractor and commission expenses

    Did you have any contractor, sub-contractor or commission expenses in your business?

    No

    Go to part F

    Yes

    Read on

    You need to know

    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.

    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.

    Completing this part

    Step 1

    Write your total primary production contractor, sub-contractor and commission expenses at 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 at 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-Superannuation expenses

    Did you make any superannuation contributions on behalf of eligible employees or their dependants as a business expense?

    No

    Go to part G

    Yes

    Read on

    You need to know

    Show superannuation expenses for the year of income. Do not include any amount that was a contribution for yourself. The deduction for your own superannuation contributions must be claimed at D13 on your tax return. See question D13 in TaxPack 2003 supplement.

    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 the income year in which the contributions are made.

    Contributions made to a non-complying fund:

    • are not allowable as a deduction
    • do not count towards superannuation guarantee obligations. Under the superannuation guarantee an employer needs to provide a minimum level of superannuation for eligible employees or pay a tax called the superannuation guarantee charge to the Commissioner. The superannuation guarantee charge 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.

    The amount of contributions that can be claimed as a deduction by an employer contributing to a resident complying superannuation fund or RSA in respect of eligible employees is limited by the age of each relevant employee.

    Where an employee has reached the age of 70, there is a further restriction on the deduction that can be claimed for an employer contribution to a complying superannuation fund or RSA.

    For the 2002-03 income year the age based limits are as follows:

    Employee's deduction limit

    Age in years

    Deduction limit

    under 35

    $12,651

    35 to 49

    $35,138

    50 and over*

    $87,141*

    * For contributions made after the 28th day of the month following the employee's 70th birthday, the deduction claimable is limited to the amount of the contribution required:

    1. under a federal, state or territory award, or
    2. to meet the employer's superannuation guarantee obligation on salary or wages paid to the employee before the employee's 70th birthday.

    The employee's age limit is determined at the end of the day on which the last contribution for the income year was made by the employer or associate of the employer 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.

    Completing this part

    Step 1

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

    Step 2

    Write your total non-primary production superannuation contributions at 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-Bad debts

    Did you write off any bad debts in your business?

    No

    Go to part H

    Yes

    Read on

    You need to know

    Include income from the recovery of bad debts in Other business income at I or J in the Income section item P8 on your schedule.

    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 I. They can be shown under expenses at All other expenses then added back under reconciliation items at H Expense 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 on 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.

    Completing this part

    Step 1

    Write your total amount of primary production bad debts at 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 at 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-Lease expenses

    Did you have lease expenses in your business?

    No

    Go to part I

    Yes

    Read on

    You need to know

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

    In some circumstances, lease expenses may be debt deductions for the purposes of the new thin capitalisation rules. For more information see Thin capitalisation.

    Note

    If you include an amount of lease expense which is not allowable as a deduction, such as amounts disallowed under the thin capitalisation rules, you will need to add back the amount at H Expense reconciliation adjustments in the reconciliation items section on your schedule.

    Expenses incurred under a hire purchase agreement are not lease expenses. Such expenses are dealt with in reconciliation items, Part E Reconciliation adjustments in these instructions.

    Special rules apply to leased cars if the cost of the car exceeds the car limit that applies for the financial year in which the lease commences. The car limit for 2002-03 is $57,009. If you lease a car that is subject to the special rules, the reconciliation between the lease expense and the tax treatment is carried out at H Expense reconciliation adjustments item P8 on your schedule. For more information, see Luxury car leasing.

    Records you need to keep

    List the assets 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.

    Completing this part

    Step 1

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

    Step 2

    Write your total non-primary production lease expenses at 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-Rent expenses

    Did you have rent as a business expense?

    No

    Go to part J

    Yes

    Read on

    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.

    Completing this part

    Step 1

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

    Step 2

    Write your total non-primary production rent expenses at 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-Interest expenses within Australia

    Did you incur interest as a business expense on money borrowed within Australia?

    No

    Go to part K

    Yes

    Read on

    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.

    Completing this part

    Step 1

    Write your total primary production interest expenses within Australia at 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 at 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-Interest expenses overseas

    Did you have overseas interest as a business expense?

    No

    Go to part L

    Yes

    Read on

    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.

    In general terms, an amount of withholding tax is required to be withheld from interest paid or payable to non-residents and interest derived by a resident through an overseas branch. These amounts must be sent to the ATO.

    If you paid or credited any interest or amounts in the nature of interest to a non-resident of Australia or to a resident's overseas branch, you will need to provide additional information. Print SCHEDULE OF ADDITIONAL INFORMATION-ITEM 14 on the top of a separate piece of paper. Show the name and address of each recipient, total amounts paid or credited to each non-resident or overseas branch of a resident and the amount of tax withheld. If no tax was withheld, please state the reason for this. Include your name, address and TFN. 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, phone the Small Business Infoline on 13 28 66.

    Note

    If you include an amount of interest expense which is not allowable as a deduction, such as amounts denied by the thin capitalisation rules, you will need to add back the amount at H Expense reconciliation adjustments in the RECONCILIATION ITEMS section on your schedule. For more information see Thin capitalisation.

    Completing this part

    Step 1

    Write your total primary production overseas interest expenses at 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 at 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 Depreciation expenses

    Did you have depreciation as a business expense?

    No

    Go to part M

    Yes

    Read on

    You need to know

    If you did not carry on a business in the year, but in a prior year allocated assets to a general STS pool or long-life STS pool, do not include the STS pool deductions at M. In such a case, show any allowable STS pool deductions at item D15 on your tax return.

    If you are eligible to enter or continue in the STS and have chosen to do so at item S1, read on. Otherwise go to the section on Other businesses.

    STS taxpayers

    You show at M Depreciation expenses item P8 the total depreciation deductions being claimed under the STS depreciation (capital allowance) rules and for the business use of other assets under the uniform capital allowance (UCA) rules. This includes your deduction under the STS depreciation rules for depreciating assets used for work related or self-education purposes. You do not need to complete a Capital allowances schedule 2003.

    STS taxpayers can claim an immediate deduction for depreciating assets costing less than $1,000 (excluding input tax credit entitlements) and pool most of their other depreciating assets. There are two STS pools:

    • a general STS pool for depreciating assets with an effective life of less than 25 years
    • a long-life STS pool for depreciating assets with an effective life of 25 years or more.
     

    Some depreciating assets are excluded from the STS rules but a deduction may be available under the UCA rules. For more information about the STS depreciation rules, refer to the ATO publication The simplified tax system - a guide for tax agents small businesses and  or phone the Small Business Infoline on 13 28 66 or visit the ATO website at www.ato.gov.au

    Calculating depreciation deductions

    Only use calculations 1 to 5 to work out your depreciation deductions if you are eligible to enter or continue in the STS and have chosen to do so at item S1.

    If your accounting system or financial statements provide you with the amounts to complete the table-Depreciation deductions, write these amounts in the table. Otherwise, use calculations 1 to 5 below to calculate your depreciation deductions.

    The amounts you write in the table must be tax and not accounting values.

    Definitions

    Depreciating asset is an asset with a limited effective life which declines in value over that life.

    Decline in value (previously 'depreciation') is the value that an asset loses over its effective life.

    Adjustable value of a depreciating asset is its cost (excluding input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

    Taxable purpose includes for the purpose of producing assessable income.

    Taxable purpose proportion is the extent to which you use the asset for a taxable purpose, such as for the purpose of producing assessable income.

    Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. Exclude the GST component where the amount received is for a taxable supply.

    Assessable balancing adjustmentamount arises where the termination value of the depreciating asset is more than the adjustable value.

    Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.

    Calculation 1 Low-cost assets

    For each depreciating asset you acquired this income year and used or held ready for use this year for the purpose of producing assessable income

    • whose cost at the end of this year is less than $1,000 (excluding input tax credit entitlements), and
    • which qualifies for a deduction under the STS depreciation (capital allowance) rules

    work out the extent it is used for the purpose of producing assessable income (taxable purpose proportion). The deduction for each eligible asset is calculated as follows:

    asset's adjustable value x taxable purpose proportion

    The adjustable value of an asset is its cost less its decline in value since you first used it (or installed it ready for use) for any purpose, including a private purpose. The adjustable value of an asset, at the time you first used it (or held it ready for use) for a taxable purpose, will be its cost, unless you previously used or held the asset solely for private purposes. For example, for a tool set bought on 1 December 2002 at a cost of $800 (excluding input tax credit entitlements) and used for producing assessable income from that date at an estimated 70% of the time, the immediate deduction would be $800 x 70% = $560.

    Add up these results and write the total at (a) in the table below.

    Do not include in this calculation amounts for depreciating assets that you acquired prior to entering the STS and that cost less than $1,000 (excluding input tax credit entitlements). These assets are allocated to the general STS pool (see calculation 2).

    Calculation 2 STS pool deductions

    To calculate your deductions for both the general and long-life STS pools you must first calculate the opening pool balance of each pool.

    If you are entering the STS, allocate each depreciating asset you hold at the start of the income year to the appropriate pool according to the asset's effective life. Only include the taxable purpose proportion of the adjustable value of each depreciating asset. For example, for an asset with an adjustable value of $10,000, which is used only 50% for an income-producing purpose, only $5,000 will be added to the pool.

    You can choose not to allocate an asset to your long-life STS pool if it was first used or installed ready for use for a taxable purpose before 1 July 2001.

    The opening pool balance for each STS pool is calculated by adding the value of all depreciating assets allocated to the relevant pool.

    If you are continuing in the STS, the opening pool balance of each STS pool is the closing pool balance for the 2001-02 income year, except where an adjustment is made to reflect the changed business use of a pooled asset.

    Calculate your deduction for each STS pool as follows:

    General STS pool deduction:

    opening pool balance ($) x 30%

    Long-life STS pool deduction:

    opening pool balance ($) x 5%

    Where necessary make a reasonable apportionment for each STS pool deduction between primary production and non-primary production activities.

    Write the result of your general STS pool deduction at (b) in the table below.

    Write the result of your long-life STS pool deduction at (c) in the table below.

    If either pool balance (after taking into account additions and disposals but before working out the deductions in calculations 2 and 3) is below $1,000, you work out the deduction for the pool using calculation 5(b).

    Calculation 3 Depreciating assets first used for a taxable purpose during the income year and improvements made to assets already allocated to a pool

    You calculate your deduction at half the relevant pool rate for:

    • depreciating assets that you first used or installed ready for use for a taxable purpose during the year
    • improvements made during the year to assets already allocated to an STS pool.

    Calculate your deduction as follows:

    • the taxable purpose proportion of the adjustable value of each depreciating asset first used for a taxable purpose this year x 15% (general STS pool assets) or 2.5% (long-life pool assets) plus
    • the taxable purpose proportion of the cost of the improvement x 15% (general STS pool assets) or 2.5% (long-life pool assets).

    Write the total deduction for general STS pool assets at (d) and the total deduction for long-life STS pool assets at (e) in the table below.

    If either pool balance (after taking into account additions and disposals but before calculating the deductions in calculations 2 and 3) is below $1,000, work out your deduction for these assets using calculation 5(b).

    Calculation 4 Other depreciating assets

    Work out your deduction for the decline in value of all your other depreciating assets that are not included in calculations 1 to 3. See the publication Guide to depreciating assets (NAT 1996-6.2003) for information on how to calculate the decline in value of these assets.

    Write your total deduction at (f) in the table below.

    Do not include at (f) in the table depreciating assets which qualify for a deduction under Subdivision 40-F or 40-G ITAA 1997 as water facilities or landcare operations in your primary production business and for which you have chosen to claim a deduction under those Subdivisions and not the STS rules. Show these deductions at WLandcare operations and business deduction for decline in value of water facility item P8.

    Calculation 5 Disposal of depreciating assets

    (a) Low-cost assets

    If you have disposed of a low-cost asset, for which you have claimed an immediate deduction in calculation 1 this year or in the prior year, include the taxable purpose proportion of the termination value at the reconciliation items section item P8. For example, for a low-cost asset used only 50% for an income-producing purpose which was sold for $200 (excluding GST), only $100 will be assessable and included as a reconciliation adjustment. Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset.

    (b) Assets allocated to STS pools

    Where you dispose of depreciating assets that have been allocated to either the general or long-life STS pools, the taxable purpose proportion of the termination value is deducted from the closing pool balance. For example, for a pooled depreciating asset used only 50% for an income-producing purpose which was sold for $3,000 (excluding GST), only $1,500 will be deducted from the closing pool balance. If the balance of a pool (after taking into account any additions and disposals but before calculating the deductions in calculations 2 and 3) is below $1,000, you can claim an immediate deduction for this amount. Write this deduction against the appropriate pool at (b) or (c) in the table in the next column.

    If the closing pool balance is less than zero, the amount below zero is included in your assessable income at the reconciliation items section item P8. For more information about closing pool balances, see below.

    (c) Other depreciating assets

    See the publication Guide to depreciating assets for information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets. Balancing adjustment amounts are included at the reconciliation items section item p8. Refer to What are reconciliation adjustments?

    Closing pool balance

    The closing balance of each STS pool for an income year is:

    • the opening pool balance (see calculation 2) plus
    • the taxable purpose proportion of the adjustable value of assets that were first used or installed ready for use for a taxable purpose during the year (see calculation 3) plus
    • the taxable purpose proportion of the cost of any improvements made to assets in the pool during the year (see calculation 3) less
    • the taxable purpose proportion of the termination value of any pooled assets disposed of during the year [see calculation 5(b)] less
    • the STS pool deduction (see calculation 2) less
    • the deduction for assets first used by the taxpayer during the year (see calculation 3) less
    • the deduction for the cost of improvements made to the pooled assets during the year (see calculation 3).

    If your closing pool balance is less than zero, see calculation 5(b).

    The closing pool balance for this year becomes the opening pool balance for the 2003-04 income year except where an adjustment is made to reflect the changed business use of a pooled asset.

    You will need your opening pool balance to work out the pool deduction next year. Do not write your closing pool balance on your tax return.

    Depreciation deductions (STS taxpayers only)

     

    Primary production
    ($)

    Non-primary production
    ($)

    Total ($)

    Low-cost assets

       

    (a)

     

    General pool

       

    (b)

     

    Long-life pool

       

    (c)

     

    General pool
    (1/2 rate)

       

    (d)

     

    Long-life pool
    (1/2 rate)

       

    (e)

     

    Other assets

       

    (f)

     

    Depreciation expenses
    [add (a) to (f)]

       

    (g)

     

    Completing this part if you are an STS taxpayer

    Step 1

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

    Step 2

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

    Step 3

    Transfer the amount at (g) in the above table to M Depreciation expenses item P8 on your schedule. Do not show cents.

    Step 4

    Transfer the amount at (a) in the above table to A item P10 STS depreciating assets on your schedule. Do not show cents.

    Step 5

    Transfer the total of the amounts at (b) and (d) in the above table to B item P10 STS depreciating assets on your schedule. Do not show cents.

    Step 6

    Transfer the total of the amounts at (c) and (e) in the above table to C item P10 STS depreciating assets on your schedule. Do not show cents.

    Step 7

    Go to part M below.

    Other businesses

    You need to know

    You show at M Depreciation expenses item P8 the depreciation claimed in your books of account other than for those assets allocated in a prior year to a general STS pool or a long-life STS pool. For assets allocated to such a pool, include at this part the amount of the pool deduction to be claimed for tax purposes. For information about STS depreciation deductions.

    The depreciation amount shown at M should not include profit or loss on the sale of depreciating assets. Profit on the sale of depreciating assets should be included in Other business income at I or J in the INCOME section item P8 on your schedule. Loss on the sale of depreciating assets should be included at P All other expenses in the expenses section.

    Accounting or book depreciation may differ from the deduction for the decline in value of depreciating assets.

    The reconciliation between accounting depreciation and the deduction for decline in value is carried out at H Expense reconciliation adjustments in the reconciliation items section. See the publication Guide to depreciating assets for information on the deduction for decline in value.

    Completing this part

    Step 1

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

    Step 2

    Write your total non-primary production depreciation expenses at 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 greater than $15,000 at M, you will need to complete and attach a Capital allowances schedule 2003 unless you:

    • are eligible to enter or continue in the STS and have chosen to do so at item S1 or
    • have exited from the STS.
     

    For more information, refer to the publication Capital allowances schedule 2003 instructions (NAT 4089-6.2003).

    Part M Motor vehicle expenses

    Did you have motor vehicle expenses in your business?

    No

    Go to part N

    Yes

    Read on

    You need to know

    Questions D1 and D2 in TaxPack 2003 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 item P8 on your schedule.

    Completing this part

    Step 1

    Write your total primary production motor vehicle expenses at 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 at 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 four methods described in question D1 in TaxPack 2003, 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 2003-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 Repairs and maintenance

    Did you have repairs and maintenance as a business expense?

    No

    Go to part O

    Yes

    Read on

    You need to know

    This is expenditure shown in your accounts for repairs and maintenance of premises, plant, machinery, implements, utensils, rolling stock or articles associated with the production of income. Any non-deductible expenditure, such as items of a capital nature or amounts relating to private use of an item, included at this part, should also be included at H Expense reconciliation adjustments in the reconciliation items section item P8 on your schedule. The following information on deductions for repairs will assist you to work out whether you need to make an expense reconciliation adjustment.

    Repairs

    You may deduct the cost of repairs-not being expenditure of a capital nature-to property, plant, machinery or equipment used solely 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.

    Completing this part

    Step 1

    Write your total primary production repairs and maintenance expenses at 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 at 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-All other expenses

    Did you have any other business expenses?

    No

    Go to part P

    Yes

    Read on

    You need to know

    This is the total of all other expenses which 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, office supplies and loss on sale of a depreciating asset as shown in your accounts.

    Capital and other non-deductible items (including debt deductions denied by thin capitalisation rules) shown at this part should also be included at H Expense reconciliation adjustments in the reconciliation items section item P8 on your schedule. See Part E Reconciliation adjustments for more information.

    For more information see Thin capitalisation.

    Home office expenses

    If part of your home is specifically set aside as your place of business and is 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 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.

    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.

    Completing this part

    Step 1

    Write your total other primary production expenses at 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 at 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-Total expenses

    Completing this part

    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, Totals 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-Deduction for environmental protection expenses

    Did you have a business expense for environmental protection activities?

    No

    Go to part B

    Yes

    Read on

    You need to know

    Show at this part the amount of allowable expenditure on environmental protection activities (EPA).

    You can deduct expenditure to the extent that you incur it for the sole or dominant purpose of carrying on EPA. EPA are activities undertaken to prevent, fight or remedy pollution, or to treat, clean up, remove or store waste from your earning activity. Your earning activity is one you carried on, carry on or propose to carry on for the purpose of:

    • producing assessable income (other than a net capital gain)
    • exploration or prospecting, or
    • mining site rehabilitation.

    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:

    • EPA bonds and security deposits
    • expenditure for acquiring land
    • expenditure for constructing or altering buildings, structures or structural improvements
    • expenditure to the extent that you can deduct an amount for it under another provision.

    Accordingly, expenditure which forms part of the cost of a depreciating asset is not deductible as expenditure on EPA if a deduction is available for the decline in value of the asset-see the publication Guide to depreciating assets for information on the deduction for decline in value.

    Expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at the rate of 2.5% per annum under the provisions for capital works expenditure.

    Expenditure on EPA that is also an environmental impact assessment of your project is not deductible as expenditure on EPA. Instead, it will be deductible over the life of the project using a pool-see Business deduction for project pool. 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.

    If the deduction arises from a non-arm's length transaction and the expenditure is more than the market value of what it was for, the amount of the expenditure is instead taken to be that market value.

    Any recoupment of the expenditure would be assessable income.

    Completing this part

    Step 1

    Write your total primary production EPA expenses at Deduction for environmental protection expenses, Primary production column, item P8 on your schedule. Do not show cents

    Step 2

    Write your total non-primary production EPA expenses at Deduction for 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 EPA expenses and write the amount at V item P8 on your schedule.

    Part B-Section 40-880 deduction

    Can you deduct business related costs under section 40-880?

    No

    Go to part C

    Yes

    Read on

    You need to know

    Certain business related costs incurred after 30 June 2001 are deductible over five income years under section 40-880 of ITAA 1997 to the extent that the business is, was or will be carried on to claim a deduction for the following types of business related capital expenditure:

    • costs of establishing your business structure-such as the costs of incorporating a company or creating a trust or partnership through which you will carry on your business
    • costs of converting your business structure to another structure-such as the costs of transferring your business assets to another entity through which you will carry on your business
    • costs of raising equity for your business
    • costs of defending your business against a takeover
    • costs to the business of unsuccessfully attempting a takeover
    • costs of liquidating a company that carried on a business and of which you are a shareholder
    • costs to stop carrying on your business-such as the legal costs of terminating the services of employees when the business ceases.

    Note

    You deduct 20% of the expenditure in the year you incur it and in each of the following four years.

    The deduction cannot be claimed for capital expenditure which:

    can be deducted under another provision

    • forms part of the cost of a depreciating asset or of land
    • relates to a lease
    • would be taken into account in working out a profit or loss
    • would be taken into account when working out the amount of a capital gain or capital loss or
    • is specifically not deductible under the income tax laws-such as a fine.

    If the deduction arises from a non-arm's length transaction and the expenditure is more than the market value of what it was for, the amount of the expenditure is instead taken to be that market value.

    Any recoupment of the expenditure must be shown as assessable income, either at Other business income or as part of your Income reconciliation adjustments in reconciliation items item P8 on your schedule.

    Claim the amount deductible under section 40-880 at this part where you carried on a business as an individual at any time during the year. If you stopped carrying on business as an individual in the prior year and you have not fully claimed your five-year write-off under section 40-880, claim the amount deductible this year at D15 on your tax return.

    Completing this part

    Step 1

    Write your deduction for primary production business related costs at Section 40-880 deduction, Primary production column, item P8 on your schedule. Do not show cents.

    Step 2

    Write your deduction for non-primary production business related costs at Section 40-880 deduction, Non-primary production column, item P8 on your schedule. Do not show cents.

    Step 3

    Add up your primary production and non-primary production deductions for business related costs and write the total amount at A item P8 on your schedule.

    Part C-Business deduction for project pool

    Did you have capital expenditure directly connected with a business project?

    No

    Go to part D

    Yes

    Read on

    You need to know

    Certain capital expenditure you incurred after 30 June 2001 which is directly connected with a project you carry on or propose to carry on for a taxable purpose can be written off over the life of the project using a pool.

    Such capital expenditure, known as a project amount, is expenditure incurred on:

    • creating or upgrading community infrastructure associated with the project-this expenditure must be paid (not just incurred) to be a project amount
    • site preparation for depreciating assets (other than to drain swamp or low-lying land or to clear land for horticultural plants and grapevines)
    • feasibility studies for the project
    • environmental assessments for the project
    • obtaining information associated with the project
    • seeking to obtain a right to intellectual property
    • ornamental trees or shrubs.

    Project amounts also include mining capital expenditure and expenditure on certain facilities used to transport minerals or quarry materials. For more information on these project amounts, refer to the publication Guide to depreciating assets.

    The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset.

    Project amounts incurred are allocated to what is known as a 'project pool'. If you began to operate a project to produce assessable business income in 2002-03, your business deduction for a project pool starts in 2002-03. The deduction is worked out on the value of the project pool at the end of 2002-03. Use the Worksheet below to work out your deduction.

    Worksheet

    Value of project pool at 30 June 2003. This is the closing pool value for the 2001-02 income year (if any) plus the sum of the project amounts you allocated to the pool in 2002-03.

    (a)

    $

    Your estimate of the life of the project
    (in years)

    (b)

    $                        years

    Divide (a) by (b).

    (c)

    $

    Multiply (c) by 150%-this is your 2002-03 deduction for project pool.

    (d)

    $

    Note

    Your deduction at (d) must not be more than the amount at (a).

    If a project operated in 2002-03 for purposes other than earning assessable business income, your deduction at (d) must be reduced by a reasonable amount for the extent to which the project operated for such purposes.

    Note-Closing pool value for 2002-03

    This is amount (a) less amount (d) in the worksheet. You will need the closing pool value for 2002-03 to work out your deduction for project pool next year.

    Any recoupment of the expenditure must be shown as assessable income either at Other business income or as part of your Income reconciliation adjustments in reconciliation items item P8 on your schedule.

    Where a project is abandoned, sold or otherwise disposed of in 2002-03

    In this case-whether or not the project had begun to operate-you can claim a deduction for the value of the project pool at that time. Any proceeds from the abandonment, sale or disposal of the project must be shown as assessable income either at Other business income or as part of your Income reconciliation adjustments in reconciliation items item P8 on your schedule.

    Note

    To the extent that the deduction is for amounts directly connected to a project you carry on in carrying on a business, show the amount at L. To the extent that the deduction is for amounts directly connected to a project you carry on other than in carrying on a business, show the deduction at item D14 on your tax return.

    Completing this part

    Step 1

    Write your total primary production project pool business deduction at Business deduction for project pool, Primary production column, item P8 on your schedule. Do not show cents.

    Step 2

    Write your total non-primary production project pool business deduction at Business deduction for project pool, Non-primary production column, item P8 on your schedule. Do not show cents.

    Step 3

    Add up your primary production and non-primary production project pool business deductions and write the total amount at L item P8 on your schedule.

    Note

    If you have included an amount greater than $1,000 at L, you will need to complete and attach a Capital allowances schedule 2003 unless you are eligible to enter or continue in the STS and have chosen to do so at item S1. For more information, refer to the publication Capital allowances schedule 2003 instructions.

    Part D-Landcare operations and business deduction for decline in value of water facility

    Did you have landcare operations and/ or water conservation/ conveying expenses?

    No

    Go to part E

    Yes

    Read on

    You need to know

    Landcare operations expenses

    Landcare operations expenses cover what were previously known as land degradation measures. You can claim a deduction in the year you incur capital expenditure on a landcare operation for land in Australia.

    The deduction is available where the land is 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.

    You must reduce your deduction to the extent you do not use the land wholly for either of these purposes.

    A landcare operation is one of the following operations:

    • eradicating or exterminating animal pests from the land
    • eradicating, exterminating or destroying plant growth detrimental to the land
    • preventing or combating land degradation other than by the use of fences
    • erecting fences to keep out animals 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 a levee or similar improvements
    • constructing drainage works-other than the draining of swamps or low-lying areas-to control salinity or assist in drainage control.

    No deduction is available if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements.

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

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

    Any recoupment of the expenditure must be shown as assessable income either at Other business income or as part of your Income reconciliation adjustments in Reconciliation items, item P8 on your schedule. Phone the Small Business Infoline on 13 28 66 for further information.

    Landcare operations expenses incurred in a partnership are allocated to each partner and deducted from the partner's income.

    Water conservation and conveyance facilities

    A deduction for the decline in value of a water facility is allowable. A water facility is plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water. The expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business on land in Australia.

    The deduction can be claimed in equal instalments over three years.

    Items which can be deducted 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.

    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 is reduced where the facility is not wholly used for either:

    • carrying on a primary production business on land in Australia, or
    • a taxable purpose-for example, producing assessable income.

    Any recoupment of the expenditure would be assessable income. Phone the Small Business Infoline on 13 28 66 for further information.

    Costs incurred in a partnership for facilities to conserve or convey water are allocated to each partner and deducted from the partner's income.

    Note

    For STS taxpayers the amount to show at W should not include any amount relating to a depreciating asset used in your primary production business if you have chosen to claim a deduction for it under the STS depreciation rules.

    Completing this part

    Step 1

    Write your total deductions for primary production landcare operations expenses and for water facilities at Landcare operations and business deduction for decline in value of water facility, Primary production column, item P8 on your schedule. Do not show cents.

    Step 2

    Write your total deduction for non-primary production landcare operations expenses at Landcare operations and business deduction for decline in value of water facility, Non-primary production column, item P8 on your schedule. Do not show cents.

    Step 3

    Add up your primary production and non-primary production deductions for landcare operations and water facilities and write the total amount at W item P8 on your schedule.

    Part E-Reconciliation adjustments

    Do you need to make any reconciliation adjustments?

    No

    Go to part F

    Yes

    Read on

    You need to know

    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 business deduction for decline in value of water facility, 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 or non-deductible expenses at these labels, or have not included amounts which are assessable income or expenditure that is deductible, you must work out your reconciliation adjustments.

    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 amounts on disposal of depreciating 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:
    1. profit on sale of depreciating assets
    2. other income that is not assessable for income tax purposes-for example, gross exempt income.

    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 Reconciliation statement will assist you with your calculations.

    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 amount is negative, print L in the box at the right of the amount.

    Expense reconciliation adjustments include:

    • expense add backs-expenses shown in the accounts which are not tax deductible, including timing deductions, such as:
    1. prepaid expenses not deductible in this year
    2. depreciation
    3. loss on sale of a depreciating asset
    4. other items not allowable as a deduction-for example, capital expenditure, additions to provisions and reserves, income tax expense, expenses relating to exempt income, debt deduction denied by the thin capitalisation rules, other non-deductible expenses

    (For more information seeThin capitalisation)

    • expense subtractions-items not shown as expenses which are deductible for tax purposes, such as:
    1. prepaid expenses deductible this year but not included at any other label
    2. deduction for decline in value of depreciating assets
    3. deductible balancing adjustment amounts on disposal of depreciating assets
    4. other items deductible for tax purposes.

    You need to subtract the total of items 9, 10, 11 and 12 from the total of items 5, 6, 7 and 8 to work out the net expense reconciliation adjustment. The amount calculated is written at H item P8 on your schedule. The Reconciliation statement will assist you with your calculations.

    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 amount is negative, print L in the box at the right of the amount.

    Read on for examples of specific reconciliation adjustments that may apply to you. TheReconciliation statement will assist you with your calculations.

    If you are eligible to enter or continue in the STS and have chosen to do so at item S1, read on. Otherwise go to Specific reconciliation adjustments below

    STS taxpayers

    STS taxpayers must use the STS accounting method. This accounting method recognises most business income when received and most business expenses only when paid. More information about the STS accounting method .

    You will need to make adjustments at this section of item P8 on your schedule if:

    • the amounts you have shown at the INCOME and EXPENSE sections of item P8 are not based on the STS accounting method
    • your accounting method has not taken into account adjustments necessary when you enter the STS, or
    • you have disposed of depreciating assets during the year.

    These adjustments are explained in more detail below. The Reconciliation statement will assist you with your calculations.

    Trade debtors and creditors as at 30 June 2003

    If you have included at item P8 amounts of ordinary income that have been derived but not received in 2002-03, the amounts not received are not assessable under the STS rules this year.

    These amounts form part of your Income reconciliation adjustments at X item P8. Include these amounts at (f) on the Reconciliation statement.

    If you have included at item P8 amounts for general deductions, repairs and tax-related expenses that have been incurred but not paid in 2002-03, the amounts not paid are not deductible under the STS rules this year.

    These amounts form part of your Expense reconciliation adjustments at H item P8. Include these amounts at (n) on the Reconciliation statement.

    Adjustments when entering the STS

    If you have included at item P8 amounts of ordinary income received in 2002-03 that have been included in a previous year's assessable income, these amounts are not assessable again under the STS rules (for example, debtors as at 30 June 2002).

    These amounts form part of your Income reconciliation adjustments at X item P8. Include these amounts at (f) on the Reconciliation statement.

    If you have included at item P8 amounts paid in 2002-03 for general deductions including repairs and tax-related expenses that have been deducted in a previous year, these amounts are not deducted again under the STS rules (for example, creditors as at 30 June 2002).

    These amounts form part of your Expense reconciliation adjustments at H item P8. Include these amounts at (n) on the Reconciliation statement

    Disposal of depreciating assets

    If you disposed of any depreciating assets during the income year, the following amounts (if any) form part of your Income reconciliation adjustments at X Item P8:

    • taxable purpose proportion of the termination value of low-cost assets disposed of for which an immediate deduction has been claimed
    • if the closing pool balance of the STS pool is less than zero, the amount below zero
    • assessable balancing adjustment amounts on the disposal of depreciating assets not allocated to STS pools.

    Include the amounts at (b) on the Reconciliation statement.

    Any deductible balancing adjustment amounts on the disposal of depreciating assets that you have not allocated to STS pools form part of your Expense reconciliation adjustments at H item P8. Include these amounts at (q) on the Reconciliation statement.

    For more information on assessable balancing adjustment amounts and deductible balancing adjustment amounts, see the publication Guide to depreciating assets.

    Definitions

    Depreciating asset is an asset with a limited effective life which declines in value over that life.

    Decline in value (previously 'depreciation') is the value that an asset loses over its effective life.

    Adjustable value of a depreciating asset is its cost (excluding input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

    Taxable purpose includes for the purpose of producing assessable income.

    Taxable purpose proportion is the extent to which you use the asset for a taxable purpose, such as for the purpose of producing assessable income.

    Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. Exclude the GST component where the amount received is for a taxable supply.

    Assessable balancing adjustmentamount arises where the termination value of the depreciating asset is more than the adjustable value.

    Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.

    Read on to determine if you need to make any further reconciliation adjustments.

    Specific reconciliation adjustments

    The following are examples of specific reconciliation adjustments that may apply to you.

    Exiting from the STS this year

    If you have exited from the STS and have not included at any income labels at item P8 amounts of ordinary income that were derived but not received whilst in the STS, these amounts are assessable in this year-for example, debtors as at 30 June 2002.

    Include these amounts at (b) on the Reconciliation statement.

    If you have exited from the STS and have not included at any deduction labels at item P8, amounts of general deductions including repairs and tax-related expenses that have been incurred but not paid whilst in the STS, these amounts are deductible this year-for example, creditors as at 30 June 2002.

    Include these amounts (other than tax-related expenses) at (t) on the Reconciliation statement. Show your deduction for tax-related expenses at D10 on your tax return.

    Prepaid expenses

    Special rules may affect the timing of deductions for prepaid expenditure. Under these rules you may need to apportion certain prepaid expenses over more than one income year. You must make an expense reconciliation adjustment to add back that part of the expense that is not deductible in the year it is incurred. Show the adjustment at (k) on the Reconciliation statement.

    If you had a prepaid expense in a prior year which is to be apportioned over the service period and you are entitled to a deduction for part of the expense this year but have not included it at any other label, show the adjustment as an expense subtraction at (s) on the Reconciliation statement. For further information about the prepayment rules, see the publication Deductions for prepaid expenses.

    Deduction for decline in value (non-STS taxpayers only)

    A deduction for a decline in value of a depreciating asset calculated under the income tax law may differ from the accounting or book calculation of depreciation. Different rules regarding such things as effective life, the calculation of balancing adjustment amounts and the treatment of debt forgiveness amounts can produce a discrepancy between the two calculations.

    Under the income tax law you can deduct an amount equal to the decline in value of a depreciating asset in the 2002-03 income year if you held the depreciating asset for any time during the year and used it (or installed it ready for use) for a taxable purpose, such as for producing assessable income.

    The deduction is reduced to the extent the asset is not used for a taxable purpose.

    To assist you in calculating your deduction for decline in value you should refer to the publication Guide to depreciating assets. This publication also provides explanations of relevant terms. The guide also explains the option to allocate to a low-value pool depreciating assets that cost less than $1,000 (excluding input tax credit entitlements) and depreciating assets that have an opening adjustable value of less than $1,000.

    If you choose to use the low-value pool method to calculate the decline in value of low-cost or low-value depreciating assets and the pool contains assets used for work related, self-education or rental purposes, read question D6 in TaxPack 2003. Do not include the deduction at item P8 on your schedule. If none of the depreciating assets in the pool is used for any of those purposes, include the amount of your low-value pool deduction at (r) on the Reconciliation statement. Where necessary, make a reasonable apportionment between primary production and non-primary production activities.

    The deduction for decline in value of depreciating assets not allocated to a pool should also be included at (r) on the Reconciliation statement.

    The depreciation charged in your accounts and shown at M Depreciation expenses in the Expenses section item P8 should be added back as an expense reconciliation adjustment. Include the amount at (h) on the Reconciliation statement. The amount at (h) should not include any STS pool deductions which you have claimed at M.

    Luxury car leasing

    A leased car, either new or second hand, is a luxury car if its cost exceeds the car limit that applies for the financial year in which the lease commences. The car limit for 2002-03 is $57,009.

    Luxury car leases entered into after 7.30pm (by legal time in the Australian Capital Territory) on 20 August 1996 (other than genuine short-term hire arrangements) are treated as a notional sale and loan transaction.

    The cost or value of the car specified in the lease (or the market value if the parties were not dealing at arm's length in connection with the lease) is taken to be the cost of the car for the lessee and the amount loaned by the lessor to the lessee to buy the car.

    In relation to the notional loan, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component for the notional loan applicable for the particular period (the accrual amount) is deductible to the lessee subject to any reduction required under the thin capitalisation rules.

    The amount forms part of your Expense reconciliation adjustments at H item P8 on your schedule. Include the amount at (p) on the Reconciliation statement.

    In relation to the notional sale, the lessee is treated as the holder of the luxury car and may be entitled to claim a deduction for the decline in value of the car. If the lessee is an STS taxpayer for the income year in which the lease is entered into, the lessee allocates the car to its general STS pool.

    For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the financial year in which the lease is granted. For more information on deductions for the decline in value of leased luxury cars, refer to the publication Guide to depreciating assets.

    In summary, the lessee is entitled to deductions equal to:

    • the accrual amount, and
    • the decline in value of the luxury car, based on the applicable car limit, unless the car is allocated to the general STS pool.

    Both deductions are reduced to reflect any use of the car for other than a taxable purpose.

    Where the car is allocated to the general STS pool with the cost based on the applicable car limit, see below to calculate the deduction under the STS depreciation rules.

    If you have included the lease expense at J Lease expenses in the Expenses section item P8 in your schedule, the amount should also form part of your Expense reconciliation adjustments at H item P8. Include the amount at (i) on the Reconciliation statement. Include the deduction for the accrual amount at (p) on the Reconciliation statement.

    If the lease terminates or is not extended or renewed and the lessee does not actually acquire the car from the lessor, the lessee is treated under the rules as disposing of the car by way of sale to the lessor. This constitutes a balancing adjustment event. If the car is not subject to the STS rules, any assessable or deductible balancing adjustment amount for the lessee must be determined. If the car has been allocated to the lessee's general STS pool, see Calculation 5 Disposal of depreciating assets for STS taxpayers.

    Hire purchase agreements

    Hire purchase and instalment sale agreements of goods are treated as a sale of the property by the financier (or hire purchase company) to the hirer (or instalment purchaser).

    The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or value or the property's arm's length value.

    The periodic hire purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The interest component is deductible to the hirer, subject to any reduction required under the thin capitalisation rules. This amount forms part of the Expense reconciliation adjustments at H item P8 on your schedule. Include the amount at (t) on the Reconciliation statement.

    In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and either allocates the asset to the appropriate STS pool, if an STS taxpayer for the income year, or may be entitled to claim a deduction for the decline in value of the depreciating asset. The cost of the asset for this purpose is taken to be the agreed cost or value, or the arm's length value if the dealing is not at arm's length.

    If you have included hire purchase charges at an expenses label in item P8 on your schedule, the amount should also form part of your Expense reconciliation adjustments at H item P8. Include the amount at (n) on the Reconciliation statement.

    Termination of a limited recourse debt

    Excessive deductions for capital allowances are to be included in assessable income where expenditure on property has been financed or refinanced wholly or partly by limited recourse debt.

    This will occur where:

    • the limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor
    • because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the taxpayer. Special rules apply in working out whether the debt has been fully paid.

    Limited recourse debt is a debt where the rights of the creditor against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to the property that has been financed by the debt, or is security for the debt, or rights in relation to such property.

    A debt is also a limited recourse debt if notwithstanding that there may be no specific conditions to that effect, it is reasonable to conclude that the creditor's rights against the debtor are capable of being limited in that way. Limited recourse debt includes a notional loan under a hire purchase agreement.

    The amount that is included within assessable income as a result of these provisions forms part of your Income reconciliation adjustments at X item P8 on your schedule. Include the amount at (b) on the Reconciliation statement.

    Reconciliation statement

    The Reconciliation statement below refers to Assessable balancing adjustment amounts on disposal of depreciating assets, Deduction for decline in value of depreciating assets and Deductible balancing adjustment amounts on disposal of depreciating assets. All these terms are explained in the publication Guide to depreciating assets.

    Completing this part

    Step 1

    Fill in the Reconciliation statement.

    Step 2

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

    Step 3

    If either of the total primary production reconciliation adjustments is a negative amount, print L in the box at the right of the amount.

    Step 4

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

    Step 5

    If either of the total non-primary production reconciliation adjustments is a negative amount, print L in the box at the right of the amount.

    Step 6

    Add up your primary production and non-primary production Income reconciliation adjustments and write the total amount at X item P8 on your schedule.

    Step 7

    Add up your primary production and non-primary production Expense reconciliation adjustments and write the total amount at H item P8 on your schedule.

    Step 8

    If either of the total reconciliation adjustments is a negative amount, print L in the box at the right of the amount at X or H item P8 on your schedule.

    In the Reconciliation statement do not include in the amount at (t):

    • environmental protection expenditure
    • section 40-880 deductions
    • business deductions for project pools
    • deductions for landcare operations and water facilities.

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

    Reconciliation statement

    A separate reconciliation should be done for primary production and for non-primary production items.

    Income reconciliation adjustments

    Primary production

    Non-primary production

    Additions

    Assessable balancing adjustment amounts on disposal of depreciating assets

    (a)

    $

    $

    Assessable business income not included in the profit and loss statement

    (b)

    $

    $

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

    (c)

    $

    $

    Subtractions

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

    (d)

    $

    $

    Profit on sale of depreciating assets included in accounts

    (e)

    $

    $

    Other non-assessable income included in the profit and loss statement

    (f)

    $

    $

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

    (g)

    $

    $

    Income reconciliation adjustment-take (g) away from (c)

    $        /

    $        /

    Expense reconciliation adjustments

    Primary production

    Non-primary production

    Additions

    Depreciation charged in accounts (non-STS taxpayers only)

    (h)

    $

    $

    Lease payments for luxury cars

    (i)

    $

    $

    Loss on sale of depreciating assets included in accounts

    (j)

    $

    $

    Part of prepaid expenses not deductible this year

    (k)

    $

    $

    Items not allowable as deductions:

    • capital expenditure
     

    (l)

    $

    $

    • -additions to provisions and reserves
     

    (m)

    $

    $

    • -other non-deductible items, including income tax
     

    (n)

    $

    $

    Subtotal-add all amounts from (h) to (n)

    (o)

    $

    $

    Subtractions

    Accrual amount deduction for lessee of luxury cars

    (p)

    $

    $

    Deductible balancing adjustment amounts on disposal of depreciating assets

    (q)

    $

    $

    Deduction for decline in value of depreciating assets (non-STS taxpayers only)

    (r)

    $

    $

    Part of prepaid expenses deductible this year but not included at any other label

    (s)

    $

    $

    Other items deductible for tax purposes not included in the profit and loss statement

    (t)

    $

    $

    Subtotal-add all amounts from (p) to (t)

    (u)

    $

    $

    Expense reconciliation adjustment-take (u) away from (o)

    $        /

    $        /

    *only include amounts at (h) if you are not an STS taxpayer. However, exclude any STS pool deductions which you have included at M item P8.

    Part F-Net income or loss from business this year

    Working out your net income or loss from business this year, not including any non-commercial business losses deferred from a prior year

    Completing this part

    Step 1

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

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

    Write your primary production total business income shown at TOTAL BUSINESS INCOME, Primary production column, item P8.

    (a)

    $

    /

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

    (b)

    $

    /

    Total the amounts of any drought investment allowance and deductions for primary production environmental protection expenses, section 40-880 expenditure, project pool and landcare operations and water facilities.

    (c)

    $

    /

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

    (d)

    $

    /

    Take the amount at (d) from the amount at (a).

    (e)

    $

    /

    Add:

    • any primary production income reconciliation adjustment and
     

    (f)

    $

    /

    • any primary production expense reconciliation adjustment

    to the amount at (e).

    (g)

    $

    /

    This is your net income or loss from primary production business.

    (h)

    $

    /

    Note:If the amount at (d) is more than the amount at (a), the amount at (e) is a loss. If it is, or if you have a negative amount at (f) or (g), the examples given will help you to work out your loss from primary production business.

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

    Write your non-primary production total business income shown at TOTAL BUSINESS INCOME, Non-primary production column, item P8.

    (i)

    $

    /

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

    (j)

    $

    /

    Total the amounts of any deductions for non-primary production environmental protection expenses, section 40-880 expenditure, project pool and landcare operations.

    (k)

    $

    /

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

    (l)

    $

    /

    Take the amount at (l) from the amount at (i).

    (m)

    $

    /

    Add:

    • any non-primary production income reconciliation adjustment and
     

    (n)

    $

    /

    • any non-primary production expense reconciliation adjustment

    to the amount at (m).

    (o)

    $

    /

    This is your net income or loss from non-primary production business.

    (p)

    $

    /

    Note:If the amount at (l) is more than the amount at (i), the amount at (m) is a loss. If the amount at (m) is a loss, or if you have a negative amount at (n) or (o), the examples given will help you to work out your loss from non-primary production business.

    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 $5,000 profit, the amount at (f) is $2,000 income and the amount at (g) is a $8,000 loss, the loss from the primary production business is $1,000 (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 loss from the non-primary production business is $10,000 (p).

    Step 2

    Write the amount of your net income or loss from your primary production business at B item P8 on your schedule. Do not show cents. If you made a 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 C item P8 on your schedule. Do not show cents. If you made a loss from non-primary production business, print L in the 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 THIS YEAR, item P8 on your schedule. The amount shown should not include any non-commercial business losses deferred from a prior year (which are shown at D or E-see part G below).

    If you made a loss from your business, print L in the box at the right of this amount.

    If the amount at B or C includes details from more than one business activity, and any one of these activities resulted in a net loss, you also need to complete items P3 and P9 on your schedule.

    Part G-Deferred non-commercial business losses from a prior year

    Do you have any deferred non-commercial business losses from a prior year?

    No

    Go to part H

    Yes

    Read on.

    You need to know

    A deferred non-commercial business loss is a loss you incurred in a prior year which you were unable to claim against other income.

    Question 15 in TaxPack 2003 supplement explains how the non-commercial business loss rules work.

    Note

    The non-commercial business loss may be reduced if:

    • you earned net exempt income in this income year, or
    • you have become bankrupt or are released from any debts by the operation of an Act relating to bankruptcy.
     

    Phone the Tax Reform Infoline on 13 24 78 for more information. For an explanation of net exempt income, see question L1 in TaxPack 2003.

    Completing this part

    Step 1

    Write the amount of any primary production losses you deferred in a prior year from activities that are the same or similar to your current year activity at D item P8 on your schedule. Do not show cents.

    Step 2

    Write the amount of any non-primary production losses you deferred in a prior year from activities that are the same or similar to your current year activity at E item P8 on your schedule. Do not show cents.

    Step 3

    Add up the amount of primary and non-primary production deferred non-commercial business losses and write the total amount at Deferred non-commercial business losses from a prior year, Totals column, item P8.

    Part H-Net income or loss from business, including losses deferred from a prior year

    Completing this part

    Step 1

    If you have net income from primary production business this year at B, take away the amount of your deferred non-commercial primary production business losses from a prior year shown at D. Write this amount at Y item P8 on your schedule. This is your total net income or loss from your primary production business.

    Where Y is a negative amount, print L in the box at the right of the amount.

    If you have a loss from primary production business this year at B, add it to the amount of your deferred non-commercial primary production business losses from a prior year shown at D. Write the amount at Y item P8 on your schedule and print L in the box at the right of the amount. This is your total net loss from your primary production business.

    Note

    If you have printed L in the box at the right of the amount at Y, you also need to complete items P3 and P9 on your schedule.

    Step 2

    If you have net income from non-primary production business this year at C, take away the amount of your deferred non-commercial non-primary production business losses from a prior year shown at E. Write this amount at Z item P8 on your schedule. This is your total net income or loss from your non-primary production business.

    Where Z is a negative amount, print L in the box at the right of the amount.

    If you have a loss from non-primary production business this year at C, add it to the amount of your deferred non-commercial non-primary production business losses from a prior year shown at E. Write the amount at Z item P8 on your schedule and print L in the box at the right of the amount. This is your total net loss from your non-primary production business.

    Note

    If you have printed L in the box at the right of the amount at Z, you also need to complete items P3 and P9 on your schedule.

    Step 3

    Add up the total net income or loss shown at Y and Z.

    Write this amount at NET INCOME OR LOSS FROM BUSINESS, Totals column, item P8 on your schedule. Where the total is a negative amount, print L in the box at the right of the amount.

    Step 4

    Transfer the amounts at Y and Z on your schedule to B and C item 14 on your tax return respectively

    Last modified: 16 Jun 2006QC 27476