P8 Business income and expenses

Income

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

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

Note: Except for:

• the values of opening and closing stock, which are to be shown at tax values, and
• depreciation expenses for STS taxpayers only, which are to be shown at tax values

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

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

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

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

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

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

Stop: If you received PSI as a sole trader, you must complete item P1 of the 2004 business and professional items schedule for individuals. PSI is income that is mainly a reward for an individual's personal efforts or skills. Where you have net PSI at A item P1, do not include the PSI or claim deductions relating to that income at item P8.

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

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

Note: STS taxpayers MUST use the STS accounting method.

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

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

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

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

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

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

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

For more information about the STS accounting method, phone the Small business infoline on 13 28 66 or visit the Tax Office website at www.ato.gov.au

The amounts you include at item P8 should be based on the STS accounting method. If your accounting system or financial statements do not reflect the STS accounting rules, you may need to make additional adjustments at the reconciliation adjustments section. More information is available about these adjustments. In addition to the STS accounting method there are also specific STS rules for depreciation, and for trading stock.