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# Calculating taxable income

Last updated 3 December 2018

The steps for calculating taxable income, as discussed in Taxable income and mutuality, are:

1. Classify revenue
2. Classify expenditure
3. Separate the apportionable items
4. Calculate the taxable income

We provide two worked examples of how to calculate taxable income:

## Case study 1: Alizarin Society

### Facts

The Alizarin Society is a not-for-profit company with the following revenue and expenses for the year ended 30 June. It is not registered for GST and not required to be registered.

Revenue

\$

Expenses

\$

Membership subscriptions

\$3,000

Postage (see note 2)

\$100

Term deposit interest

\$800

Photocopying (see note 2)

\$100

Christmas dinner (see note 1)

\$5,000

Christmas dinner (see note 1)

\$4,000

Lamington sale to public

\$2,500

Cost of lamingtons

\$1,800

Term deposit charges

\$50

Total

\$11,300

\$6,050

Note 1 The Christmas dinner was attended by 70 members and 30 non-members who paid \$50 each. It cost \$40 per person to cater for the dinner.

Note 2 From an examination of the society's records, 10% of its communication during the year was with non-members.

### Steps for calculating taxable income

#### Step 1: Classify revenue

Revenue

Non-assessable

Assessable

Apportionable

Total

Membership subscriptions

\$3,000

\$3,000

Term deposit interest

\$800

\$800

Sale of lamingtons

\$2,500

\$2,500

Christmas dinner

\$5,000

\$5,000

Total

\$3,000

\$3,300

\$5,000

\$11,300

#### Step 2: Classify expenses

Expenses

Non-deductible

Deductible

Apportionable

Total

Postage

\$100

\$100

Photocopying

\$100

\$100

Christmas dinner

\$4,000

\$4,000

Cost of lamingtons

\$1,800

\$1,800

Term deposit charges

\$50

\$50

Total

\$1,850

\$4,200

\$6,050

#### Step 3: Separate the apportionable items

Revenue

Non-assessable

Assessable

Total

Christmas dinner (see note 3)

\$3,500

\$1,500

\$5,000

Note 3 Revenue from the Christmas dinner is apportioned on the basis that it was attended by 70 members and 30 non-members who paid \$50 each.

Expenses

Non-deductible

Deductible

Total

Christmas dinner (see note 4)

\$2,800

\$1,200

\$4,000

Postage (see note 5)

\$90

\$10

\$100

Photocopying (see note 5)

\$90

\$10

\$100

Total

\$2,980

\$1,220

\$4,200

Note 4 Expenses for the Christmas dinner are apportioned on the basis that it was attended by 70 members and 30 non-members and it cost \$40 per person to cater for the dinner.

Note 5 Expenses for postage and photocopying are apportioned on the basis that 10% of Alizarin Society's communication during the year was with non-members.

#### Step 4: Calculate the taxable income

 Assessable income (\$3,300 + \$1,500) \$4,800 Less: deductible expenses (\$1,850 + \$1,220) \$3,070 Taxable income \$1,730

As its taxable income is more than the taxable threshold, the Alizarin Society will need to lodge a company tax return. For information on how to complete the company tax return, see Guide to company tax return for not-for-profit organisations.

## Case study 2: Celadon Club

### Facts

The Celadon Club provides licensed facilities to its members and the general public. It also provides assistance to community and sporting organisations by way of donations.

The club is incorporated in the Australian Capital Territory under the Associations Incorporation Act 1991. Its constitution contains clauses prohibiting it from making any distribution, whether in money, property or otherwise, to its members.

The club's facilities include a bar, restaurant and function room. It also has poker machines (which it owns), Keno and TAB.

The club contracts with an external catering company to undertake the operation of the restaurant. Under the contract, the club receives lease payments and the caterer is responsible for all catering, including kitchen and waiting staff.

The club hires out its function room to the public. It also uses the function room for its own events such as Valentine's Day and Melbourne Cup luncheons.

The club has 5,000 members. A register is kept at the door which records member and non-member attendance. During the income year ended 30 June, 50,000 visitors entered the premises, including 43,000 guests who were signed in by members. The club traded for a total of 360 days during the year, and on average 250 members attended the club every trading day.

The club is registered for GST. Its revenue and expenses are shown net of GST, except where the amount of GST incurred is not recoverable from the ATO.

The club's financial statements for the year ended 30 June show the following revenue and expenses:

Revenue

\$

Bar sales

827,695

Bingo and raffle income

23,496

Club luncheons – ticket sales

22,500

Function room hire

6,000

54,322

Keno commissions

46,152

Lease income – restaurant

10,000

Member subscriptions

51,800

Poker machine revenue – gross net of payouts

1,598,247

TAB commissions

18,421

Vending machine commissions

21,467

Total

\$2,680,100

Expenses

\$

Accounting – general

7,000

Accounting – management of tax affairs

3,000

Audit

5,000

18,461

Bank charges

1,927

Bar expenses:

• Cost of goods sold

392,576

• Decline in value (depreciating assets)

13,592

• Maintenance and supplies

29,764

Bingo expenses

4,533

Cleaning

45,000

Club luncheons – catering expenses

13,500

Club luncheons – entertainer expenses

3,000

Computer expenses

9,664

Decline in value (depreciating assets)

121,498

Directors expenses and honoraria

19,712

12,869

Electricity

82,478

Insurance

48,192

Gaming machine expenses:

• Gaming machine tax

210,969

• Payments to community organisations

13,786

• Repairs and maintenance

36,438

• Decline in value (depreciating assets)

262,481

• Central monitoring service charges

26,183

Keno expenses

2,157

Members magazine

8,000

Membership cards

2,000

Payroll tax

9,586

Printing, stationery and postage

22,544

Raffle expenses

24,851

Rates and land taxes

19,688

Repairs and maintenance

86,563

Salaries and wages

728,547

Pay TV

21,665

Subscription expenses

9,226

Superannuation

66,499

TAB expenses

3,661

Telephone

15,297

Total

\$2,401,907

Net profit

\$278,193

### Steps for calculating taxable income

Follow the four steps below to calculate the taxable income for Case study 2: the Celadon Club:

#### Step 1: Classify revenue

Revenue

Non-assessable income

Assessable income

Apportionable revenue

Total

Bar sales

827,695

827,695

Bingo and raffle income

23,496

23,496

Club luncheons – ticket sales

22,500

22,500

Function room hire

6,000

6,000

54,322

54,322

Keno commissions

46,152

46,152

Lease income – restaurant

10,000

10,000

Member subscriptions

51,800

51,800

Poker machine revenue

1,598,247

1,598,247

TAB commissions

18,421

18,421

Vending machine commissions

21,467

21,467

Total

\$51,800

\$156,362

\$2,471,938

\$2,680,100

#### Step 2: Classify expenses

Expenses

Non-deductible expenses

Deductible expenses

Apportionable expenses

Total

Accounting – general

7,000

7,000

Accounting – management of tax affairs

3,000

3,000

Audit

5,000

5,000

18,461

18,461

Bank charges

1,927

1,927

Bar expenses:

• Cost of goods sold

392,576

392,576

• Decline in value (depreciating assets)

13,592

13,592

• Maintenance and supplies

29,764

29,764

Bingo expenses

4,533

4,533

Cleaning

45,000

45,000

Club luncheons – catering expenses

13,500

13,500

Club luncheons – entertainer expenses

3,000

3,000

Computer expenses

9,664

9,664

Decline in value (depreciating assets)

121,498

121,498

Directors expenses and honoraria

19,712

19,712

12,869

12,869

Electricity

82,478

82,478

Insurance

48,192

48,192

Gaming machine expenses:

• Gaming machine tax

210,969

210,969

• Payments to community organisations

13,786

13,786

• Repairs and maintenance

36,438

36,438

• Decline in value (depreciating assets)

262,481

262,481

• Central monitoring service charges

26,183

26,183

Keno expenses

2,157

2,157

Members magazine

8,000

8,000

Membership cards

2,000

2,000

Payroll tax

9,586

9,586

Printing, stationery and postage

22,544

22,544

Raffle expenses

24,851

24,851

Rates and land taxes

19,688

19,688

Repairs and maintenance

86,563

86,563

Salaries and wages

728,547

728,547

Pay TV

21,665

21,665

Subscription expenses

9,226

9,226

Superannuation

66,499

66,499

TAB expenses

3,661

3,661

Telephone

15,297

15,297

Total

\$19,226

\$107,874

\$2,274,807

\$2,401,907

#### Step 3: Separate the apportionable items

Revenue

Non-assessable

Assessable

Total

Bar sales

595,609

232,086

827,695

Bingo and raffle income

16,908

6,588

23,496

Club luncheons – ticket sales

18,000

4,500

22,500

Poker machine revenue

1,150,099

448,148

1,598,247

Total

\$1,780,616

\$691,322

\$2,471,938

Club luncheons

The club held three special event luncheons during the year (Valentine's Day, Melbourne Cup and Christmas Day). The ticket price to attend each event was \$50. The club apportions the revenue from the luncheons on the basis that a total of 450 tickets were sold to the events – 360 tickets to members and 90 tickets to non-members. The non-member percentage to apply using this method is 90/450 = 20%.

Other revenue items

The club regularly attracts members of the public, making it difficult to identify and separate its other revenue items. The club apportions these items using the Waratahs formula as follows:

The percentage of members who attend on a daily basis is 5%, or 250 members on average who attend on a daily basis divided by 5,000 memberships. The total number of visitors for the year was 50,000, which included 43,000 members' guests – that is, visitors signed in by members.

After putting in the figures, the non-member percentage to apply using the Waratahs formula is 28.04%.

(B x 75%) + C  =  (43,000 x 0.75) + 7,000   =   0.2803571(R x S x T) + A   5,000 x 0.05 x 360) + 50,000   or 28.03571%

Expenses

Non-deductible

Deductible

Total

Accounting – general

5,037

1,963

7,000

Audit

3,598

1,402

5,000

13,285

5,176

18,461

Bank charges

1,387

540

1,927

Bar expenses:

• Cost of goods sold

282,498

110,078

392,576

• Decline in value (depreciating assets)

9,781

3,811

13,592

• Maintenance and supplies

21,418

8,346

29,764

Bingo expenses

3,262

1,271

4,533

Cleaning

32,382

12,618

45,000

Club luncheons – catering expenses

10,800

2,700

13,500

Club luncheons – entertainer expenses

2,400

600

3,000

Computer expenses

6,954

2,710

9,664

Decline in value (depreciating assets)

87,430

34,068

121,498

Directors expenses and honoraria

14,185

5,527

19,712

Electricity

59,351

23,127

82,478

Insurance

34,679

13,513

48,192

Gaming machine expenses:

• Gaming machine tax

151,813

59,156

210,969

• Payments to community organisations*

9,920

3,866

13,786

• Repairs and maintenance

26,221

10,217

36,438

• Decline in value (depreciating assets)

188,881

73,600

262,481

• Central monitoring service charges

18,841

7,342

26,183

Payroll tax

6,898

2,688

9,586

Printing, stationery and postage

16,223

6,321

22,544

Raffle expenses

17,883

6,968

24,851

Repairs and maintenance

62,291

24,272

86,563

Salaries and wages

524,262

204,285

728,547

Pay TV

15,590

6,075

21,665

Telephone

11,008

4,289

15,297

Total

\$1,638,278

\$636,529

\$2,274,807

* These payments are required under a state law. The law requires clubs holding gaming machine licenses to make payments from their gaming machine revenue to community organisations at a rate prescribed by the state. For this year, the club made cash payments that met, but did not exceed, the prescribed rate.

Club luncheons

The club held three special event luncheons during the year (Valentine's Day, Melbourne Cup and Christmas Day). Catering was through the club's contract caterer at a cost of \$30 a head. The club apportions the cost of the luncheons on the basis that a total of 450 tickets were sold to the events – 360 tickets to members and 90 tickets to non-members. The percentage to apply using this method is 90/450 = 20%. This percentage would also apply to other costs associated with the club luncheons – that is, the entertainer expenses.

Other expense items

The club regularly attracts members of the public, making it difficult to identify and separate its other expense items. The club apportions its other expense items using the Waratahs formula. The percentage to apply using the Waratahs formula is 28.04% (as calculated in Other revenue items).

#### Step 4: Calculate the taxable income

 Assessable income (\$156,362 + \$691,322) \$847,684 Less: deductible expenses (\$107,874 + \$636,529) \$744,403 Taxable income \$103,281

As its taxable income is more than the taxable threshold, the Celadon Club will need to lodge a company tax return.

For information on how to complete the company tax return, including a worked example that uses the figures from Case study 2, see Guide to company tax return for not-for-profit organisations.

QC23099