• Specific reconciliation adjustments

    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

    If you have chosen to enter or continue in the STS at item S1, read STS taxpayers below first. Otherwise Go to Exiting the STS this year

    STS taxpayers

    If you are eligible to continue in the STS and have chosen to do so at item S1, you may need to make additional adjustments (see STS taxpayers).

    Make adjustments in this section of item P8 on your schedule if you:

    • are continuing in the STS this year, have chosen to continue using the STS accounting method and the amounts you have shown at the Income and Expense sections of item P8 are not based on the STS accounting method
    • are continuing in the STS this year and are changing from using the STS accounting method, or
    • you have disposed of depreciating assets during the year.
     

    These adjustments are explained in more detail below.

    Worksheet 6  will assist you with your calculations.

    Trade debtors and creditors as at 30 June 2006

    If you are continuing in the STS this year, have chosen to continue using the STS accounting method and have included at item P8 amounts of ordinary income that have been derived but not received in 2005-06, the amounts not received are not assessable under the STS rules this year - for example, trade debtors.

    These amounts form part of your Income reconciliation adjustments at X item P8. Include these amounts at (f) on Worksheet 6.

    If you are continuing in the STS this year, have chosen to continue using the STS accounting method and have included at item P8 amounts for general deductions, repairs and tax-related expenses that have been incurred but not paid in 2005-06, the amounts not paid are not deductible under the STS rules this year - for example, trade creditors.

    These amounts form part of your Expense reconciliation adjustments at H item P8. Include these amounts at (n) on Worksheet 6.

    Adjustment when changing from the STS accounting method

    If you are continuing in the STS this year and have chosen to discontinue using the STS accounting method read on.

    If you have not included at any Income labels at item P8 amounts of ordinary income that were derived but not received while using the STS accounting method, these amounts are assessable this year.

    Include these amounts at (b) on Worksheet 6.

    If you have not included at any Expenses labels at item P8 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.

    Include these amounts (other than tax-related expenses) at (t) on Worksheet 6. Show your deduction for tax-related expenses at D10 on your tax return.

    Disposal of depreciating assets

    If you disposed of any depreciating assets during the income year, the following amounts (if any) form part of your Income reconciliation adjustments at X item P8:

    • the taxable purpose proportion of the termination value of low-cost assets disposed of for which an immediate deduction has been claimed
    • if the closing pool balance of an STS pool is less than zero, the amount below zero, and
    • assessable balancing adjustment amounts on the disposal of depreciating assets not allocated to STS pools.
     

    See the Definitions box for an explanation of these terms.

    Include the amounts at (b) on Worksheet 6.

    Any deductible balancing adjustment amounts on the disposal of depreciating assets that you have not allocated to STS pools form part of your Expense reconciliation adjustments at H item P8. Include these amounts at (q) on Worksheet 6.

    For more information on assessable balancing adjustment amounts and deductible balancing adjustment amounts, see the Guide to depreciating assets 2005-06 (NAT 1996-6.2006).

    Read the following information to determine if you need to make any further reconciliation adjustments.

    Exiting the STS this year

    If you have exited the STS and have amounts of ordinary income that you derived but did not receive while you were in the STS, these amounts are assessable in this year - for example, debtors as at 30 June 2005.

    Include these amounts at (b) on Worksheet 6, unless you have already included them at other income labels at item P8.

    Similarly, if you have exited the STS and have amounts of general deductions (including repairs and tax-related expenses) that you incurred but did not pay while you were in the STS, these amounts are deductible this year - for example, creditors as at 30 June 2005.

    Include these amounts (other than tax-related expenses) at (t) on Worksheet 6, unless you have already included them at other deduction labels at item P8. Show your deduction for tax-related expenses at D10 on your tax return.

    Prepaid expenses

    Special rules may affect the timing of deductions for prepaid expenditure. Under these rules you may need to apportion certain prepaid expenses over more than one income year. You must make an expense reconciliation adjustment to add back that part of the expense that is not deductible in the year it is incurred. Show the adjustment at (k) on Worksheet 6.

    If you had a prepaid expense in a prior year which is to be apportioned over the service period and you are entitled to a deduction for part of the expense this year but have not included it at any other label, show the adjustment as an expense subtraction at (s) on Worksheet 6.

    For further information about the prepayment rules, see the publication Deductions for prepaid expenses 2005-06 (NAT 4170-6.2006).

    Deduction for decline in value (non-STS taxpayers only)

    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 the 2005-06 income year if you held the depreciating asset for any time during the year and used it (or installed it ready for use) for a taxable purpose, such as for producing assessable income.

    The deduction is reduced to the extent you do not use the asset for a taxable purpose.

    To help you calculate your deduction for decline in value, see the Guide to depreciating assets 2005-06 (NAT 1996-6.2006), which also provides explanations of relevant terms. The guide also explains the option to allocate to a low-value pool depreciating assets that cost less than $1,000 (excluding input tax credit entitlements) and depreciating assets that have an opening adjustable value of less than $1,000.

    If you choose to use the low-value pool method to calculate the decline in value of low-cost or low-value depreciating assets and the pool contains assets used for work-related, self-education or rental purposes, read question D6 in TaxPack 2006. Do not include the deduction at item P8 on your schedule. If none of the depreciating assets in the pool is used for any of those purposes, include the amount of your low-value pool deduction at (r) on Worksheet 6. 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 (r) on Worksheet 6.

    You should also add back the depreciation charged in your accounts and shown at M Depreciation expenses in the Expenses section of item P8 as an expense reconciliation adjustment. Include the amount at (h) on worksheet 6. The amount at (h) should not include any STS pool deductions which you have claimed at M.

    Luxury car leasing

    A leased car, either new or second-hand, is a luxury car if its cost exceeds the car limit that applies for the financial year in which the lease commences. The car limit for 2005-06 is $57,009.

    Luxury car leases entered into after 7.30pm (by legal time in the ACT) on 20 August 1996 (other than genuine short-term hire arrangements) are treated as a notional sale and loan transaction.

    The cost or value of the car specified in the lease (or the market value if the parties were not dealing at arm's length in connection with the lease) is taken to be the cost of the car for the lessee and the amount loaned by the lessor to the lessee to buy the car.

    In relation to the notional loan, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component for the notional loan applicable for the particular period (the accrual amount) is deductible to the lessee subject to any reduction required under the thin capitalisation rules.

    The amount forms part of your Expense reconciliation adjustments at H item P8 on your schedule. Include the amount at (p) on Worksheet 6.

    In relation to the notional sale, the lessee is treated as the holder of the luxury car and may be entitled to claim a deduction for the decline in value of the car. If the lessee is an STS taxpayer for the income year in which the lease is entered into, the lessee allocates the car to their general STS pool.

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

    For more information on deductions for the decline in value of leased luxury cars, see the Guide to depreciating assets 2005-06 (NAT 1996-6.2006).

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

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

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

    Where you allocate the car to the general STS pool with the cost based on the applicable car limit, calculate the deduction under the STS depreciation rules.

    If you have included the lease expense at J Lease expenses in the Expenses section of item P8 in your schedule, the amount should also form part of your Expense reconciliation adjustments at H item P8. Include the amount at (i) on Worksheet 6. Include the deduction for the accrual amount at (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 STS rules, any assessable or deductible balancing adjustment amount for the lessee must be determined. If the car has been allocated to the lessee's general STS pool, see calculation 5 for STS taxpayers.

    Hire purchase agreements

    Hire purchase and instalment sale agreements of goods are treated as a sale of the property by the financier (or hire purchase company) to the hirer (or instalment purchaser).

    The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or value or the property's arm's length value.

    The periodic hire purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The interest component is deductible to the hirer, subject to any reduction required under the thin capitalisation rules. This amount forms part of the Expense reconciliation adjustments at H item P8 on your schedule. Include the amount at (t) on Worksheet 6.

    In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and either allocates the asset to the appropriate STS pool if they are an STS taxpayer for the income year, or may be entitled to claim a deduction for the decline in value of the depreciating asset. The cost of the asset for this purpose is taken to be the agreed cost or value, or the arm's length value if the dealing is not at arm's length.

    If you have included hire purchase charges at an expenses label in item P8 on your schedule, the amount should also form part of your Expense reconciliation adjustments at H item P8. Include the amount at (n) on Worksheet 6.

    Termination of a limited recourse debt

    Excessive deductions for capital allowances are to be included in assessable income where expenditure on property has been financed or refinanced wholly or partly by limited recourse debt.

    This will occur if the:

    • Limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor.
    • Capital allowance deductions exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor, because the debt has not been paid in full. Special rules apply in working out whether the debt has been fully paid.

    Limited recourse debt is a debt where the rights of the creditor against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to the property that has been financed by the debt or that is security for the debt, or to rights in relation to such property. A debt is also a limited recourse debt, even if there are no specific conditions to that effect, if it is reasonable to conclude that the creditor's rights against the debtor are capable of being limited in that way. Limited recourse debt includes a notional loan under a hire purchase or instalment sale agreement of goods. See section 243-20 of ITAA 1997.

    The amount that is included within assessable income as a result of these provisions forms part of your Income reconciliation adjustments at X item P8 on your schedule. Include the amount at (b) on Worksheet 6.

    Worksheet 6: Reconciliation statement

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

    Income reconciliation adjustments

    Primary production

    Non-primary production

    Additions

    Assessable balancing adjustment amounts on disposal of depreciating assets**

    (a)

    $

    $

    Assessable business income not included in the profit and loss statement

    (b)

    $

    $

    Subtotal: add (a) and (b)

    (c)

    $

    $

    Subtractions

    Net exempt income - gross exempt income less expenses relating to that exempt income

    (d)

    $

    $

    Profit on sale of depreciating assets included in accounts

    (e)

    $

    $

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

    (f)

    $

    $

    Subtotal: add (d), (e) and (f)

    (g)

    $

    $

    Income reconciliation adjustments: (c) minus (g)

     

    $

    $

    Expense reconciliation adjustments

    Primary production

    Non-primary production

    Additions

    Depreciation charged in accounts*

    (h)

    $

    $

    Lease payments for luxury cars

    (i)

    $

    $

    Loss on sale of depreciating assets included in accounts

    (j)

    $

    $

    Part of prepaid expenses not deductible this year

    (k)

    $

    $

    Items not allowable as deductions:

    - capital expenditure

    (l)

    $

    $

    - additions to provisions and reserves

    (m)

    $

    $

    - other non-deductible items, including income tax

    (n)

    $

    $

    Subtotal:

    add (h), (i), (j), (k), (l), (m) and (n)

    (o)

     

    $

    Subtractions

    Accrual amount deduction for lessee of luxury cars

    (p)

    $

    $

    Deductible balancing adjustment amounts on disposal of depreciating assets**

    (q)

    $

    $

    Deduction for decline in value of depreciating assets** (non-STS taxpayers only)

    (r)

    $

    $

    Part of prepaid expenses deductible this year but not included at any other label

    (s)

    $

    $

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

    (t)

    $

    $

    Subtotal: add (p), (q), (r), (s) and (t)

    (u)

    $

    $

    Expense reconciliation adjustments: (o) minus (u)

     

    $

     

    *, Only include amounts at (h) if you are not an STS taxpayer. However, exclude any STS pool deductions which you have included at M item P8.

    **, See the Guide to depreciating assets 2005-06 (NAT 1996-6.2006) for an explanation of this term.

    Completing this item

    Step 1, Complete Worksheet 6 using the explanations provided at Specific reconciliation adjustments. This will give you your total income and expense reconciliation amounts (primary and non-primary production) that you need for your schedule.

    Step 2, Transfer the totals in the yellow rows on the worksheet to the appropriate boxes on page 3 of your schedule. Do not show cents.

    Step 3, If any of the reconciliation adjustment amounts is negative, print L in the box at the right of the amount.

    Step 4, Add up your primary production and non-primary production Income reconciliation adjustments and write the total at X.

    Step 5, Add up your primary production and non-primary production Expensereconciliationadjustments and write the total at H.

    Step 6, If the total income reconciliation adjustment amount is negative, print L in the box at the right of the amount at X. If the total expense reconciliation adjustment amount is negative, print L in the box at the right of H.

    Note

    Do not include in the amount at (t) on worksheet 6:

    • environmental protection expenditure
    • section 40-880 deductions
    • business deductions for project pools, or
    • deductions for landcare operations and water facilities.
     

    Reconciliation adjustments for these amounts are shown separately at V, A, L and W on your schedule.

    Worksheet 7: Working out your net income or loss from primary productionbusiness this year

    Write your primary production total business income shown in the Primary production column at Total business income item P8

    (a)

    $

     

    Write your primary production total business expenses shown at S item P8

    (b)

    $

     

    Add up the amounts of any deductions for primary production environmental protection expenses, section 40-880 expenditure, project pool and landcare operations and water facilities and write the total at (c)

    (c)

    $

     

    Add the amount at (b) to the amount at (c)

    (d)

    $

     

    Take the amount at (d) from the amount at (a)

    (e)

    $

     

    Write your primary production income reconciliation adjustment (if any)

    (f)

    $

     

    Write your primary production expense reconciliation adjustment (if any)

    (g)

    $

     

    Your net income or loss from your primary production business - add (e), (f) and (g)

    (h)

    $

     

    Worksheet 8: Working out your net income or loss from non-primary production business this year

    Write your non-primary production total business income shown in the Non-primary production column at Total business income item P8

    (i)

    $

     

    Write your non-primary production total business expenses shown at T item P8

    (j)

    $

     

    Add up the amounts of any deductions for non-primary production environmental protection expenses, section 40-880 expenditure, project pool, landcare operations and write the total at (k)

    (k)

    $

     

    Add the amount at (j) to the amount at (k)

    (l)

    $

     

    Take the amount at (l) from the amount at (i)

    (m)

    $

     

    Write your non-primary production income reconciliation adjustment (if any)

    (n)

    $

     

    Write your non-primary production expense reconciliation adjustment (if any)

    (o)

    $

     

    Your net income or loss from your non-primary production business - add (m), (n) and (o)

    (p)

    $

     

    Examples

    • If the amount at (e) is a $5,000 loss, the amount at (f) is $12,000 income, and the amount at (g) is a $1,000 loss, the net income from the primary production business at (h) is $6,000.
    • If the amount at (e) is $5,000 profit, the amount at (f) is $2,000 income and the amount at (g) is an $8,000 loss, the loss from the primary production business at (h) is $1,000.
    • If the amount at (m) is a $5,000 loss, the amount at (n) is a $4,000 loss and the amount at (o) is a $1,000 loss, the loss from the non-primary production business at (p) is $10,000.
    Last modified: 01 Sep 2006QC 18499