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  • Appendices

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    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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    In this section:

    Appendix 1. Commercial debt forgiveness

    If a commercial debt owed by a company is forgiven during the income year, the company should apply the ’net forgiven amount’ of that debt to reduce the company’s tax losses, net capital losses, certain undeducted revenue or capital expenditure and the cost bases of CGT assets, in that order.

    A debt is a commercial debt if any part of the interest (or an amount in the nature of interest) paid or payable on the debt is, or would be, an allowable deduction or could have been deducted but for a specific exception provision in the ITAA 1997 (other than the exceptions in subsection 8-1(2) for outgoings of a capital nature, private or domestic outgoings and for outgoings relating to exempt income or non-assessable non-exempt income). Where interest is not payable in respect of the debt, it is still a commercial debt if interest would have been deductible if interest had been charged. The commercial debt forgiveness rules also apply to a non-equity share issued by a company.

    A debt is forgiven if the company’s obligation to pay the debt is released, waived or otherwise extinguished, other than by repaying the debt in full.

    A debt is also forgiven if:

    • the right to recover it ceases because of the expiry of a limitation period
    • a creditor assigns the right to receive payment of the debt to an associate of the debtor
    • the debtor is a company, and the creditor subscribes to shares in that company to enable the debtor to repay the debt it owes to the creditor, and the debtor uses any of the money subscribed in or towards payment of the debt
    • an agreement is entered into under which the obligation to pay some or all of the debt will end without the debtor incurring any obligation (other than an insignificant obligation).

    Calculation of net forgiven amount

    Calculate the net forgiven amount as follows:

    1. Determine the value of the debt. This is usually the lesser of

    • the market value of the debt at the time of forgiveness (assuming the company was solvent at the time the debt was incurred and the company’s capacity to pay the debt has not changed from the time the debt was incurred), and
    • the sum of the market value of the debt at the time the debt was forgiven (based on the above assumptions and assuming that interest rates and currency exchange rates that affect the market value of the debt remain constant from the time the debt was incurred until the forgiveness time), plus any amounts allowable as deductions because of the forgiveness of the debt that are attributable to changes in those interest rates and currency exchange rates. This might occur because of a decrease in the value of the debt due to market movements. Special rules apply in calculating the value of non-recourse debt and assigned debt; see sections 245-60 and 245-61 of the ITAA 1997.

    2. Calculate the gross forgiven amount of the debt by subtracting from the value of the debt certain amounts paid or given in respect of the forgiveness; see section 245-65 of the ITAA 1997.

    3. Work out the net forgiven amount by subtracting from the gross forgiven amount any amount

    • which has been, or will be, included in the company’s assessable income for any income year as a result of the forgiveness of the debt
    • by which a deduction otherwise allowable to the company has been, or will be, reduced as a result of the forgiveness of the debt, except for a reduction under Division 727 of the ITAA 1997 (which is about indirect value shifting), and
    • by which the cost base of any CGT assets of the company has been, or will be, reduced as a result of the forgiveness of the debt under the CGT provisions of the ITAA 1997.

    4. For intra-group debt only (where the debtor company and the creditor company are under common ownership throughout the term of the debt), the companies may enter into an agreement whereby the creditor company agrees to forgo its entitlement to a specified amount of a capital loss, or to a deduction for a bad debt under section 8-1 or section 25-35 of the ITAA 1997, that would otherwise have arisen from the creditor forgiving the debt in the forgiveness income year. If such an agreement is made, reduce the creditor’s capital loss or the deduction otherwise allowable to the creditor, to the extent of the amount agreed on, up to the amount left after 3 above. For the debtor company, reduce the amount remaining after 3 above by the same amount.

    5. The amount remaining (if any) is the net forgiven amount of the debt. Add the net forgiven amount of each debt forgiven during the income year to arrive at the total net forgiven amount for the income year.

    Application of total net forgiven amount

    Apply this total net forgiven amount to reduce the amounts the company has in the following categories, in the order listed:

    • tax losses
    • net capital losses
    • certain expenditures, and
    • cost bases of certain CGT assets.

    Within each category, the company may choose the item against which the total net forgiven amount is applied, provided it is applied to the maximum extent possible within that category. Once the total net forgiven amount is applied against all the amounts in a category, apply any excess against the next category in the above order. If there is an excess remaining after applying the amount against all categories, disregard this excess.

    Tax losses

    These are tax losses from an earlier income year and undeducted at the beginning of the forgiveness income year.

    Net capital losses

    These are unapplied net capital losses that were made in income years before the forgiveness income year and that could be applied in working out the debtor’s net capital gain in the forgiveness income year, assuming that the company had sufficient capital gains.

    Expenditures

    Expenditures against which the total net forgiven amount can be applied are limited to those incurred by the company before the forgiveness income year which remain undeducted but which, on conditions prevailing during the forgiveness income year, would be deductible in that year or future income years. The relevant expenditures are:

    • expenditure deductible under Division 40 of the ITAA 1997 (depreciating assets)
    • expenditure incurred in borrowing money to produce assessable income under section 25-25 of the ITAA 1997
    • expenditure on scientific research under subsection 73A(2) of the ITAA 1936
    • R&D expenditure deductible under Division 355 of the ITAA 1997
    • advance revenue expenditure under Subdivision H of Division 3 of Part III of the ITAA 1936
    • expenditure on acquiring a unit of industrial property to produce assessable income under former subsection 124M(1) of the ITAA 1936
    • expenditure on Australian films under section 124ZAFA of the ITAA 1936
    • expenditure on assessable income-producing buildings and other capital works under section 43-10 of the ITAA 1997.

    There are two principal methods for reducing expenditures:

    • Straight line deduction: If the deduction is calculated as a percentage, fraction or proportion of a base amount (for example, deductions for the decline in value of depreciating assets calculated under the prime cost method), make the reduction to the base amount. The effect is that deductions allowable in the forgiveness income year and later income years are reduced. The total amount of deductions allowable is limited to the reduced base amount. The amount of the reduction is treated as if it had been a deduction when calculating any required balancing adjustment amount.
    • Diminishing balance deduction: If the deduction for a particular expenditure is a percentage, fraction or proportion of an amount worked out after taking into account any previous deductions for the expenditure (for example, deductions for the decline in value of depreciating assets calculated under the diminishing value method), the amount of the reduction is taken to have been allowed as a deduction before the forgiveness income year.
    • If any deductions are disallowed under the ITAA 1936 or the ITAA 1997 as a result of recouping an amount of expenditure that is subject to reduction as a result of the above debt forgiveness rules, the recouped expenditure against which the total net forgiven amount was previously reduced is included in the assessable income in the year it is recouped.
    Cost bases of certain CGT assets

    The cost bases and reduced cost bases of certain CGT assets owned by the company at the beginning of the forgiveness income year are reduced by the total net forgiven amount remaining after reducing the expenditures (see above). These are assets where a capital gain or capital loss might arise on a CGT event occurring, such as disposal of the assets.

    Assets whose cost bases are not subject to reduction include those for which a capital gain or capital loss will not arise or is unlikely to arise if a CGT event happens to them, for example, CGT assets acquired before 20 September 1985, trading stock or a personal use asset within the meaning of section 108-20 of the ITAA 1997. Also excluded are CGT assets whose cost is deductible, such as depreciating assets.

    The company may choose the CGT assets whose cost bases and reduced cost bases are to be reduced and the extent of that reduction. However, the cost base of CGT assets that constitute investments in associates of the company must be reduced last.

    If a company chooses to apply an amount to reduce either the cost base or the reduced cost base of a CGT asset, then at any time on or after the beginning of the forgiveness income year, the cost base and reduced cost base) of each relevant CGT asset is taken to be reduced by that amount.

    Ordinarily, the reduction of a CGT asset’s cost base and reduced cost base cannot exceed the amount that would have been the reduced cost base of the asset, calculated as if the asset was disposed of at market value on the first day of the forgiveness income year. However, a special rule applies (see subsection 245-190(3) of the ITAA 1997) if an event occurred after the beginning of the forgiveness income year that would cause the reduced cost base of the asset to be reduced.

    The reduction of the cost base and reduced cost base of a CGT asset affects the calculation of the amount of the capital gain or capital loss on a CGT event happening to the nominated reducible CGT asset, because the cost base or reduced cost base that is taken into account in determining the capital gain or capital loss must reflect that reduction.

    Consolidated and MEC groups

    Where a commercial debt is owed by a member of a consolidated or MEC group to a non-group entity, the head company is treated as the debtor for its income tax purposes. If the debt is forgiven, the head company must calculate the net forgiven amount and apply this amount to the head company's tax losses, net capital losses, certain expenditures and the cost bases of certain CGT assets.

    In certain circumstances the head company of a consolidated group can apply a transferred tax loss or net capital loss with a nil available fraction to reduce the total net forgiven amount under the commercial debt forgiveness rules (see section 707-415 of the ITAA 1997).

    Intra-group debts

    One of the consequences of consolidation is that intra-group loans and intra-group dealings are not recognised for the group’s income tax purposes. Where a debt owed by one member of a consolidated or MEC group to another member of the same group is forgiven, there will be no income tax consequences for the head company or the subsidiary members of the group.

    Appendix 2. Capital works deductions

    Division 43 of the ITAA 1997 provides for a system of deducting capital expenditure incurred in the construction of buildings and other capital works used to produce assessable income.

    Capital works

    You can deduct construction costs for the following capital works:

    • buildings or extensions, alterations or improvements to a building
    • structural improvements or extensions, alterations or improvements to structural improvements
    • environmental protection earthworks; see Appendix 6.

    Deductions for construction costs and structural improvements must be based on actual costs incurred. If it is not possible to genuinely determine the actual costs, obtain an estimate by a quantity surveyor or other independent qualified person. The costs incurred by the company for the provision of this estimate are deductible as a tax-related expense, not as an expense in gaining or producing assessable income.

    Different deduction rates apply (2.5% or 4%) depending on the date on which construction began, the type of capital works, and the manner of use.

    Who can claim?

    The company can claim a deduction under Division 43 for an income year only if it:

    • owns, leases or holds part of a construction expenditure area of capital works (‘your area’)
    • incurred the construction expenditure or is an assignee of the lessee or holder who incurred the expense, and
    • uses ‘your area’ to produce assessable income or in some cases for carrying on R&D activities.

    In calculating the company’s deductions, identify ‘your area’ for each construction expenditure area of the capital works. Your area may comprise the whole of the construction area or part of it.

    There are special rules that qualify the use of the capital works for R&D activities. The R&D activities must be conducted in connection with a business carried on for the purposes of producing assessable income and be registered under section 27A of the Industry Research and Development Act 1986 for an income year.

    Lessee or holder of capital works

    A lessee or holder can claim a deduction for an area leased or held under a quasi-ownership right. To claim a deduction the lessee or holder must have:

    • incurred the construction expenditure or be an assignee of the lessee or holder who incurred the expenditure
    • continuously leased or held the capital works area itself, or leased or held the area that had been so held by previous lessees, holders or assignees since completion of construction, and
    • used the area to produce assessable income, or in some cases for carrying on R&D activities.

    If there is a lapse in the lease, the entitlement to the deduction reverts to the building owner.

    Requirement for deductibility

    The company can deduct an amount for capital works in an income year if:

    • the capital works have a ‘construction expenditure area’
    • there is a ‘pool of construction expenditure’ for that area, and
    • the company uses the area in the income year to produce assessable income or for carrying on R&D activities in the way set out in section 43-140 of the ITAA 1997.

    No deduction until construction is complete

    The company cannot claim a deduction for any period before the completion of construction of the capital works even though the company used them, or part of them, before completion. Additionally, the deduction cannot exceed the undeducted construction expenditure for your area.

    Capital works are taken to have begun when the first step in the construction phase starts; for example, pouring foundations or sinking pilings for a building.

    Establishing the deduction base

    You can deduct expenditure for the construction of capital works if there is a construction expenditure area for the capital works. Whether there is a construction expenditure area for the capital works and how it is identified depends on the following factors:

    • the type of expenditure incurred
    • the time the capital works commenced
    • the area of the capital works to be owned, leased or held by the entity that incurred the expenditure
    • for capital works begun before 1 July 1997, the area of the capital works that was used in a particular manner, see section 43-90 of the ITAA 1997.

    Construction expenditure

    Expenses incurred on construction include:

    • preliminary expenses, such as an architect’s fees, engineering fees, foundation excavation expenses and costs of building permits
    • costs of structural features that are an integral part of the income-producing building or income-producing structural improvements; for example, lift wells and atriums
    • some portion of indirect costs.

    For an owner/builder entitled to a deduction under Division 43 of the ITAA 1997, the value of the owner/builder’s contributions to the works (labour or expertise and any notional profit element) do not form part of construction expenditure.

    See also:

    • Taxation Ruling TR 97/25 and 97/25A Addendum – Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements.

    Construction expenditure does not include expenditure on:

    • acquiring land
    • demolishing existing structures
    • clearing, levelling, filling, draining or otherwise preparing the construction site before carrying out excavation work
    • landscaping
    • plant
    • property or expenditure for which a deduction is allowable, or would be allowable if the property were for use for the purpose of producing assessable income, under another specified provision of the ITAA 1936 or the ITAA 1997.

    Construction expenditure area

    The construction of the capital works must be complete before the construction expenditure area is determined. A separate construction expenditure area is created each time an entity undertakes the construction of capital works.

    For construction expenditure incurred before 1 July 1997, the capital works must have been constructed for a specified use at the time of completion, depending on the time when the capital works commenced. The first specified use construction time was 22 August 1979; see section 43-90 and section 43-75(2) of the ITAA 1997.

    Pool of construction expenditure

    The pool of construction expenditure is the portion of the construction expenditure incurred by an entity on capital works, which is attributable to the construction expenditure area.

    Deductible use

    The company can only obtain a deduction under Division 43 if it uses your area in a way described in table 43-140 or 43-145 of Subdivision 43-D of the ITAA 1997.

    Special rules about uses

    Your area is taken to be used for a particular purpose or manner if:

    • it is maintained ready for that use and is not used for another purpose, and its use has not been abandoned, or
    • its use has temporarily ceased because of construction or repairs, or for seasonal or climatic conditions.

    Your area is not accepted as being used to produce assessable income:

    • if it is a building (other than a hotel or apartment building) used or for use wholly or mainly for exhibition or display in connection with the sale of all or part of any building, where construction began after 17 July 1985 but before 1 July 1997. If construction began after 30 June 1997, buildings that are used for display are eligible
    • if it is a building (other than a hotel or apartment building) where construction began after 19 July 1982 and before 18 July 1985 and it is used wholly or mainly for    
      • or in association with, residential accommodation, and is not a hotel or apartment building, or
      • exhibition or display in connection with the sale of all or part of any building, or the lease of all or any part of any building for use wholly or mainly for, or in association with, residential accommodation and is not a hotel or apartment building or an extension, alteration or improvement to such a building
    • to the extent that the company or an associate uses part of it for residential accommodation and it is not a hotel or apartment building, for exceptions to this rule, see subsection 43-170(2) of the ITAA 1997.

    Your area is taken to be used wholly or mainly as, or in association with residential accommodation if it is:

    • part of an individual’s home, other than a hotel or apartment building
    • a building (other than a hotel or apartment building) where construction began after 19 July 1982 and before 18 July 1985, and used as a hotel, motel or guest house.

    Special rules for hotels and apartments are contained in section 43-180 of the ITAA 1997.

    Calculation and rate of deduction

    The company’s entitlement to a deduction begins on the date the building is first used to produce assessable income after construction is completed. The first and last years of use may be apportioned. The entitlement to a deduction runs for either 25 or 40 years (the limitation period) depending on the rate of deduction applicable.

    The legislation contains two calculation provisions:

    • section 43-210 of the ITAA 1997 deals with the deduction for capital works that began after 26 February 1992
    • section 43-215 of the ITAA 1997 deals with deductions for capital works that began before 27 February 1992.
    Capital works begun before 27 February 1992 and used as described in table 43-140

    Calculate the deduction separately for each part that meets the description of your area.

    Multiply the company’s construction expenditure by the applicable rate (either 4% if the capital works were begun after 21 August 1984 and before 16 September 1987 or 2.5% in any other case) and by the number of days in the income year for which the company owned, leased or held your area and used it in a relevant way. Divide that amount by the number of days in the year.

    Apportion the amount if your area is used only partly to produce assessable income or for carrying on R&D activities.

    The amount the company claims cannot exceed the undeducted construction expenditure.

    Capital works begun after 26 February 1992

    Calculate the deduction separately for each part of capital works that meets the description of your area.

    There is a basic entitlement to a rate of 2.5% for parts used as described in table 43-140: Current year use. The rate increases to 4% for parts used as described in table 43-145: Use in the 4% manner.

    Undeducted construction expenditure

    The undeducted construction expenditure for your area is the part of the company’s construction expenditure it has left to write off. It is used to work out:

    • the number of years in which the company can deduct amounts for the company’s construction expenditure
    • the amount that the company can deduct under section 43-40 of the ITAA 1997 if your area or a part of it is destroyed.

    Balancing deduction on destruction

    If a building is destroyed or damaged during an income year, you can claim a deduction for the remaining amount of undeducted construction expenditure that has not yet been deducted, less any compensation received. If the destruction or demolition is voluntary, the entitlement to a deduction is unaffected.

    You can claim the deduction in the income year in which the destruction occurs.

    The deduction is reduced if the capital works are used in an income year only partly for the purpose of producing assessable income or for carrying on R&D activities.

    For guidelines issued by the Commissioner on these measures, see Taxation Ruling TR 97/25 and 97/25A Addendum.

    Appendix 3. Thin capitalisation

    The thin capitalisation provisions reduce certain deductions (called debt deductions) incurred in obtaining and servicing debt if the debt used to finance the Australian operations of a company exceeds the limits set out in Division 820 of the ITAA 1997. These rules ensure that entities fund their Australian operations with an appropriate amount of equity.

    The rules apply to a range of situations. Where in a given year, you are not affected by the rules, answer no to question 27.

    Do the thin capitalisation rules apply?

    Australia’s thin capitalisation rules apply to:

    • Australian entities with certain overseas operations, and their associate entities
    • Australian entities that are foreign controlled
    • foreign entities with operations or investments in Australia that are claiming debt deductions.

    The thin capitalisation rules may apply to a company if the company:

    • is an Australian resident company and either    
      • the company, or any of its associate entities, is an Australian controller of a foreign entity or carries on business overseas at or through a PE, or
      • the company is foreign controlled, either directly or indirectly
    • is a foreign resident company and carries on business in Australia at or through a PE or otherwise has assets that produce assessable income in Australia.

    Entities that are not affected by the rules

    For any given income year, the following entities are not affected by thin capitalisation rules:

    • an entity that does not incur debt deductions for the income year
    • an entity whose debt deductions, together with those of any associate entities, are $2 million or less for the income year
    • an Australian resident entity that is neither an inward investing entity nor an outward investor
    • a foreign entity that has no investment or presence in Australia
    • an outward investor that is not also foreign controlled and meets the assets threshold test. This is explained further in section 820-37.

    Certain special purpose entities are also excluded, where all of the following apply:

    • the entity is established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments
    • at least 50% of its assets are funded by debt interests
    • the entity is an insolvency remote special purpose entity according to the criteria of an internationally recognised rating agency that are applicable to the entity’s circumstances. That entity does not have to have been rated by a rating agency.

    Where several large entities are taken to be a single, notional entity, any one of those entities can still meet this exception provided that all the entities taken together would meet the above conditions. The entity will only be exempted from the thin capitalisation rules for the period that it meets all of the above conditions.

    For more information, see Thin capitalisation. This explains what certain terms mean for thin capitalisation purposes, such as control, associated entities, debt deductions and asset threshold test. For example, the rules regarding ‘control’ take into account both direct and indirect interests that the company holds in the other entity (or vice versa), and the direct and indirect interests that associate entities of the company hold in the other entity.

    What if the thin capitalisation rules affect you this year?

    If the thin capitalisation rules affect you, print Y for yes at item 29 Thin capitalisation. In addition, complete the International dealings schedule 2017.

    The International dealings schedule is available through the electronic lodgment service (ELS), Standard Business Reporting (SBR), or complete and lodge the paper schedule.

    What if the thin capitalisation rules are breached?

    If the thin capitalisation rules are breached, some of the company’s debt deductions may be denied. Include the amount denied at W Non-deductible expenses item 7.

    Appendix 4. Taxation treatment of pooled development funds and investors

    How pooled development funds (PDFs) are taxed

    A PDF is a company that is registered as a PDF and provides development capital to small and medium sized companies. The PDF regime was closed to new applications for registration as a PDF from 21 June 2007.

    If a company was registered as a PDF part way through an income year and is still a PDF at the end of the income year, it is taxed as a PDF for the period from the date of registration to the end of the income year as if that period were an income year. The taxable income in the pre-PDF period is taxed at the rate of 30%.

    If a company ceases to be a PDF part way through an income year, it is taxed as an ordinary company for the whole year; that is, taxable income is taxed at the rate of 30%.

    The SME income component of the PDF’s taxable income is taxed at the rate of 15%. The SME component is the company’s SME assessable income less any deductions allowable to the company for the year, whether they relate to SME assessable income or not. If the available deductions exceed the amount of SME assessable income, the excess may be applied against the unregulated investment component of the company’s taxable income.

    SME assessable income is income derived from, or from the disposal of, an SME investment and includes amounts that would otherwise be capital gains. An SME investment is not an unregulated investment which is an investment by way of a loan to, deposit with or debenture of a bank, or a deposit with an authorised money market dealer.

    The unregulated investment component of the PDF’s taxable income is worked out by deducting the company’s SME income component from its taxable income for the year. The amount (if any) remaining is the company’s unregulated investment component. The unregulated investment component is taxed at the rate of 25%.

    Imputation

    PDFs generate franking credits in the same way as other companies, mainly from the payment of income tax and from the receipt of franked distributions. The franking credit that arises is the tax paid (at the relevant rate applicable to the taxable income of PDFs, not at the company tax rate).

    PDFs make franked distributions in the same manner as other companies.

    The PDF obtains venture capital credits from the payment of income tax reasonably attributable to capital gains from venture capital investments; that is, SME investments made in accordance with the Pooled Development Funds Act 1992. If a PDF keeps a record of its venture capital sub-account, it can make distributions franked with venture capital credits.

    If a PDF over-distributes venture capital credits during the income year, it incurs a liability to venture capital deficit tax.

    Tax offset for franking credits

    A PDF that receives a franked distribution must include the distribution and the franking credit attached to the distribution in its assessable income. The PDF is then entitled to a tax offset equal to the amount of franking credits included in its assessable income. This is the gross-up and tax offset rule.

    Losses

    Deductions for PDF tax losses are allowable only in an income year in which the company is a PDF throughout that income year.

    PDF tax losses cannot be transferred to other companies in the same group.

    Non-PDF tax losses incurred before the company became a PDF that are not recouped while the company is a PDF continue to be deductible after the company ceases to be a PDF.

    Capital losses incurred while the company is a PDF are not deductible from capital gains accruing to the company after it ceases to be a PDF.

    How PDF shareholders are taxed

    Unfranked PDF distributions and the unfranked part of a franked distribution are exempt from tax.

    The franked part of a PDF distribution is also exempt from income tax unless the shareholder elects to be taxed on it. The election is made by including the distribution (and franking credit) in assessable income. The election will apply to all franked PDF distributions derived during the income year. A corporate shareholder who receives a franked PDF distribution and who elects to include the distribution in assessable income will receive a franking credit equal to the franking credit attached to the distribution.

    Special rules apply to PDF distributions franked with venture capital credits that are paid to complying superannuation funds, pooled superannuation trusts and like entities. Such entities are also entitled to a venture capital tax offset and the relevant part of the distribution is also exempt income.

    The costs associated with borrowing to purchase PDF shares are not deductible to the extent the distributions are exempt from tax.

    Non-resident PDF shareholders are exempt from withholding tax on PDF distributions.

    PDF shares are not trading stock.

    Income from selling shares in a company that is a PDF at the time of sale is exempt from income tax. Any capital gains or capital losses from the disposal of PDF shares are disregarded.

    Appendix 6. Uniform capital allowances

    The following concepts relevant to the UCA system are referred to in this appendix:

    • balancing adjustment amounts
    • deduction for decline in value of depreciating assets
    • deduction for environmental protection expenses
    • deduction for project pool
    • electricity connections and telephone lines
    • hire-purchase agreements
    • landcare operations and decline in value of water facility, fencing asset and fodder storage asset
    • loss on the sale of a depreciating asset
    • luxury car leases
    • profit on the sale of a depreciating asset
    • section 40-880 deduction
    • the TOFA rules and UCA.

    See also:

    Small business entities

    Eligible small business entities that choose to use the simplified depreciation rules calculate deductions for most of their depreciating assets under the specific small business entity depreciation rules.

    Balancing adjustment amounts

    If the company ceases to hold or to use a depreciating asset, a balancing adjustment event occurs. Calculate a balancing adjustment amount to include in the company’s assessable income or to claim as a deduction.

    Include the assessable balancing adjustment amount for all assets at B Other assessable income item 7. (Assessable balancing adjustment amounts for assets used in R&D activities are required to be uplifted prior to being included at B Other assessable income item 7.

    Include the deductible balancing adjustment amount for non-R&D assets at X Other deductible expenses item 7.

    Balancing adjustment loss amounts for assets used only for R&D activities subject to the R&D tax incentive are taken into account in part A of the Research and development tax incentive schedule 2017 and also as part of calculating an R&D tax offset amount at item 21.

    Balancing adjustment losses for assets used on R&D and non-R&D activities are uplifted under sections 40-292 or 40-293 of the ITAA 1997 and included at X Other deductible expenses item 7, if the company is otherwise eligible for an R&D tax offset under section 355-100 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 Other deductible expenses item 7 and claimed at 100%.

    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 may arise for the amount attributable to that non-taxable use. This capital gain or capital loss is included in calculating the net capital gain or net capital loss for the income year.

    Include any profit or loss on the sale of a depreciating asset that has been included in the accounts of the company at either R Other gross income item 6 or S All other expenses item 6. See Profit on the sale of a depreciating asset or Loss on the sale of a depreciating asset.

    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 balancing adjustment assessable or deductible amount (include this at either B Other assessable income item 7 or X Other deductible expenses item 7 as appropriate), and
    • the gain or loss on the hedging financial arrangement under the TOFA rules that has not yet been assessed or deducted (include this at 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 as appropriate).

    If a balancing adjustment event occurred to a depreciating asset of the company during the income year, you may also need to include an amount at H Termination value of intangible depreciating assets item 9 or at I Termination value of other depreciating assets item 9.

    Deduction for decline in value of depreciating assets

    The decline in value of a depreciating asset is generally worked out using either the prime cost or diminishing value method. Both methods are based on the effective life of an asset. For most depreciating assets, the company can choose whether to self-assess the effective life or adopt the Commissioner’s determination that can be found in ATO Interpretative Decision ATO ID 2002/180 Income tax: effective life of depreciating asset: choice of Commissioner's determination.

    The company can deduct an amount equal to the decline in value for an income year of a depreciating asset for the period that it holds the asset during that year. However, the deduction is reduced to the extent the company uses the asset or has it installed ready for use other than for a taxable purpose.

    The decline in value of a depreciating asset costing $300 or less is its cost (but only to the extent the asset is used for a taxable purpose) if the asset satisfies all of the following requirements:

    • It is used predominantly for the purpose of producing assessable income that is not income from carrying on a business.
    • It is not part of a set of assets acquired in the same income year that costs more than $300.
    • It is not one of any number of substantially identical items acquired in the same income year that together cost more than $300.

    Certain assets that cost less than $1,000 or that have an opening adjustable value of less than $1,000 can be allocated to a low-value pool to calculate the decline in value. Assets eligible for the immediate deduction cannot be allocated to a low-value pool.

    To work out the deduction for decline in value of most depreciating assets use worksheets 1 and 2 in the Guide to depreciating assets 2017.

    Deduction for environmental protection expenses

    The company can deduct expenditure to the extent that it incurs it for the sole or dominant purpose of carrying on environmental protection activities (EPA). EPA are activities undertaken to prevent, fight or remedy pollution or to treat, clean up, remove or store waste from the company’s earning activity. The company’s earning activity is one it carried on, carries on or proposes to carry on for the purpose of:

    • producing assessable income (other than a net capital gain)
    • exploration or prospecting, or
    • mining site rehabilitation.

    The company may also claim a deduction for cleaning up a site on which a predecessor carried on substantially the same business activity.

    The deduction is not available for:

    • EPA bonds and security deposits
    • expenditure for acquiring land
    • expenditure for constructing or altering buildings, structures or structural improvements
    • expenditure to the extent that the company can deduct an amount for it under another provision.

    Expenditure that forms part of the cost of a depreciating asset is not expenditure on EPA.

    Expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at the rate of 2.5% a year under the provisions for capital works expenditure.

    Expenditure on an environmental impact assessment of a project of the company is not deductible as expenditure on EPA. If it is capital expenditure directly connected with a project, it could be a project amount for which a deduction would be available over the life of the project; see Deduction for project pools.

    If the deduction arises from a non-arm’s length transaction and the expenditure is more than the market value of what it was for, the amount of the expenditure is taken instead to be that market value.

    Any recoupment of the expenditure is assessable income.

    Deduction for project pools

    Certain capital expenditure incurred after 30 June 2001 that is directly connected with a project carried on or proposed to be carried on for a taxable purpose can be allocated to a project pool and written off over the project life. Each project has a separate project pool.

    The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a ‘project amount’ is directly connected with the project.

    A project is carried on if it involves a continuity of activity and active participation. Merely holding a passive investment such as a rental property would not be regarded as carrying on a project.

    For more information, see Taxation Ruling TR 2005/4 Income tax: capital allowances – project pools – core issues.

    The capital expenditure, known as a project amount, must be expenditure incurred:

    • to create or upgrade community infrastructure for a community associated with the project, this expenditure must be paid (not just incurred) to be regarded as a project amount
    • for site preparation for depreciating assets (other than in draining swamp or low-lying land or in clearing land for horticultural plants including grapevines)
    • for feasibility studies for the project
    • for environmental assessments for the project
    • to obtain information associated with the project
    • in seeking to obtain a right to intellectual property
    • for ornamental trees or shrubs.

    Project amounts also include mining capital expenditure and transport capital expenditure.

    The expenditure must not otherwise be deductible or form part of the cost of a depreciating asset.

    If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value.

    The deduction for project amounts allocated to a project pool commences when the project starts to operate.

    If your project pool contains only project amounts incurred on or after 10 May 2006 and the project starts to operate on or after that date, your deduction is calculated as follows:

    • (Pool value × 200%) divided by DV project pool life

    In some circumstances, a post 9 May 2006 project may be taken to have started to operate before 10 May 2006. This would occur, for example, if the company abandoned a project and then restarted it on or after 10 May 2006 in an attempt to enable it to claim deductions in accordance with the above formula.

    For other project pools, the deduction is calculated using the following formula:

    • (Pool value × 150%) divided by DV project pool life

    The ‘DV project pool life’ is the project life or, if that life has been recalculated, the most recently recalculated project life. The project life is determined by estimating how long (in years and fractions of years) it will be from when the project starts to operate until it stops operating. Generally, a project starts to operate when the activities that will produce assessable income start. The project life is estimated from the company’s perspective, having regard to factors which are outside the company’s control.

    See also:

    The ‘pool value’ for an income year at a particular time is broadly the sum of the project amounts allocated to the pool up to the end of that year less the sum of the deductions the company has claimed for the project pool in previous years or could have claimed had the project operated wholly for a taxable purpose.

    The pool value can be subject to adjustments.

    If the company is or becomes entitled to a GST input tax credit for expenditure allocated to a project pool, the pool value is reduced by the amount of the credit. Certain increasing or decreasing adjustments for expenditure allocated to a project pool will also require an adjustment to the pool value.

    If during any income year commencing after 30 June 2003 the company ceased to have an obligation to pay foreign currency and the obligation was incurred as a project amount allocated to a project pool, a foreign currency gain or loss (referred to as a forex realisation gain or loss) may have arisen under the forex provisions. If the amount was incurred after 30 June 2003 (or earlier, if so elected) and became due for payment within 12 months after it was incurred, then (unless elected otherwise, see below) the pool value for the income year in which the amount was incurred is increased by any forex realisation loss and decreased by any forex realisation gain. However, if a forex realisation gain exceeds the pool value, the pool value is reduced to zero and the excess gain is assessable income. If the company elected that this treatment should not apply, any forex realisation gain will be assessable and any forex realisation loss will be deductible.

    The deduction for a project pool cannot be more than the amount of the pool value for that income year.

    There is no need to apportion the deduction if the project starts to operate during the income year or for project amounts incurred during the year. However, the deduction is reduced to the extent to which the project is operated for other than a taxable purpose during the income year.

    If the project is abandoned, sold or otherwise disposed of, the company can deduct the sum of the closing pool value of the prior income year (if any) plus any project amounts allocated to the pool during the income year, after allowing for any necessary pool value adjustments. A project is abandoned if it stops operating and will not operate again.

    Any amount received for the abandonment, sale or other disposal of a project is assessable.

    If an amount of expenditure allocated to a project pool is recouped or if the company derives a capital amount for a project amount or something on which a project amount was expended, the amount must be included in assessable income.

    If any receipt arises from a non-arm’s length dealing and the amount is less than the market value of what it was for, the amount received is taken to be that market value.

    Electricity connections and telephone lines

    A deduction can be claimed by the company over 10 years for capital expenditure incurred in connecting:

    • mains electricity to land on which a business is carried on or in upgrading an existing connection to that land, or
    • a telephone line to land being used to carry on a primary production business.

    Include the deduction at X Other deductible expenses item 7. If you have included the expenditure as an expense at item 6 Calculation of total profit or loss, also include the expenditure at W Non-deductible expenses item 7.

    Include any recoupment of the expenditure in assessable income at B Other assessable income item 7 if you have not included it at R Other gross income item 6.

    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 hirer can deduct the interest component subject to any reduction required under the thin capitalisation rules.

    In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and is entitled to claim a deduction for the decline in value. The cost of the asset for this purpose is generally taken to be the agreed cost or value, or the arm’s length value if the dealing is not at arm’s length.

    If the company has included hire-purchase charges at any label at item 6 Calculation of total profit or loss, include the amount at W Non-deductible expenses item 7.

    Include the deduction for the decline in value of the goods at F Deduction for decline in value of depreciating assets item 7. Include the interest component at X Other deductible expenses item 7.

    Landcare operations and decline in value of water facility, fencing asset and fodder storage asset

    Landcare operations

    The company can claim a deduction in the year it incurs capital expenditure on a landcare operation for land in Australia.

    Unless the company is a rural land irrigation water provider, the deduction is available to the extent the company uses the land for either:

    • a primary production business, or
    • in the case of rural land, carrying on a business for a taxable purpose from the use of that land, except a business of mining or quarrying.

    The company may claim the deduction even if it is only a lessee of the land.

    The deduction is also available to rural land irrigation water providers, that is, to entities whose business is primarily and principally the supply of water (other than by using a motor vehicle) to entities for use in primary production businesses on land in Australia or to businesses (other than mining or quarrying businesses) using rural land in Australia.

    If the company is a rural land irrigation water provider, it can claim a deduction for capital expenditure it incurs on a landcare operation for:

    land in Australia that other entities (being entities supplied with water by the company) use at the time for carrying on primary production businesses, or

    rural land in Australia that other entities (being entities supplied with water by the company) use at the time for carrying on businesses for a taxable purpose from the use of that land (except a business of mining or quarrying).

    A rural land irrigation water provider’s deduction is reduced by a reasonable amount to reflect an entity’s use of the land for other than a taxable purpose after the water provider incurred the expenditure.

    A landcare operation is one of the following operations:

    • eradicating or exterminating animal pests from the land
    • eradicating, exterminating or destroying plant growth detrimental to the land
    • preventing or combating land degradation other than by erecting fences
    • erecting fences to keep out animals from areas affected by land degradation to prevent or limit further damage and to help reclaim the areas
    • erecting fences to separate different land classes in accordance with an approved land management plan
    • constructing a levee or similar improvement
    • constructing drainage works (other than the draining of swamps or low-lying areas) to control salinity or assist in drainage control
    • an alteration, addition, extension, or repair of a capital nature to an asset described in the fourth to seventh dot points, or an extension of an operation described in the first three dot points
    • a structural improvement, or an alteration, addition, extension or repair of a capital nature to a structural improvement, that is reasonably incidental to levees or drainage works deductible under a landcare operation.

    You cannot claim a deduction if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements.

    Any recoupment of the expenditure would be assessable income.

    Water facilities

    The company may be entitled to claim a deduction for capital expenditure it incurs on a water facility if it is a primary producer or an irrigation water provider (for expenditure incurred on or after 1 July 2004). If the company incurred the expenditure from 7.30pm (AEST), 12 May 2015 it can deduct the full amount in the year it incurred the expenditure. If the company incurred the expenditure before this time, it can deduct one-third of the amount in the income year in which it incurred the expenditure, and one-third in each of the following two years.

    A water facility is plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water, or a structural improvement that is reasonably incidental to conserving or conveying water. It also includes a repair of a capital nature, or an alteration, addition or extension, to that plant or structural improvement. Examples of water facilities include dams, tanks, tank stands, bores, wells, irrigation channels or similar improvements, pipes, pumps, water towers, and windmills.

    Unless the company is an irrigation water provider, the expenditure must be incurred by the company primarily and principally for conserving or conveying water for use in its primary production business on land in Australia. The company may claim the deduction even if it is only a lessee of the land.

    The deduction is reduced if the facility is not wholly used for either:

    • carrying on a primary production business on land in Australia, or
    • a taxable purpose.

    The deduction for water facilities is also available to irrigation water providers, that is, to entities whose business is primarily and principally the supply (other than by using a motor vehicle) of water to other entities for use in a primary production business on land in Australia.

    If the company is an irrigation water provider, it must incur the expenditure on the water facility primarily and principally for conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia, being entities supplied with water by the company. The company’s deduction is reduced if the water facility is not wholly used for a taxable purpose.

    Fencing assets

    The company may be entitled to claim a deduction for capital expenditure it incurs on fencing assets. If the company incurred the expenditure from 7.30pm (AEST), 12 May 2015 it can deduct the full amount in the year it incurred the expenditure. If the company incurred the expenditure before this time - or if the expenditure relates to a stockyard, pen or portable fence – the company can deduct an amount for the asset’s decline in value based on its effective life.

    A fencing asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to a fence. The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of a fencing asset that is used primarily and principally in a primary production business you conduct on land in Australia. The company may claim the deduction even if it is only a lessee of the land.

    The deduction is reduced where the fencing asset is not wholly used for either:

    • carrying on a primary production business on land in Australia, or
    • a taxable purpose.
    Fodder storage assets

    The company can claim a deduction for the capital expenditure it incurs on fodder storage assets. If the company incurred the expenditure from 7.30pm (AEST), 12 May 2015 it can deduct one-third of the amount in the income year in which the company incurred it, and one-third in each of the following two years. If the company incurred the expenditure before this time, the company can deduct an amount for the asset’s decline in value based on its effective life.

    A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.

    The term 'fodder' refers to food for livestock, usually but not exclusively dried, such as grain, hay or silage. Fodder can include liquid feed and supplements. Examples of typical fodder storage assets include:

    • silos
    • liquid feed supplement storage tanks
    • bins for storing dried grain
    • hay sheds
    • grain storage sheds, and
    • above-ground bunkers.

    The expenditure must be incurred by the company on the construction, manufacture, installation or acquisition of a fodder storage asset that is used primarily and principally in a primary production business it conducts on land in Australia. The company may claim the deduction even if it is only a lessee of the land.

    The deduction is reduced where the fodder storage asset is not wholly used for either:

    • carrying on a primary production business on land in Australia, or
    • a taxable purpose.

    Loss on the sale of a depreciating asset

    Any such loss included in the accounts will differ from the balancing adjustment amount taken into account for taxation purposes.

    If the accounts show a loss on the sale of a depreciating asset under S All other expenses item 6, include that amount at W Non-deductible expenses item 7 except to the extent it relates to assets used in R&D activities, which are shown at D Accounting expenditure in item 6 subject to R&D tax incentive item 7. Also see Balancing adjustment amounts.

    Luxury car leases

    Luxury car leasing arrangements (other than genuine short-term hiring agreements or a hire-purchase agreement) are treated as notional sale and loan transactions.

    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 2016–17 is $57,581.

    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 both 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.

    In relation to the notional sale, the lessee is treated as the holder of the luxury car and is entitled to claim a deduction for the decline in value of the car.

    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 also:

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

    • the accrual amount, and
    • the decline in value of the luxury car, based on the applicable car limit.

    Both deductions are reduced to reflect any use of the car for other than a taxable purpose.

    If the company has included the lease expenses at F Lease expenses within Australia item 6 or I Lease expenses overseas item 6, include the amount at W Non-deductible expenses item 7.

    Include the deduction for decline in value of the luxury car at F Deduction for decline in value of depreciating assets item 7. Include the accrual amount at X Other deductible expenses item 7.

    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 and any assessable or deductible balancing adjustment amount for the lessee must be determined.

    Profit on the sale of a depreciating asset

    Any such profit included in the accounts will differ from the balancing adjustment amount taken into account for taxation purposes.

    If the accounts show a profit on the sale of a depreciating asset under R Other gross income item 6, include that amount at Q Other income not included in assessable income item 7. Also see Balancing adjustment amounts.

    The TOFA rules and UCA

    The TOFA rules contain interaction provisions which may modify the cost and termination value of a depreciating asset acquired by a company to which the TOFA rules apply. This will be the case where the consideration (or a substantial proportion of it) is deferred for greater than 12 months after delivery.

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

    Section 40-880 deduction

    Immediate deductibility for start-up costs

    From 2015-–16, section 40-880 allows a company that is not in business, or that is a small business entity, to immediately deduct certain start-up expenses relating to the proposed structure or proposed operation of a business that is proposed to be carried on.

    Expenditure is fully deductible in the income year incurred if:

    • it is incurred by a small business entity or a company that is not carrying on business and is not connected or affiliated with another company that is carrying on business that is not a small business entity, and
    • it relates to a business that is proposed to be carried on and is either    
      • incurred for advice or services relating to the proposed structure or proposed operation of the business, or
      • is paid to an Australian government agency in relation to setting up the business or establishing its operating structure.
    Section 40-880 deduction

    If the deduction relates to an earlier income year, or does not meet the criteria set out above, the previous rules apply, which is a five-year write-off for certain business-related capital expenditure incurred by the company for a past, present or proposed business.

    As part of the tax treatment for black hole expenditure, rules apply to business-related capital expenditure incurred after 30 June 2005. Section 40-880 deductions are no longer limited to seven specific types of business-related capital expenditure. The company may now be able to claim a deduction for capital expenditure it incurs after 30 June 2005:

    • for its business
    • for a business that it used to carry on, such as capital expenses incurred in order to cease the business
    • for a business it proposes to carry on, such as the costs of feasibility studies, market research or setting up the business entity
    • as a shareholder or partner to liquidate or deregister a company or to wind up a trust or partnership, provided that the company, trust or partnership carried on a business.

    If the company incurs the relevant capital expenditure for its existing business, a former business or a proposed business, the expenditure is only deductible to the extent the business is, was, or is proposed to be, carried on for a taxable purpose.

    The company cannot deduct expenditure for an existing business that is carried on by another entity or a proposed business unless it is proposed to commence within a reasonable time. However, it can deduct expenditure it incurs for a business that used to, or is proposed to be, carried on by another entity. Such expenditure is only deductible to the extent that:

    • the business was, or is proposed to be, carried on for a taxable purpose, and
    • the expenditure is in connection with    
      • business that was, or is proposed to be, carried on, and
      • derivation of assessable income from that business by the partnership.

    A section 40-880 deduction cannot be claimed for capital expenditure to the extent that it:

    • can be deducted under another provision of the income tax laws
    • forms part of the cost of a depreciating asset the company holds, used to hold, or will hold
    • forms part of the cost of land
    • relates to a lease or other legal or equitable right
    • would be taken into account in working out an assessable profit or deductible loss
    • could be taken into account in working out a capital gain or a capital loss from a CGT event
    • would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
    • is specifically not deductible under the income tax laws for a reason other than that the expenditure is capital expenditure
    • is of a private or domestic nature
    • is incurred for gaining or producing exempt income or non-assessable non-exempt income
    • is excluded from the cost or cost base of an asset because, under special rules in the UCA or capital gains tax regimes respectively, the cost or cost base of the asset was taken to be the market value
    • is a return of or on capital (for example, distributions by trustees) or a return of a non-assessable amount (for example, repayments of loan principal).

    The company deducts 20% of the qualifying capital expenditure in the year it is incurred and in each of the following four years.

    If you have included any of the expenditure incurred for the income year as an expense at item 6, show this amount as an expense add back at W Non-deductible expenses item 7.

    Include the deduction for the section 40-880 deduction at X Other deductible expenses item 7.

    Appendix 7. Company tax rate

    Appendix 8. Foreign and other jurisdictions codes

    Note: Guernsey, Jersey and Isle of Man each have a separate country code

    Foreign and other jurisdiction codes

    Country

    Code

    Afghanistan

    AFG

    Aland Islands

    ALA

    Albania

    ALB

    Algeria

    DZA

    American Samoa

    ASM

    Andorra

    AND

    Angola

    AGO

    Anguilla

    AIA

    Antarctica

    ATA

    Antigua and Barbuda

    ATG

    Argentina

    ARG

    Armenia

    ARM

    Aruba

    ABW

    Austria

    AUT

    Azerbaijan

    AZE

    Bahamas

    BHS

    Bahrain

    BHR

    Bangladesh

    BGD

    Barbados

    BRB

    Belarus

    BLR

    Belgium

    BEL

    Belize

    BLZ

    Benin

    BEN

    Bermuda

    BMU

    Bhutan

    BTN

    Bolivia

    BOL

    Bonaire, Saint Eustatius and Saba islands

    BES

    Bosnia and Herzegovina

    BIH

    Botswana

    BWA

    Bouvet Island

    BVT

    Brazil

    BRA

    British Indian Ocean Territory

    IOT

    British Virgin Islands

    VGB

    Brunei Darussalam

    BRN

    Bulgaria

    BGR

    Burkina Faso

    BFA

    Burundi

    BDI

    Cambodia

    KHM

    Cameroon

    CMR

    Canada

    CAN

    Cape Verde

    CPV

    Cayman Islands

    CYM

    Central African Republic

    CAF

    Chad

    TCD

    Chile

    CHL

    China

    CHN

    Christmas Island

    CXR

    Cocos (Keeling) Islands

    CCK

    Colombia

    COL

    Comoros

    COM

    Congo, Democratic Republic of (was Zaire)

    COD

    Congo, People’s Republic of

    COG

    Cook Islands

    COK

    Costa Rica

    CRI

    Cote D’Ivoire (Ivory Coast)

    CIV

    Croatia (Hrvatska)

    HRV

    Cuba

    CUB

    Curacao

    CUW

    Cyprus

    CYP

    Czech Republic

    CZE

    Denmark

    DNK

    Djibouti

    DJI

    Dominica

    DMA

    Dominican Republic

    DOM

    East Timor (Timor-Leste)

    TLS

    Ecuador

    ECU

    Egypt

    EGY

    El Salvador

    SLV

    Equatorial Guinea

    GNQ

    Eritrea

    ERI

    Estonia

    EST

    Ethiopia

    ETH

    Falkland Islands (Malvinas)

    FLK

    Faroe Islands

    FRO

    Fiji

    FJI

    Finland

    FIN

    France

    FRA

    French Guiana

    GUF

    French Polynesia

    PYF

    French Southern Territories

    ATF

    Gabon

    GAB

    Gambia

    GMB

    Georgia

    GEO

    Germany

    DEU

    Ghana

    GHA

    Gibraltar

    GIB

    Greece

    GRC

    Greenland

    GRL

    Grenada

    GRD

    Guadeloupe

    GLP

    Guam

    GUM

    Guatemala

    GTM

    Guernsey

    GGY

    Guinea

    GIN

    Guinea-Bissau

    GNB

    Guyana

    GUY

    Haiti

    HTI

    Heard and McDonald Islands

    HMD

    Holy See (Vatican City State)

    VAT

    Honduras

    HND

    Hong Kong

    HKG

    Hrvatska (Croatia)

    HRV

    Hungary

    HUN

    Iceland

    ISL

    India

    IND

    Indonesia

    IDN

    Iran

    IRN

    Iraq

    IRQ

    Ireland

    IRL

    Isle of Man, The

    IMN

    Israel

    ISR

    Italy

    ITA

    Ivory Coast (Cote D’Ivoire)

    CIV

    Jamaica

    JAM

    Japan

    JPN

    Jersey

    JEY

    Jordan

    JOR

    Kazakhstan

    KAZ

    Kenya

    KEN

    Kiribati

    KIR

    Korea, Democratic People’s Republic of (North Korea)

    PRK

    Korea, Republic of (South Korea)

    KOR

    Kuwait

    KWT

    Kyrgyzstan

    KGZ

    Laos

    LAO

    Latvia

    LVA

    Lebanon

    LBN

    Lesotho

    LSO

    Liberia

    LBR

    Libya

    LBY

    Liechtenstein

    LIE

    Lithuania

    LTU

    Luxembourg

    LUX

    Macau

    MAC

    Macedonia, The Former Yugoslav Republic of

    MKD

    Madagascar

    MDG

    Malawi

    MWI

    Malaysia

    MYS

    Maldives

    MDV

    Mali

    MLI

    Malta

    MLT

    Marshall Islands

    MHL

    Martinique

    MTQ

    Mauritania

    MRT

    Mauritius

    MUS

    Mayotte

    MYT

    Mexico

    MEX

    Micronesia, Federated States of

    FSM

    Moldova

    MDA

    Monaco

    MCO

    Mongolia

    MNG

    Montenegro

    MNE

    Montserrat

    MSR

    Morocco

    MAR

    Mozambique

    MOZ

    Myanmar (Burma)

    MMR

    Namibia

    NAM

    Nauru

    NRU

    Nepal

    NPL

    Netherlands

    NLD

    New Caledonia

    NCL

    New Zealand

    NZL

    Nicaragua

    NIC

    Niger

    NER

    Nigeria

    NGA

    Niue

    NIU

    Norfolk Island

    NFK

    Northern Mariana Islands

    MNP

    North Korea

    PRK

    Norway

    NOR

    Oman

    OMN

    Pakistan

    PAK

    Palau

    PLW

    Palestinian Territories

    PSE

    Panama

    PAN

    Papua New Guinea

    PNG

    Paraguay

    PRY

    Peru

    PER

    Philippines

    PHL

    Pitcairn Island

    PCN

    Poland

    POL

    Portugal

    PRT

    Puerto Rico

    PRI

    Qatar

    QAT

    Reunion

    REU

    Romania

    ROU

    Russian Federation

    RUS

    Rwanda

    RWA

    Saint Barthelemy

    BLM

    Saint Helena

    SHN

    Saint Kitts and Nevis

    KNA

    Saint Lucia

    LCA

    Saint Martin (Dutch part)

    SXM

    Saint Martin (French part)

    MAF

    Saint Pierre and Miquelon

    SPM

    Saint Vincent and The Grenadines

    VCT

    Samoa

    WSM

    San Marino

    SMR

    Sao Tome and Principe

    STP

    Saudi Arabia

    SAU

    Senegal

    SEN

    Serbia

    SRB

    Seychelles

    SYC

    Sierra Leone

    SLE

    Singapore

    SGP

    Slovakia (Slovak Republic)

    SVK

    Slovenia

    SVN

    Solomon Islands

    SLB

    Somalia

    SOM

    South Africa

    ZAF

    South Georgia and the South Sandwich Islands

    SGS

    South Korea

    KOR

    South Sudan

    SSD

    Spain

    ESP

    Sri Lanka

    LKA

    Sudan

    SDN

    Suriname

    SUR

    Svalbard and Jan Mayen Islands

    SJM

    Swaziland

    SWZ

    Sweden

    SWE

    Switzerland

    CHE

    Syria

    SYR

    Taiwan

    TWN

    Tajikistan

    TJK

    Tanzania, United Republic of

    TZA

    Thailand

    THA

    Timor-Leste (East Timor)

    TLS

    Togo

    TGO

    Tokelau

    TKL

    Tonga

    TON

    Trinidad and Tobago

    TTO

    Tunisia

    TUN

    Turkey

    TUR

    Turkmenistan

    TKM

    Turks and Caicos Islands

    TCA

    Tuvalu

    TUV

    Uganda

    UGA

    Ukraine

    UKR

    United Arab Emirates

    ARE

    United Kingdom

    GBR

    United States

    USA

    United States Minor Outlying Islands

    UMI

    United States Virgin Islands

    VIR

    Uruguay

    URY

    Uzbekistan

    UZB

    Vanuatu

    VUT

    Vatican City State (Holy See)

    VAT

    Venezuela

    VEN

    Vietnam

    VNM

    Wallis and Futuna Islands

    WLF

    Western Sahara

    ESH

    Yemen

    YEM

    Zambia

    ZMB

    Zimbabwe

    ZWE

    Appendix 9. Personal services income

    PSI is income that is mainly a reward for an individual’s personal efforts or skills. If PSI is received by a company (a personal services entity) it is still the individual’s PSI for income tax purposes.

    The PSI rules do not affect PSI received by employees, except when the individual is an employee of a personal services entity. The rules also do not apply to PSI that is earned in the course of conducting a personal services business.

    What is a personal services business?

    You qualify as a personal services business if, in respect of each individual whose PSI is included in your income:

    • you meet the results test, or
    • less than 80% of the individual’s PSI in an income year comes from each client (and their associates) and you meet either the unrelated clients test, the employment test or the business premises test, or
    • you obtain a determination from the Commissioner of Taxation confirming that you are a personal services business.

    What if you do not qualify as a personal services business and the PSI rules apply?

    Generally, if the rules apply to you there are three main effects:

    The PSI, reduced by certain deductions to which the personal services entity is entitled, is treated as the income of the individual who does the personal services work and must be included on their income tax return.

    The personal services entity must either

    • pay the PSI promptly, as salary or wages, to the individual who does the personal services work, or
    • attribute the net PSI to the individual who does the personal services work and withhold and remit tax on that income.

    The deductions that may be claimed are limited.

    If the personal services entity has made a net PSI loss:

    • the individual is entitled to a deduction for the loss, and
    • the total amount of the deductions to which the entity is entitled is reduced by the amount of the individual’s deduction for the loss.

    Deductions

    The deductions that may be limited include the following:

    Certain car expenses

    You may deduct:

    • a car expense for each car used solely for business purposes
    • a car expense or an amount of fringe benefits tax payable for a car fringe benefit where a car is used partly for private purposes. However, there cannot be, at the same time, more than one car for which such deductions can arise in gaining or producing the same individual’s PSI. If there is more than one car used privately at the same time for the same individual, you must choose one car only for which to claim deductions. The choice remains in effect until you cease to hold that car.
    Superannuation contributions

    You may claim a deduction for contributions that you make to a complying superannuation fund or retirement savings account (RSA) for the purpose of making provision for superannuation benefits for an individual whose PSI you derive.

    However, if the individual:

    • performs less than 20% of your principal work, and
    • is an associate of another individual whose PSI you derive

    Then your deduction cannot exceed the amount you would have to contribute to ensure you did not have an individual superannuation guarantee shortfall for that associate.

    If the associate only performs non-principal work, you cannot claim any deduction relating to PSI for contributions you make to a complying superannuation fund or RSA for the associate.

    Entity maintenance deductions

    These are:

    • fees or charges associated with an account with an authorised deposit-taking institution (but not including interest or interest-like amounts)
    • tax-related expenses
    • any expense incurred in preparing or lodging a document under Corporations Law, except if the payment is made to an associate, and
    • certain statutory fees.

    Entity maintenance deductions must first be offset against your other income. If the entity maintenance deductions exceed your other income, the excess of the entity maintenance deductions may reduce PSI attributable to the individuals.

    If your income includes the PSI of more than one individual, apportion the excess entity maintenance deductions between the individuals using the following formula:

    Excess entity maintenance deuctions multiplied by Individual's PSI divided by total PSI.

    Mortgage interest, rates and land tax

    You cannot deduct amounts that are incurred in gaining or producing an individual’s PSI if such amounts represent rent, mortgage interest, rates and land tax for the residence of the individual or the residence of an associate of yours.

    Payments to associates

    You cannot deduct payments to associates or any amount you incur from an obligation you have to your associate to the extent the payment or obligation relates to the associate performing non-principal work.

    Additional PAYG withholding obligations

    When the PSI rules apply, you will have additional PAYG obligations for the amount attributed (treated as belonging) to each individual who generated the PSI.

    The additional PAYG withholding obligation ensures that:

    • an amount of withholding has been reported and paid to us for the attributed income (the income treated as belonging to the individual who generated the PSI)
    • each individual who generated PSI receives a PAYG withholding credit for their income tax return.

    Normal PAYG withholding applies to the PSI you received that is promptly paid out to the individual as salary or wages.

    An individual receiving such salary or wages must complete item 1 Salary or wages on their income tax return.

    If you have a net PSI loss for an income year, there are no additional PAYG withholding obligations as no income has been attributed.

    Treatment of attributed PSI on your income tax return

    If PSI is attributed to an individual, the income is not assessable to the company. Include the PSI on the company tax return as follows:

    Include the attributed amount at Q Other income not included in assessable income item 7, as calculated in Worksheet 2: Other reconciliation items.

    The following example will help you complete the PSI details on the company tax return. The entity in the example is not conducting a personal services business.

    Example 1: Some salary or wages have been promptly paid, and some PSI is attributed to an individual because it has not been promptly paid as salary or wages

    A company derives income that is the PSI of a director.

    Part of the PSI has been promptly paid as salary within 14 days of the end of the relevant PAYG withholding period. The company’s profit and loss statement is as follows:

    Income (all PSI of the director) = $100,000

    Less Expenses

    Salary = $30,000

    Rent for director’s home that is a place of business = $5,000

    Other expenses (all deductible = $25,000

    Total = $60,000

    Net profit = $40,000

    The rent paid for the director’s home used as a place of business is not deductible under the alienation of PSI provisions. The net profit is PSI of the director and is attributed to the director for income tax purposes (together with the amount representing nondeductible rent expense).

    Income information

    Income

    Label

    Amount

    Other gross income

    R

    $100,000

    Total income

    S

    $100,000

    Expense information

    Expense

    Label

    Amount

    Rent expenses

    H

    $5,000

    All other expenses

    S

    $55,000

    Total expenses

    Q

    $60,000

    Total profit or loss

    Calculation

    Label

    Amount

    (subtract Total expenses from Total income)

    T

    $40,000

    Complete item 14 Personal services income as follows:

    Write the amount of income you included at 6R at 14A. Write the amount of expenses you included at 6Q at 14B.

    Profit or Loss

    Total profit or loss amount shown at T item 6

     


    $40,000

    Add

     


     


    Non-deductible expenses (rent)

    W

    $5,000

    Subtotal

     


    $45,000

    Less

     


     


    Other income not included in assessable income

    Q

    $45,000

    Subtraction items subtotal

     


    $45,000

    Taxable income or loss

    T

    $0

    Treatment of net PSI loss on your income tax return

    If an individual can deduct the net PSI loss, the total amount of the deductions to which the company is entitled is reduced by that amount. Include the PSI loss amounts on the company tax return as follows:

    Include the net PSI loss amounts at W Non-deductible expenses item 7 Reconciliation to taxable income or loss as calculated in Worksheet 2: Other reconciliation items.

    The following example will help you complete the PSI details on the company tax return. The entity in the example is not conducting a personal services business.

    End of example
    Last modified: 02 Oct 2019QC 51220