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  • Income and expense reconciliation adjustments

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    Warning:

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

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

    Do not complete any income reconciliation adjustments or expense reconciliation adjustments if all the amounts you have shown between ABN not quoted and Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset (inclusive) are assessable income or allowable tax deductions for income tax purposes.

    If you have included amounts such as exempt income or non-deductible expenses or have not included amounts which are assessable income or expenditure that is deductible, you must work out your reconciliation adjustments.

    Worksheet 4 will assist you with your calculations.

    What are income reconciliation adjustments?

    Income reconciliation adjustments include:

    • income add backs; this is 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; this is 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.
       

    Your income reconciliation adjustment is your total income add backs less your total income subtractions.

    Use worksheet 4 to work out your income reconciliation adjustments for your primary and non-primary production businesses.

    What are expense reconciliation adjustments?

    Expense reconciliation adjustments include the following.

    • Expense add backs are expenses shown in the accounts which are not tax deductible, 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 deductions denied by the thin capitalisation rules, other non-deductible expenses; for further information, see Thin capitalisation and PSI deductions.
       
    • Expense subtractions are items not shown as expenses in the accounts but which are deductible for tax purposes, such as    
      • prepaid expenses from a prior year that are deductible this year but not included elsewhere
      • deduction for decline in value of depreciating assets
      • deductible balancing adjustment amounts on disposal of depreciating assets
      • deduction for environmental protection expenses
      • other items deductible for tax purposes.
       

    Your expense reconciliation adjustment is your total expense add backs less your total expense subtractions.

    Use worksheet 4 to work out your expense reconciliation adjustments for your primary and non-primary production businesses.

    Specific reconciliation adjustments

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

    If you were previously in the STS read Former STS taxpayers below first. Otherwise, go to Depreciating assets deducted under the simplified depreciation rules.

    Former STS taxpayers

    Make adjustments in this section if you:

    • are eligible and have chosen to continue using the STS accounting method and the amounts you have shown at the Income and Expense sections are not based on the STS accounting method, or
    • stopped using the STS accounting method in the 2017–18 income year.

    These adjustments are explained in more detail at Adjustments when ceasing to use the STS accounting method.

    Worksheet 4 will assist you with your calculations.

    Income derived but not received as at 30 June 2018 and expenses incurred but not paid as at 30 June 2018

    If you are eligible and have chosen to continue using the STS accounting method and have included amounts of ordinary income that have been derived but not received in 2017–18, the amounts not received are not assessable this year, for example, trade debtors as at 30 June 2018.

    These amounts form part of your income reconciliation adjustments. Include these amounts at row f on worksheet 4.

    If you are eligible and have chosen to continue using the STS accounting method and have included amounts for general deductions, repairs and tax-related expenses that have been incurred but not paid in 2017–18, the amounts not paid are not deductible this year, for example, trade creditors as at 30 June 2018.

    These amounts form part of your expense reconciliation adjustments. Include these amounts at row n on worksheet 4

    Adjustments when ceasing to use the STS accounting method

    If you have discontinued using the STS accounting method read on.

    If you have not included at the Business income section any amounts of ordinary income that were derived but not received while using the STS accounting method, these amounts are assessable this year, for example, trade debtors as at 30 June 2017.

    Include these amounts at row b on worksheet 4.

    If you have not included at the Business expenses section any amounts of general deductions, repairs or tax-related expenses that were incurred but not paid while using the STS accounting method, these amounts are deductible this year, for example, trade creditors as at 30 June 2017.

    Include these amounts (other than tax-related expenses) at row t on worksheet 4. Enter your deduction for tax-related expenses at Cost of managing tax affairs on your tax return.

    Depreciating assets deducted under the simplified depreciation rules

    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:

    • the taxable purpose proportion of the termination value of assets that have been disposed of for which an immediate deduction has been claimed either this year or in a prior year
    • if the closing pool balance of a general small business pool is less than zero, the amount below zero
    • assessable balancing adjustment amounts on the disposal of depreciating assets not allocated to a general small business pool.

    See Definitions for an explanation of these terms.

    Include the amounts at row b on worksheet 4.

    Any deductible balancing adjustment amounts on the disposal of depreciating assets that you have not allocated to a small business pool form part of your Expense reconciliation adjustments. Include these amounts at q on worksheet 4.

    See also: Guide to depreciating assets, or you can work out your depreciation and capital allowance claims by using the Depreciation and capital allowances tool.

    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 row k on worksheet 4.

    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 elsewhere, show the adjustment as an expense subtraction at row s on worksheet 4.

    See also Deductions for prepaid expenses.

    Deduction for decline in value

    A deduction for a decline in value of a depreciating asset calculated under 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 income tax law you can deduct an amount equal to the decline in value of a depreciating asset in 2017–18 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 you do not use the asset for a taxable purpose.

    To help you calculate your deduction for decline in value, use the Depreciation and capital allowances tool, or see Guide to depreciating assets which also provides explanations of relevant terms. The publication 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 non-business rental purposes, read Low value pool deduction. Do not include the deduction at the Business income or losses section. 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 row r on worksheet 4. Where necessary, make a reasonable apportionment between primary production and non-primary production activities.

    You should also include the deduction for decline in value of depreciating assets not allocated to a pool at row r on worksheet 4.

    You should also add back the depreciation charged in your accounts and shown at Depreciation expenses in the Business Expenses section as an expense reconciliation adjustment. Include the amount at row h on worksheet 4. The amount at row h should not include any small business pool deductions which you have claimed at Depreciation expenses.

    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 income year in which the lease commences. The car limit for 2017–18 is $57,581.

    A luxury car lease entered into after 7.30pm (by legal time in the ACT) on 20 August 1996 (other than genuine short-term hire arrangements) is 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. Include the amount at row p on worksheet 4.

    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 a small business entity using the simplified depreciation rules for the income year in which the lease is entered into, the lessee allocates the car to their general small business pool.

    For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the income year in which the lease is granted.

    For more information on deductions for the decline in value of leased luxury cars, see Guide to depreciating assets.

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

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

    You reduce both deductions to reflect any use of the car for a non-taxable purpose.

    Where you allocated the car to the general small business pool with the cost based on the applicable car limit, see Calculating your depreciation deductions.

    If you have included the lease expense at Lease expenses in the Business expenses section, the amount should also form part of your expense reconciliation adjustments. Include the amount at row i on worksheet 4. Include the deduction for the accrual amount at row p.

    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 simplified depreciation 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 small business pool, see calculation 4 for small business entities.

    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. Include the amount at row t on worksheet 4.

    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 small business pool if they are a small business entity using the simplified depreciation rules 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 as an expense, the amount should also form part of your expense reconciliation adjustments. Include the amount at row n on worksheet 4.

    Termination of a limited recourse debt

    Excessive deductions for capital allowances are 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 the limited recourse debt
    • 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 debtor. Special rules apply in working out whether the debt has been fully paid.

    A 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 which 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 as against the debtor’s are capable of being so limited.

    A limited recourse debt includes a notional loan under a hire-purchase or instalment sale agreement of goods to which Division 240 of the ITAA 1997 applies, see section 243-20.

    The amount that is included within assessable income as a result of these provisions forms part of your income reconciliation adjustments. Include the amount at row b on worksheet 4.

    Worksheet 4: Reconciliation statement

    Reconcile your primary production and non-primary production items separately.

    Part 1a: Income reconciliation adjustments – Additions

    Row

    Calculation elements

    Primary production

    Non-primary production

    a

    Assessable balancing adjustment amounts on disposal of depreciating assets

    $

    $

    b

    Assessable business income not included in the profit and loss statement

    $

    $

    c

    Subtotal: add the amounts at row a and row b.

    $

    $

    Part 1b: Income reconciliation adjustments – Subtractions

    Row

    Calculation elements

    Primary production

    Non-primary production

    d

    Net exempt income (gross exempt income less expenses relating to that exempt income)

    $

    $

    e

    Profit on sale of depreciating assets included in accounts

    $

    $

    f

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

    $

    $

    g

    Subtotal: add the amounts at rows d, e and f.

    $

    $

     


    Income reconciliation adjustments: take the amount at row g away from the amount at row c.

    $

    $

    Part 2a: Expense reconciliation adjustments – Additions

    Row

    Calculation elements

    Primary production

    Non-primary production

    h

    Depreciation charged in accounts

    $

    $

    i

    Lease payments for luxury cars

    $

    $

    j

    Loss on sale of depreciating assets included in accounts

    $

    $

    k

    Part of prepaid expenses not deductible this year

    $

    $

    Part 2b: Expense reconciliation adjustments – Items not allowable as deductions

    Row

    Calculation elements

    Primary production

    Non-primary production

    l

    Capital expenditure

    $

    $

    m

    Additions to provisions and reserves

    $

    $

    n

    Other non-deductible items, including income tax

    $

    $

    o

    Subtotal: add the amounts at rows h, i, j, k, l, m and n.

    $

    $

    Part 2c: Expense reconciliation adjustments – Subtractions

    Row

    Calculation elements

    Primary production

    Non-primary production

    p

    Accrual amount deduction for lessee of luxury cars

    $

    $

    q

    Deductible balancing adjustment amounts on disposal of depreciating assets

    $

    $

    r

    Deduction for decline in value of depreciating assets

    $

    $

    s

    Part of prepaid expenses deductible this year but not included elsewhere

    $

    $

    t

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

    $

    $

    u

    Subtotal: add the amounts at rows p, q, r, s and t.

    $

    $

     


    Expense reconciliation adjustments: take the amount at row u away from the amount from row o.

    $

    $

    Notes:

    1. Include amounts at row h only if you are not using the simplified depreciation rules. However, exclude any pool deductions which you have included at
      Depreciation expenses which relate to a continuing small business pool.
    2. See Guide to depreciating assets for an explanation of depreciating assets.
    3. If you have included an amount of capital expenditure incurred to terminate a lease or licence at Lease expenses, make a reconciliation adjustment at Expense reconciliation adjustments by including the amount of capital expenditure as an expense add back and taking away that part of the expense which is allowed as a tax deduction.
    Completing Income and Expense reconciliation adjustments
    1. Complete worksheet 4 using the explanations provided. This will give you your total income and expense reconciliation adjustment amounts.
    2. Transfer the totals in the Income reconciliation adjustments (below row g) and the Expense reconciliation adjustments (below row u) on the worksheet to the appropriate fields.

    Do not include in the amount at row t on worksheet 4:

    • section 40-880 deductions
    • business deductions for project pools
    • deductions for landcare operations, water facilities, fencing assets and fodder storage assets.

    Reconciliation adjustments for these amounts are shown separately at:

    • Section 40-880 deduction
    • Business deduction for project pool
    • Landcare operations and business deduction for decline in value of water facility, fencing asset and fodder storage.
      Last modified: 28 Jun 2018QC 55562