Part E: Reconciliation adjustments

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

Do you need to make any reconciliation adjustments?

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
  • assessable balancing adjustment amounts on disposal of depreciating assets
  • 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
  • profit on sale of depreciating assets
  • 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
  • prepaid expenses not deductible in this year
  • depreciation
  • loss on sale of a depreciating asset
  • 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.
   
• expense subtractions – items not shown as expenses which are deductible for tax purposes, such as
  • prepaid expenses deductible this year but not included at any other label
  • deduction for decline in value of depreciating assets
  • deductible balancing adjustment amounts on disposal of depreciating assets
  • 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. The Reconciliation 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.

Reconciliation adjustments for 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 is available above.

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 2004

If you have included at item P8 amounts of ordinary income that have been derived but not received in 2003–04, 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 2003–04, 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 2003–04 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 2003).

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 2003–04 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 2003).

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.

See Definitions for an explanation of these terms.

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 2003–04 (NAT 1996–6.2004).

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 the purpose of producing assessable income.

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

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

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

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

Read the next section 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 2003.

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 2003.

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 2003–04 (NAT 4170).

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 2003–04 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 2003–04 (NAT 1996–6.2004). 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 2004. 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 2003–04 is $57,009.

Luxury car leases entered into after 7.30pm (by legal time in the ACT) 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 2003–04 (NAT 1996–6.2004).

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 above 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 they are 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 exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure. 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.