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  • 7. Reconciliation to taxable income or loss

    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 items under this heading are the adjustments for tax purposes to reconcile the amount at T Total profit or loss item 6 with T Taxable income or loss item 7. Worksheet 2 will assist with the calculations.

    Former STS Taxpayers

    If the company is eligible and is continuing to use the STS (simplified tax system) accounting method, the following might apply.

    You might need to make additional adjustments at item 7 if:

    • the company is using the STS accounting method and the amounts the company has written at the Income and Expenses sections of item 6 Calculation of total profit or loss are not based on the STS accounting method, or
    • the company stops using the STS accounting method.

    These adjustments are explained in more detail below. Worksheet 2 will help with the calculations.

    Trade debtors and creditors as at 30 June 2016

    If the company is eligible and has chosen to continue using the STS accounting method, and has included at any labels at Income item 6 amounts of ordinary income that have been derived but not received in the 2015–16 income year, (for example, trade debtors as at 30 June 2016), the amounts not received are not assessable this year.

    Include these amounts at Q Other income not included in assessable income item 7.

    If the company is eligible and has chosen to continue using the STS accounting method and has included at any labels at Expenses item 6 amounts of general deductions, repairs or tax-related expenses that have been incurred but not paid in the 2015–16 income year, (for example, trade creditors as at 30 June 2016), the amounts not paid are not deductible this year.

    Include these amounts at W Non-deductible expenses item 7.

    Ceasing to use the STS accounting method

    You may need to make adjustments if the company has stopped using the STS accounting method and changed to an accruals accounting method this year.

    If you have not included anywhere at Income item 6 amounts of ordinary income that the company derived but did not receive while using the STS accounting method (for example, trade debtors as at 30 June 2016), these amounts are assessable this year.

    Include these amounts at B Other assessable income item 7.

    If you have not included anywhere at Expenses item 6 amounts of general deductions, repairs or tax-related expenses that the company incurred but not paid while using the STS accounting method, (for example, trade creditors as at 30 June 2016), these amounts are deductible this year.

    Include these amounts at X Other deductible expenses item 7.

    Worksheet 2 will help with the calculations.

    Other reconciliation adjustments

    Disposal of depreciating assets

    If the company has disposed of depreciating assets during the income year, include the following amounts (if any) at B Other assessable income item 7:

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

    Include at X Other deductible expenses item 7 any deductible balancing adjustment amounts on the disposal of depreciating assets not deducted under the small business entity depreciation rules.

    Include at Q Other income not included in assessable income item 7 any profit on sale of depreciating assets included at Income, R Other gross income item 6.

    Include at W Non-deductible expenses item 7 any loss on sale of depreciating assets included at Expenses, S All other expenses item 6. See worksheet 2.

    Prepaid expenses

    Generally, prepaid expenses are deductible over the eligible service period or 10 years whichever is less.

    Broadly, the eligible service period is the period during which the thing is to be done under the agreement in return for the expenditure.

    Small business entities are entitled to an immediate deduction for prepaid expenses if the expenditure is incurred for a period of service not exceeding 12 months and the eligible service period ends on or before the last day of the next year of income (the 12-month rule). If the 12-month rule does not apply, apportion the deduction for the expenditure over the eligible service period or 10 years, whichever is less. The immediate deduction under the 12-month rule does not apply to expenditure incurred under a tax shelter agreement.

    If you are an early balancer and on a date that was both before 1 July 2016 and falls within your 2015–16 income year you incurred expenditure under a forestry management agreement, phone us on 13 28 66 for further assistance.

    See Deductions for prepaid expenses 2016 for more information. If the labels at Expenses item 6 include prepaid expenses that differ from the amounts allowable as deductions in the 2015–16 income year, include the reconciliation adjustment at W Non-deductible expenses item 7 or X Other deductible expenses item 7 as required. See worksheet 2.

    G - Did you have a CGT event during the year?

    If the company had a CGT event (explained in more detail below) during the income year, or had a capital gain amount from a trust, print X in the Yes box at G item 7. Otherwise print X in the No box.

    CGT events are the different types of transactions or events that may result in a capital gain or capital loss. Many CGT events involve a CGT asset (for example, the disposal of a CGT asset) while other CGT events relate directly to capital receipts.

    An Australian resident company makes a capital gain or capital loss if a CGT event happens to any of its worldwide CGT assets. Foreign residents are only subject to CGT if a CGT event happens to assets that have the necessary connection with Australia if the CGT event happens before 12 December 2006 or that are taxable Australian property if the CGT event happens on or after that date. For more information, see the Guide to capital gains tax 2016.

    If the company ceases to hold or to use a depreciating asset that was used for both taxable and non-taxable purposes, a CGT event may happen to the asset. A capital gain or capital loss may arise to the extent that the asset was used for a non-taxable purpose.

    For more information about CGT events, see the Guide to capital gains tax 2016. This includes:

    • a capital gain or capital loss worksheet for calculating a capital gain or capital loss for each CGT event
    • a CGT summary worksheet for calculating the company’s net capital gain or capital loss
    • a CGT schedule.

    The worksheets help in calculating a company’s net capital gain or capital loss for the income year and completing the tax return labels that relate to CGT. Completion of the worksheets is not mandatory. Do not attach them to the company tax return, keep them with the company’s tax records.

    However, if the company has:

    • total current year capital gains greater than $10,000, or
    • total current year capital losses greater than $10,000

    complete a Capital gains tax (CGT) schedule 2016 and attach it to the company tax return.

    Information for consolidated and multiple entry consolidated (MEC) groups

    Transfers of assets between members of the same consolidated or MEC group are not recognised for the head company’s income tax purposes.

    End of example

    M - Have you applied an exemption or roll-over?

    If you have disregarded or deferred a capital gain or capital loss because your entity is eligible to apply a CGT exemption or roll-over, print X in the Yes box at M item 7. If you are required to lodge a CGT schedule, you may need to provide details of certain CGT exemptions and roll-overs.

    If you answered yes at M, print in the code box the code(s), from the list below, for the CGT exemption(s) and roll-over(s) you or your entity has applied to disregard or defer a capital gain. Choose the most specific roll-over and exemption that applies, such as Scrip for scrip roll-over (Subdivision 124-M), before you choose a more general roll-over and exemption, such as Replacement asset roll-overs (Division 124). If you have applied more than one CGT exemption or roll-over, select all of the codes that apply. If you are lodging by paper, write the code that represents the CGT exemption or roll-over that deferred or disregarded the largest amount of capital gain.

    Table 4: CGT exemptions or roll-over code

    Code

    Type

    A

    Small business active asset reduction

    B

    Small business retirement exemption

    C

    Small business roll-over (Subdivision 152-E)

    D

    Small business 15-year exemption (Subdivision152-B)

    E

    Foreign resident CGT exemption (Division 855)

    F

    Scrip for scrip roll-over (Subdivision 124-M)

    G

    Inter-company roll-over (Subdivision 126-B)

    H

    Demerger exemption (Subdivision 125-C)

    J

    Capital gains disregarded as a result of the sale of a pre-CGT asset

    K

    Disposal of assets to, or creation of assets in, a wholly-owned company (Division 122)

    L

    Replacement asset roll-overs (Division 124)

    M

    Exchange of shares or units (Subdivision 124-E)

    N

    Exchange of rights or options (Subdivision 124-F)

    O

    Exchange of shares in one company for shares in another company (Division 615)

    P

    Exchange of units in a unit trust for shares in a company (Division 615)

    Q

    Disposal of assets by a trust to a company (Subdivision 124-N)

    R

    Demerger roll-over (Subdivision 125-B)

    S

    Same asset roll-overs (Division 126)

    X

    Other exemptions and roll-overs

    See also:

    If the company is required to lodge a CGT schedule, you may need to provide details of the capital gains deferred or disregarded as a result of applying certain CGT exemptions and roll-overs.

    Add-back items

    Add the following items to T Total profit or loss item 6 Calculation of total profit or loss.

    A - Net capital gain

    Write at A item 7 the company’s net capital gain. If the company has used the CGT summary worksheet or CGT schedule this is the amount at:

    • 6A at part 6 of the CGT summary worksheet, or
    • A at part 6 of the CGT schedule.

    The company’s net capital gain is the total of the capital gains it made (gains that are not disregarded other than by one of the small business concessions listed below) reduced by current year capital losses (that are not disregarded), prior year unapplied net capital losses and, if applicable:

    • 50% active asset reduction
    • retirement exemption
    • roll-over provisions.

    A company is not eligible for the CGT discount.

    For more information about CGT, see the Guide to capital gains tax 2016.

    For information regarding the small business concessions, see Capital gains tax (CGT) concessions for small business – overview.

    Include any net capital loss with any unapplied net capital losses carried forward to later income years and record it at V Net capital losses carried forward to later income years item 13.

    The company may need to complete either a Consolidated Groups Losses schedule 2016 or a Losses schedule 2016. For more information, see Consolidated groups losses schedule instructions 2016 or Losses schedule instructions 2016.

    U - Non-deductible exempt income expenditure

    Write at U Non-deductible exempt income expenditure, any expenditure incurred in deriving exempt income written at V Exempt income item 7. Do not include expenditure incurred in deriving exempt income from RSAs and debt deductions allowed by section 25–90 of the ITAA 1997.

    J - Franking credits

    Write at J the amount of franking credits attached to assessable distributions received from Australian corporate tax entities.

    Do not include franking credits attached to:

    • a distribution the company receives indirectly, through one or more partnerships or trusts (include these at D Gross distribution from partnerships item 6 or E Gross distribution from trusts item 6)
    • a distribution that is exempt income or non-assessable non-exempt income
    • franked distributions received from a New Zealand franking company (include these at C Australian franking credits from a New Zealand company)
    • a distribution where the shares are not held at risk as required under the holding period and related payments rules, if the dividend washing integrity rule applies, or there is other manipulation of the imputation system.

    There is no entitlement to a franking tax offset in these circumstances.

    Under the simplified imputation system a company must include in its assessable income the amount of franking credits attached to assessable franked distributions received.

    The amount of franking credits attached to a distribution cannot exceed the maximum franking credits for the distribution. To work out the maximum franking credit, take the amount of the frankable distribution and multiply it by 30/70.

    The maximum franking credit than can be allocated to a frankable distribution is 30%, including small businesses eligible for the 28.5% tax rate. As small business companies now have a higher franking credit cap than their tax rate, they need to take care not to over-frank (that is, allocate more franking credits than are in the franking account when paying dividends). Doing so can result in you having to pay a franking deficit tax.

    Example 9

    Bee Jay’s Honey Pty Ltd received the following three payments for the income year:

    • Company X paid Bee Jay’s Honey a franked dividend of $700 with a $200 franking credit attached.
    • Company Y paid Bee Jay’s Honey a franked dividend of $7,000 purportedly with a $3,500 franking credit attached.
    • Company Z paid Bee Jay’s Honey a franked non-share dividend of $14,000 with a $6,000 franking credit attached.
    Bee Jay’s Honey will complete J Franking credits in the following way:

    1

    2

    3

    4

    5

    Co.

    Amount of frankable distribution

    Franking credit attached to distribution received

    Maximum franking credit

    Allowable franking credit (lesser of columns 3 & 4)

     

    $

    $

    $

    $

    X

    700

    200

    300

    200

    Y

    7,000

    3,500

    3,000

    3,000

    Z

    14,000

    6,000

    6,000

    6,000

    The amount recorded at J is the sum of all allowable franking credits for the income year. In this example Bee Jay’s Honey would record $9,200 ($200 + $3,000 + $6,000) at J as the amount of allowable franking credits for the income year. Bee Jay’s Honey does not record $9,700, as declared on the distribution statements it received, at J. This is because the amount of franking credit allocated to the distribution received from company Y exceeded the maximum amount of franking credits that can be allocated to that distribution.

    End of example

    For most companies, the amount of franking credits included at J is allowable as a tax offset and should be claimed at C Non-refundable non-carry forward tax offsets in the Calculation statement. If the company is a life insurance company or organisation entitled to claim a refund of excess franking credits, claim the refundable amount at E Refundable tax offset in the Calculation statement, not at C Non-refundable non-carry forward tax offsets.

    C - Australian franking credits from a New Zealand franking company

    Write at C amounts of Australian franking credits from a New Zealand franking company that are included in assessable income because of a franked distribution paid to the company by a New Zealand franking company or because of its receipt indirectly through a partnership or trust. To work out whether the distribution is included in assessable income, see the Foreign income return form guide (NAT 1840).

    To calculate the amount to write at C, the Australian franking credits received directly or indirectly from a New Zealand franking company must be reduced by the amount of a supplementary dividend or the company’s share of a supplementary dividend if:

    • the supplementary dividend is paid in connection with the franked distribution, and
    • the company is entitled to a foreign income tax offset because of the inclusion of the distribution in assessable income.

    If the shares or interests are not held at risk as required under the holding period and related payments rules, or there is other manipulation of the imputation system, do not include the Australian franking credit in assessable income at C and there is no entitlement to a franking tax offset.

    For most companies the amount of Australian franking credits included at C is allowable as a tax offset and should be claimed at C Non-refundable non-carry forward tax offsets in the Calculation statement. If the company is a life insurance company or organisation entitled to claim a refund of excess franking credits, claim the refundable amount at E Refundable tax offset in the Calculation statement.

    A dividend from a New Zealand franking company may also carry New Zealand imputation credits. An Australian resident cannot claim any New Zealand imputation credits.

    E - TOFA income from financial arrangements not included in item 6

    If the company has financial arrangements to which the TOFA rules apply, include at E assessable gains under the TOFA rules from financial arrangements which have not been shown at item 6.

    For more information, see the Guide to the taxation of financial arrangements (TOFA) rules.at

    B - Other assessable income

    Write at B the total of the amounts that form part of assessable income if you have not included them as income at item 6 or at item 7 at A Net capital gain, J Franking credits or C Australian franking credits from a New Zealand company, for example, attributed foreign income of a CFC, and timing adjustments such as that which reconciles interest receivable to assessable interest income. For more examples of specific items, see the list of items in worksheet 2.

    The following items are shown at B:

    • The excess of the company’s foreign source income and attributed foreign income for taxation purposes over income from such sources shown in the accounts. Gross up foreign source income by the amount of foreign tax paid. Include any add-back or subtraction adjustment to expenses claimed against such income separately at W Non-deductible expenses item 7 or at X Other deductible expenses item 7.
    • Assessable foreign exchange gains to the extent that they have not been included at item 6 or at any other label of item 7. See Foreign exchange gains and losses for more information.
    • Assessable balancing adjustment amounts for non-R&D assets.
    • Assessable balancing adjustment amounts for assets used in R&D activities. If the asset has only been used for R&D activities, the amount to be included at this label is uplifted by one third (as per subsection 355-315(3) of the ITAA 1997). If the asset has been used partly for R&D activities, under subsection 40-292(5) of the ITAA 1997, the amount included and uplifted by one third is the proportion of the assessable balancing adjustment amount that relates to notional deductions claimed under the R&D tax incentive.
    • Feedstock adjustments as a result of expenditure on goods, materials or energy used, and claimed as notional R&D deductions on R&D activities that produce marketable products supplied or applied to the company’s own use.
    • There are special transitional rules for assets used for both the R&D tax incentive and the R&D tax concession. For more information on transitional rules, assessable balancing adjustments for assets used in R&D activities and feedstock adjustments, see Research and development tax incentive and the Research and development tax incentive schedule instructions 2016.
    • If the company ceases to hold a depreciating asset, or permanently ceases using it (or ceases having it installed ready for use) for any purpose and expects (or has decided) never to use it again, a balancing adjustment event occurs.
    • For assets subject to the small business entity depreciation rules, see step 5 Disposal of depreciating assets.
    • For assets not subject to the small business entity depreciation rules, calculate a balancing adjustment amount to include in the company’s assessable income or to claim as a deduction.
    • If the asset was used for both taxable and non-taxable purposes, reduce the balancing adjustment amount by the amount attributable to the non-taxable use. A capital gain or capital loss amount may arise attributable to that non-taxable use. For more information, see the Guide to depreciating assets 2016.
    • If a company receives a distribution from a partnership or trust and that partnership or trust claimed a deduction for a listed investment company (LIC) capital gain amount, then the company must add back as income its share of the deduction claimed by the partnership or trust. There is an exception for life insurance companies. For more information, see 16 Life insurance companies and friendly societies only.
    • Excessive deductions for capital allowances that are to be included in assessable income under the limited recourse debt rules contained in Division 243 of the ITAA 1997. This will occur where:      
      • expenditure on property has been financed or
        re-financed wholly or partly by limited recourse debt
      • the limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor, and
      • 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 debtor. 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 as 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 to such property. A debt is also 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 as against the debtor are capable of being so limited. Limited recourse debt includes a notional loan under a hire-purchase or sale agreement of goods to which Division 240 of the ITAA 1997 applies. See section 243-20. The rules in section 243-75 apply where Division 243 of the ITAA 1997 and Division 245 of the ITAA 1997 (commercial debt forgiveness, see appendix 1) both apply to the same debt.
       
    • Amounts assessable under Division 45 of the ITAA 1997. Broadly, if a taxpayer holds plant which has been used principally for leasing and some part of the lease period occurred on or after 22 February 1999, Division 45 and related amendments may apply from that date to include an amount in the assessable income of the taxpayer upon disposal of such plant, or an interest in the plant, or an interest in, or rights under, a lease of the plant, see section 45-5 of the ITAA 1997.
    • Similar tax consequences arise for a partner in a partnership if the partnership holds plant which has been used principally for leasing and some part of the lease period occurred on or after 22 February 1999, see section 45-10 of the ITAA 1997.
    • A subsidiary member of a wholly owned company group is treated under Division 45 as if it had disposed of and immediately reacquired plant that it holds where:      
      • more than 50% direct or indirect beneficial ownership in the shares of the subsidiary are acquired on or after 22 February 1999 by an entity or entities, none of which is a member of the wholly owned group
      • the plant has been used principally for leasing and some part of the lease period occurred on or after 22 February 1999
      • at that acquisition time, the plant’s written­-down value is less than the plant’s market value
      • the main business of each acquiring entity is not the same as the main business of the wholly owned group immediately before the relevant acquisition, see section 45-15 of the ITAA 1997.
       
    • Similar tax consequences arise if the subsidiary is a partner in a leasing partnership; see section 45-20 of the ITAA 1997.
    • Each company in the wholly owned group may become jointly and severally liable for any outstanding amount of tax payable by the subsidiary (because of section 45-15 or 45-20) at the end of six months from the time such tax becomes due and payable by the subsidiary, see section 45-25 of the ITAA 1997.

    W - Non-deductible expenses

    Write at W expense-related adjustments that are added back to the amount written at T Total profit or loss item 6 to reconcile with the amount written at T Taxable/net income or loss item 7.

    The amount written at W excludes:

    • any amount included at U Non-deductible exempt income expenditure item 7
    • any amount included at D Accounting expenditure in item 6 subject to R&D tax incentive item 7.

    Generally, W includes the amounts that are an expense for accounting purposes but are not deductible for income tax purposes, including timing variations. Examples are:

    • debt deductions disallowed under the thin capitalisation rules
    • unrealised losses on revaluation of assets and liabilities to fair value under international financial reporting standards
    • any expenses (including interest or amounts in the nature of interest) incurred in deriving non-assessable non-exempt income such as foreign income that is non-assessable non-exempt income under section 23AH of the ITAA 1936
    • a non-share dividend, to the extent that it is an expense for accounting purposes and therefore taken into account in determining total profit and loss, but which is not deductible for income tax purposes.

    For more examples of specific items, see worksheet 2.

    If a forex loss for accounting purposes, included in item 6, exceeds the deductible forex loss, include the difference at W Non-deductible expenses. For more information, see Foreign exchange gains and losses.

    If Australian and foreign source capital losses for accounting purposes are included at Expenses, G Unrealised losses on revaluation of assets to fair value or S All other expenses item 6, also include them at W. For Australian taxation purposes, include any net capital loss with any unapplied capital losses carried forward to later income years and write it at V Net capital losses carried forward to later income years item 13.

    D - Accounting expenditure in item 6 subject to R&D tax incentive

    Write at D, the expense amounts included at the expenditure labels at item 6 Calculation of total profit or loss, which relate to amounts that you are claiming as a notional R&D deduction under the R&D tax incentive provisions. Generally, these amounts include expenditure for accounting purposes on R&D activities, which are used in calculating the R&D tax offset, rather than being claimed as allowable deductions. Also include at D losses on disposal of assets used in R&D activities which are subject to the R&D tax incentive that were shown at S All other expenses item 6 and any book depreciation expenses for assets used in Research & Development activities which are subject to the R&D tax incentive that were included at X Depreciation expenses item 6 (any amounts not subject to the R&D tax incentive must be included at W Non-deductible expenses item 7).

    At D you also need to include amounts that you have written at the expenditure labels in item 6 Calculation of total profit or loss which you have incurred to your associates that are not yet paid or claimed and are to be carried forward. For more information, see Research and development incentive schedule instructions 2016.

    If no expense amounts relating to notional R&D deductions have been included at item 6 (for example, amounts are capitalised), write zero (0) at D Accounting expenditure in item 6 subject to R&D tax incentive.

    The amount written at D on the company tax return must be the same as the amount written at D Preliminary calculation – Add-back of research and development (R&D) accounting expenditure on the Research and development tax incentive schedule 2016.

    Add-back Subtotal

    Write the sum of the amount transferred from T Total profit or loss item 6 and the add-back items at A, U, J, C, E, B, W and D item 7.

    If this amount is a loss, print L in the box at the right of the amount.

    Subtraction items

    Deduct the following items from the amount at Subtotal.

    C - Section 46FA deduction for flow-on dividends

    Write at C any amounts claimed as a deduction during the income year that are deductible under section 46FA of the ITAA 1936. If an amount is reported at C, complete and attach an International dealings schedule 2016.

    This deduction is allowable in certain cases where a non-portfolio dividend that is not fully franked is on-paid by a resident company to its non-resident parent.

    If a deduction is claimed under section 46FA, the claiming entity must maintain an unfranked non-portfolio dividend account under section 46FB of the ITAA 1936 and complete Do you have an unfranked non-portfolio dividend account (section 46FB ITAA 1936)? item 43 on the International dealings schedule 2016.

    F - Deduction for decline in value of depreciating assets

    If the company is not a small business entity using the simplified depreciation rules, write the deduction for decline in value of most depreciating assets for taxation purposes at F.

    This amount is often different from the amount of depreciation calculated for accounting purposes written at X Depreciation expenses item 6 and added back at W Non-deductible expenses item 7.

    If the company has allocated depreciating assets to a low-value pool, include the deduction for decline in value of those assets at F.

    If a depreciating asset is used in R&D activities, the notional decline in value amount will form part of your notional R&D deduction. Eligible companies can claim this notional R&D deduction amount in calculating the R&D tax offset. For more information, see 21 Research and development tax incentive and the Research and development incentive schedule instructions 2016 . If a decline in value amount is included as a notional R&D deduction, add back at D Accounting expenditure in item 6 subject to R&D tax incentive item 7 any related depreciation expenses included at X Depreciation expenses item 6.

    If you have elected to use the hedging tax-timing method provided for in the TOFA rules and you have a gain or loss from a hedging financial arrangement used to hedge risks for a depreciating asset, work out separately:

    • the deduction for decline in value of depreciating assets (include this at F Deduction for decline in value of depreciating assets), and
    • your gain or loss on the hedging financial arrangement; include this at either:            
      • E TOFA income from financial arrangements not included in item 6, item 7 or
      • W TOFA deductions from financial arrangements not included in item 6, item 7.
       

    Include the decline in value of water facilities at N Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset item 7.

    For information about how to work out deductions for decline in value, see appendix 6.

    If the company is a small business entity using the simplified depreciation rules, include deductions for depreciating assets at X Depreciation expenses item 6.

    If the company is not using the simplified depreciation rules, and is continuing to claim a deduction for any prior pool, this deduction should be included at X Depreciation expenses item 6.

    Practice Statement PS LA 2003/8Practical approaches to low-cost business expenses provides guidance on the threshold rule and the sampling rule taxpayers can apply to determine if their business expenses on low cost items are to be treated as revenue expenditure..

    Subject to certain qualifications, the two methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost items. Under the threshold rule, low-cost items with a typically short life costing $100 or less are assumed to be revenue in nature and are immediately deductible. The sampling rule allows taxpayers with a low-value pool to use statistical sampling to determine the proportion of the total purchases of low-cost tangible assets that are revenue expenditure.

    U - Forestry managed investment scheme deduction

    See Definitions for more information about some of the terms used in this section.

    The company may be able to claim a deduction at this item for payments made to an FMIS if:

    • the company currently holds a forestry interest in an FMIS, or held a forestry interest in an FMIS during the 2015–16 income year
    • the company paid an amount to a forestry manager of an FMIS under a formal agreement
    • the forestry manager has advised the company that the FMIS satisfies the 70% direct forestry expenditure rule in Division 394 of the ITAA 1997
    • the company does not have day to day control over the operation of the scheme
    • there is more than one participant in the scheme or, the forestry manager or an associate of the forestry manager manages, arranges or promotes similar schemes, and
    • the trees are established within 18 months of the end of the income year in which an amount is first paid under the FMIS by a participant in the scheme.

    If the company is an initial participant in an FMIS it can claim initial and ongoing payments at this item. The company cannot claim a deduction if it has disposed of its forestry interest in an FMIS within four years after the end of the income year in which it first made a payment. However, the deduction will be allowed if the disposal occurs because of circumstances outside of the company's control, provided the company could not have reasonably foreseen the disposal happening when they acquired the interest. Disposals that would generally be outside the company's control may include compulsory acquisition, insolvency of the company or the scheme manager, or cancellation of the interest due to fire, flood or drought.

    If the company is a subsequent participant, it cannot claim a deduction for the amount paid for acquiring the interest. The company can only claim a deduction for ongoing payments.

    The deduction is claimed in the income year in which the payment is made.

    Excluded payments

    The company cannot claim a deduction at this item for any of the following payments:

    • payments for borrowing money
    • interest and payments in the nature of interest (such as a premium on repayment or redemption of a security, or a discount of a bill or bond)
    • payments of stamp duty
    • payments of GST
    • payments that relate to transportation and handling of felled trees after the earliest of the:            
      • sale of the trees
      • arrival of the trees at the mill door
      • arrival of the trees at the port
      • arrival of the trees at the place of processing (other than where processing happens in-field)
       
    • payments that relate to processing
    • payments that relate to stockpiling (other than in-field stockpiling).

    While the payments are not deductible FMIS payments, they may qualify as revenue or capital payments under another label.

    Write at U the total amount of deductible payments made to an FMIS.

    Non-deductible expenditure and the deductible payments made to an FMIS must also be included at W Non-deductible expenses item 7 to the extent that they have been included as an expense at item 6.

    E - Immediate deduction for capital expenditure

    Companies in the mining, petroleum and quarrying industries should write at E the total amount of capital expenditure (other than on depreciating assets) claimed as an immediate deduction for:

    • exploration and prospecting
    • rehabilitation of mining or quarrying sites
    • payment of petroleum resource rent tax.

    See also:

    H - Deduction for project pool

    Write at H the total amount of the company’s deductions for project pools.

    If a project is abandoned, sold or otherwise disposed of, the company can deduct the project pool value at that time. Include this deduction at H.

    Include the expenditure allocated to the project pool for the income year at W Non-deductible expenses item 7 to the extent that it has been included as an expense at item 6.

    For more information about project pools, see appendix 6.

    I - Capital works deductions

    Write at I the deduction claimed for capital expenditure on buildings, which includes eligible capital expenditure on extensions, alterations or improvements. Exclude capital expenditure for mining infrastructure buildings and timber milling buildings.

    For more information on capital works deductions, see appendix 2. Commercial debt forgiveness provisions may affect the calculation of some deductions, see appendix 1.

    Z - Section 40-880 deduction

    Write at Z the total of the company’s deductions allowable under section 40-880 of the ITAA 1997.

    The expenditure deductible under section 40-880 must be included at W Non-deductible expenses item 7 to the extent that it has been included as an expense at item 6.

    For information about section 40-880 deductions, see appendix 6.

    N - Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset

    Write at N the company’s total deductions for landcare operations expenses and for water facilities, fencing assets and fodder storage assets.

    Do not include the deduction for the decline in value of water facilities at F Deduction for decline in value of depreciating assets item 7.

    The expenditure on landcare operations, water facilities, fencing assets and fodder storage assets must be included at W Non-deductible expenses item 7 to the extent that it has been included as an expense at item 6.

    For information about deductions for landcare operations and water facilities, fencing assets and fodder storage assets, see appendix 6.

    O - Deduction for environmental protection expenses

    Write at O the amount of allowable expenditure on environmental protection activities.

    The deductible expenditure on environmental protection activities must also be included at W Non-deductible expenses item 7 to the extent that it has been included as an expense at item 6.

    For information about deductions for expenditure on environmental protection activities, see appendix 6.

    P - Offshore banking unit adjustment

    Only use P if the company has been declared to be an offshore banking unit (OBU) by the minister under subsection 128AE(2) of the ITAA 1936, otherwise disregard P.

    If you complete P, you must complete an International dealings schedule 2016. For more information, see the International dealings schedule instructions 2016.

    Subject to certain exceptions, an OBU is effectively taxed at the rate of 10% on income derived from offshore banking (OB) activities. In calculating an OBU’s total income for the year, include gross income from OB activities at R Other gross income item 6.

    Include total expenses from OB activities at S All other expenses item 6.

    You do not need to separate gross income or total expenses from OB activities into the various income and expenses categories that appear at item 6. These categories only apply to income and expenses that do not relate to OB activities.

    To get the effective 10% tax rate on OB activity income, section 121EG of the ITAA 1936 reduces the assessable income and allowable deductions from OB activities so that an OBU’s taxable income includes only the ‘eligible fraction’ (currently 10/applicable company tax rate) of its net income from OB activities.

    Calculation of the offshore banking unit adjustment

    Label P ensures that the net income from OB activities is taxed at an effective tax rate of 10%. Write at P the difference between the OBU’s net income from OB activities and the eligible fraction:

    P

    = net OB income - (net OB income X eligible fraction)

    When the amount written at P is deducted from the OBU’s total profit, this results in only the eligible fraction being included at T Taxable income or loss item 7. This is illustrated in the following examples.

    Example 10: An OBU has income and expenses from various activities as follows:

    Income

    Relating to OB activities

    $

    Relating to non-OB activities

    $

    Total activities

     

    $

    Interest

    200

    400

    600

    Rent

    500

    500

    Dividends

    100

    400

    500

    Total income

    300

    1,300

    1,600

     

    Expenses

    Relating to OB activities

    $

    Relating to non-OB activities

    $

    Total activities

     

    $

    Rent expenses

    600

    600

    Interest


    (within Australia)

    200

    300

    500

    Total expenses

    200

    900

    1,100

    Net profit

    100

    400

    500

    Complete item 6 as follows:

    Income

     

    $

    Gross interest

    F

    400

    Gross rent and other leasing and hiring income

    G

    500

    Total dividends

    H

    400

    Other gross income

    R

    300

    Total income

    S

    1,600

     

    Expenses

     

    $

    Rent expenses

    H

    600

    Interest expenses within Australia

    V

    300

    All other expenses

    S

    200

    Total expenses

    Q

    1,100

    Total profit or loss

    T

    500

    If this company was not an OBU, the amount of tax payable at 30% on a taxable income of $500 is $150 (assuming the OBU is not a small business entity). However, because the company is an OBU, it is entitled to an effective 10% tax rate on its net profit of $100 from OB activities.

    This is achieved by recording at P the untaxed portion of the net profit from OB activities. In this example, that is calculated as follows:

    P

    = net OB income – (net OB income x eligible fraction)

     

    = $100 – (100 x 10/30)

     

    = $67 (amount shown at item 7)

    As a result, the taxed portion is $33 and is the only part of the net profit from OB activities included at T Taxable income or loss item 7.

    Item 7 in this example contains the following entries:

    Total profit or loss amount shown at T item 6=$500

    Less:

    Offshore banking unit adjustment at P=$67

    Taxable income or loss at T= $433

    The tax payable at 30% on a taxable income of $433 is $130, which is the same as the total of the tax payable on:

    Taxable non-OBU activity income of $400 at 30%=$120

    Plus:

    Taxable OBU activity income of $100 at 10%=$10

    Tax payable=$130

    End of example

    OBU losses

    Do not use P to record a loss from OBU activities.

    If a loss is incurred, make the adjustment at W Non-deductible expenses item 7 to ensure that the company is taxed at the correct rate.

    The adjustment is made by inserting the following amount at W Non-deductible expenses item 7

    • net OB loss – (net OB loss x eligible fraction)

     

    Example 11: An OBU has income and expenses from various activities as follows:

     

    Relating to OB activities

    $

    Relating to non-OB activities

    $

    Total$

    Gross income

    200

    1,300

    1,500

    Expenses

    300

    900

    1,200

    Net income

    (100)

    400

    300

    Although the company’s net income is $300, its taxable income is actually $367. This is because only 10/30 (the eligible fraction) of the income and expenses from OB activities is taken into account in calculating an OBU’s taxable income, that is:

    Net income from non-OB activities=$400

    Less:

    Loss from OB activities (100 x 10/30)=$(33)

    Taxable income=$367

    W

    = net OB loss – (net OB loss x eligible fraction)

     

    = $100 – (100 x 10/30)

     

    = $67

    In this example, the company tax return would show the following entries:

    Item 6

    S Total income

    $1,500

     

    Q Total expenses

    $1,200

     

    T Total profit or loss

    $300

    Add:

     

     

    Item 7

    W Non-deductible expenses

    $67

     

    T Taxable income or loss

    $367

     

    End of example

    For more information on the taxation of OBUs, see Taxation Determinations TD 93/202 to 93/217, TD 93/241, TD 95/1 and TD 95/2.

    V - Exempt income

    Write at V all income that is exempt from Australian tax.

    Do not include at V amounts that are not assessable income and not exempt income, for example, any foreign income amounts that are treated as non-assessable non-exempt income under sections 23AH, 23AI, 23AK, 99B(2A) of the ITAA 1936 or sub-division 768-A in the ITAA 1997. Include these amounts at Q Other income not included in assessable income item 7.

    Do not include at V income exempt under an RSA. Exempt income from RSAs is taken into account in determining the Net taxable income from RSAs at V item 19.

    Q - Other income not included in assessable income

    Write at Q income-related adjustments that have to be subtracted from T Total profit or loss item 6 to reconcile with T Taxable income or loss item 7. Do not include again amounts included at C Section 46FA deductions for flow-on dividends to V Exempt income item 7 here.

    Generally, the amounts that are included at Q are income for accounting purposes, but not assessable for income tax purposes.

    Write exempt income separately at V Exempt income item 7.

    Include the following items at Q:

    • any excess of gross foreign source income, shown in the income labels at item 6, over the amount that represents assessable income. In calculating the excess, include dividends and other amounts that are not assessable because of sections 23AH, 23AI, 23AK, 99B(2A) of the ITAA 1936 or sub-division 768-A in the ITAA 1997. You must complete and attach an International dealings schedule 2016 if the company received dividends or other amounts covered by any of these provisions
    • any part of an unfranked distribution that is not assessable due to sections 802-15 or 802-20 of the ITAA 1997 (these provisions are relevant to conduit foreign income)
    • other amounts of non-assessable non-exempt income (do not include demerger dividends or other amounts not shown at item 6)
    • profits on disposal of assets used in R&D activities which are subject to the R&D tax incentive included at R Other gross income item 6
    • Australian and foreign source capital gains for accounting purposes that have been included at J Unrealised gains on revaluation of assets to fair value item 6 or R Other gross income item 6. For Australian taxation purposes, include any net capital gain at A Net capital gain item 7
    • any excess of a forex gain for accounting purposes, included at item 6, over the assessable forex gain. See Foreign exchange gains and losses for more information on the forex measures.

    For more examples of specific items, see worksheet 2.

    W - TOFA deductions from financial arrangements not included in item 6

    If the company has financial arrangements to which the TOFA rules apply, include at item W losses allowable under the TOFA rules from financial arrangements which have not been shown at item 6.

    For more information, see the Guide to the taxation of financial arrangements (TOFA) rules.

    X - Other deductible expenses

    Write at X expense-related adjustments that are subtracted from T Total profit or loss item 6 to reconcile with T Taxable income or loss item 7. Do not include items included under C to P item 7 again here. Generally, X shows amounts, including timing differences, that are an allowable deduction for income tax purposes but are not shown in the accounts or specifically shown at C to P item 7.

    For examples of specific items to be included, see worksheet 2.

    If the company is a life insurance company, include at :

    • tax losses deducted in the complying superannuation/ class
    • the deduction it is entitled to if it receives a dividend from a LIC, which includes a LIC capital gain amount. For more information, see 16 Life insurance companies and friendly societies only. Other companies are not entitled to this deduction.

    Show at X any capital expenditure you incurred under Subdivision 40-J of the ITAA 1997 for the establishment of trees in a carbon sink forest. Only costs incurred in establishing trees for the purpose of carbon sequestration are deductible. These costs are deductible over 14 years and 105 days at a rate of 7% per annum. If you are eligible to claim an extra deduction for the destruction of trees in a carbon sink forest, include the amount calculated under section 40-1030 of the ITAA 1997 at X.

    Include at X deductible foreign exchange losses to the extent that they have not been included in item 6 or in any other label at item 7. For more information on the forex measures, see Foreign exchange gains and losses.

    Show at X balancing adjustment losses for assets used for both R&D and non-R&D activities. If the company is otherwise eligible for an R&D tax offset under section 355-100 of the ITAA 1997, the amount shown at X is calculated and uplifted under sections 40-292 or 40-293 of the ITAA 1997. If the company is not otherwise eligible for an R&D tax offset under section 355-100 of the ITAA 1997, the balancing adjustment losses for assets used on R&D and non-R&D activities, as calculated under section 40-285 of the ITAA 1997, is included at X item 7 and claimed at 100%.

    Do not show any balancing adjustment losses for assets used only for R&D activities at X. Instead, see the Research and development tax incentive schedule 2016 and instructions for details about how you record your balancing adjustment loss.

    R - Tax losses deducted

    The company may need to complete either a Consolidated groups losses schedule 2016 or a Losses schedule 2016. For more information, see Consolidated Groups Losses Schedule or Losses schedule.

    Include at R those tax losses of prior income years that are deducted for the 2015–16 income year under section 36-17 of the ITAA 1997.

    Foreign losses are no longer quarantined from domestic assessable income (or from assessable foreign income of a different class). Resident taxpayers are also no longer required to make an election to deduct domestic tax losses against assessable foreign income.

    Therefore, for the purposes of loss utilisation, no distinction is made regarding the source of the assessable income, whether foreign or domestic. A taxpayer combines both foreign and domestic deductions. Where the combined deductions exceed assessable income and net exempt income from all sources, the excess is a tax loss and can potentially be deducted from assessable income of a future income year.

    Subject to various rules, prior year tax losses are deducted for a later income year or years in the order in which they were incurred, to the extent that they have not already been deducted.

    For a life insurance company or the head company of a consolidated or MEC group that has at least one subsidiary member that is a life insurance company, include tax losses deducted in the complying superannuation class at X Other deductible expenses, not at R.

    Continuity of ownership and same business tests

    A company cannot deduct a tax loss of an earlier year unless the company maintains continuity of ownership as prescribed under section 165-12 and section 165-215 of the ITAA 1997 (the continuity of ownership test). If a company is unable to satisfy the continuity of ownership test, it must meet the same business test as prescribed by sections 165-13 and 165-210 of the ITAA 1997 and explained in Taxation Ruling TR 1999/9.

    Control

    Additionally, a company may be prevented from deducting a tax loss where there has been a change in control as prescribed by subsection 165-15(1) of the ITAA 1997. However, this will only occur where the company also fails to satisfy the conditions relating to the carrying on of the same business in subsections 165-15(2) and (3).

    Keep a record of tax losses and account for any adjustments, including those made by us. Keep these records until the amendment period for the assessment in which the tax losses of the company were fully recouped has lapsed (up to four years from the date of that assessment).

    A prior year tax loss may be reduced by the commercial debt forgiveness provisions, see appendix 1.

    Do not include the film component of any tax loss (film loss) at R. For a film loss to be deductible, see Divisions 36 and 375 of the ITAA 1997. Film losses are only deducted from net exempt film income or net assessable film income for taxation purposes and are shown at either W Non-deductible expenses item 7, or X Other deductible expenses item 7.

    Do not include pooled development fund (PDF) tax losses at R unless the PDF tax losses are deductible under Division 195 of the ITAA 1997.

    Capital losses may only be applied in accordance with Division 102 of the ITAA 1997.

    For more information about how companies use tax losses, see How companies use tax losses.

    Information for consolidated and multiple entry consolidated (MEC) groups

    The head company may need to complete a Consolidated groups losses schedule 2016. For more information, see Consolidated groups losses schedule, or see the Consolidated groups losses schedule instructions 2016.

    Write at R tax losses deducted during the year of income under section 36-17 of the ITAA 1997.

    A head company may be entitled to deduct tax losses broadly comprising tax losses:

    • made by it for prior income years (group tax losses)
    • that were originally made by an entity before it became a member of the consolidated or MEC group and that were transferred to the head company of that group (transferred tax losses)

    Before deducting a ‘group tax loss’ or a ‘transferred tax loss’ a head company must satisfy the continuity of ownership test and control tests. If it does not, then it must satisfy the same business test.

    For more information about how companies use tax losses, see How companies use tax losses.

    For more information on the same business test, see sections 165-13 and 165-210 of the ITAA 1997 and Taxation Rulings TR 1999/9 and TR 2007/2Income tax application of the same business test to consolidated and MEC groups - principally, the interaction between section 165-210 and section 701-1 of the ITAA 1997 (as at 20 June 2007).

    End of example

    S - Tax losses transferred in

    Write at S the amount of tax losses transferred to the company from group companies under Subdivision 170-A of the ITAA 1997.

    A group company may transfer the whole or a part of a tax loss to another company where:

    • both companies are members of the same wholly owned group, and
    • one of the companies is:            
      • an Australian branch of a foreign bank, or
      • an Australian PE of a foreign financial entity if the tax loss is for an income year commencing on or after 26 June 2005, and
       

    Information for consolidated and multiple entry consolidated (MEC) groups

    • the other company is:      
      • the head company of a consolidated or MEC group, or
      • not a member of a consolidatable group, and
      • further conditions in Subdivision 170-A of the ITAA 1997 are satisfied.
       
    End of example

    The tax loss transferred to the income company is deductible to the income company in accordance with the provisions of section 36-17 of the ITAA 1997 (for example, the tax loss transferred to the income company is first offset against the income company’s net exempt income, then against its assessable income).

    Tax losses transferred cannot be used to create a tax loss.

    The Commissioner has power in certain circumstances to amend assessments to disallow a deduction for an amount of transferred tax loss despite section 170 of the ITAA 1936, see section 170-70 of the ITAA 1997.

    Information for consolidated and multiple entry consolidated (MEC) groups

    Do not show tax losses transferred from subsidiary companies under Subdivision 707-A of the ITAA 1997. These losses should be shown in part A of the Consolidated groups losses schedule 2016 at item 1 or item 2.

    End of example

    Subtraction items subtotal

    Write the sum of the amounts from C to S at Subtraction items subtotal.

    T - Taxable/net income or loss

    Write at T all assessable income less deductions that equals the amount at T Total profit or loss item 6 plus or minus the reconciliation adjustments at item 7.

    If this amount is a loss, print L in the box at the right of the amount.

    If the company has a taxable income of $1 or more, transfer the amount at T to A Taxable or net income in the Calculation statement.

    The company’s tax loss at T is the excess of its total deductions (except tax losses for earlier income years) over its total assessable income and net exempt income, see section 36-10 of the ITAA 1997. The company’s net exempt income is calculated under section 36-20 of the ITAA 1997 and is not necessarily equal to the amount written at V Exempt income item 7. Check that the amount at B Other assessable income item 7 includes the amount of net exempt income taken into account in calculating the company’s tax loss. If the company has a tax loss at T, write zero (0) at A Taxable or net income in the Calculation statement.

    If the company has excess franking offsets that can be converted under section 36-55 of the ITAA 1997 into a tax loss to be carried forward (see Excess franking offsets), do not include at T the amount of that tax loss. However, that amount should be taken into account in calculating the company’s tax loss at U Tax losses carried forward to later income years item 13. This means that a company may have a taxable income at T and a tax loss carried forward at item 13. Alternatively, if the company’s total deductions exceed total assessable income and net exempt income, it would show an amount at T that, disregarding section 36-55, would have been its tax loss for the income year.

    Last modified: 02 Oct 2019QC 48080