Non-cash business benefits – this needs to be converted into ordinary income. The intention is to prevent business trading with one another in goods terms.
The amount deemed to be converted under S.21 A ITAA 1936 is reduced by
1) any amount that is a non-cash business benefits will be reduced by one-off deduction
2) if the non-cash business benefits is classified as a non-deductible entertainment expenditure
Reimbursement of a non-deductible expenditure – If you receive an reimbursement, then that amount is generally going to be treated as income.
Disposal of a leased car for a profit – Difference between the original cost and termination cost over a period of time (assessable income)
Sale of a Work-in-progress amount – when a company is selling its unfinished inventories/products, this will be an assessable income.
Other types of statutory income – Royalties; interest; gain on disposing depreciating assets; trading stock; employment termination benefits; capital gains; superannuation benefits, dividends;
1. 2 positive limbs – 1) incurred in gaining the taxpayer’s income 2) necessarily incurred in carrying on a business
2. 4 negative limbs – 1) of a capital nature 2) of a private or domestic nature 3) incurred in relation to exempt income or NANE 4) items to be prevented from deduction due to the legislation (e,g, fine)
Expense doesn’t necessarily needs to be matched to the assessable income that is produced in the same year as the expense.
Incurred – in a situation that you are going to be definitely committed to the expense; It’s not necessarily to pay for it but when you know that you are going to pay for it.
Interest expense – two key test; 1) use test – income producing use 2) purpose test – purpose of borrowing the funds
2 Positive limbs
Incurred in gaining or producing assessable income – expense has to match that income- generation
Carrying on a business – Heavy commercial purpose; profit-making is a key driver
Pre-commencement and post-cessation expenditure – there needs to be a sufficient connection in order for these items to be allowed as deduction.
Specific deductions –
1) Repairs (if the item is of a capital nature or of a more maintenance nature); significant enhancement – capital nature; To function – deductible
2) Borrowing expenses (legal fees; loan establishment fee; guarantee fee;) – to be written off over the loan or 5 years, whichever is the lesser. If the amount is less the $100, then write it off in the year when the expenditure is incurred.
3) Bad debts – bad debts provision is not going to be deductible;
4) Leave payments – deduction is allowed when payments are made
5) tax-related expenses ; allowed as a deduction
6) entertainment expenditure – generally denied except a few situations a) entertainment gives rise to FBT b) company that is focused on entertainment ; c) promotion that is offered to the public; d) providing drinks and food to employees (morning tee)
7) Prepayments – deductible when they have been incurred and spread over any eligible service period, but there are circumstances where payments can be immediately deducted; a) if the prepayment falls on any other provision that allows immediate deduction, then the prepayment is allowed. b) Individuals who are not carrying on a business, where the period covered by the expenditure is 12 months or less. c) A ‘small business entity’ taxpayer where the period covered by the expenditure is 12 months or less; d) Expenditure that is less than $1,000; 7) Expenditure that is required by law
8) acquisition of the WIP – allows the deduction
Denial and Limitations – fines; penalty; bribes; second-hand goods; etc
Work, self-education, car and business travel expenses – generally be allowed; requires evidence and substantiation
Trading stocks – inventory business is carrying;
For tax purpose: 1) if the opening stock < closing stock; the difference will be included in the assessable income; 2) if opening stock > closing stock, then a deduction;
Purchases – it needs to be ‘on hand‘, inventory doesn’t necessarily needs to be physically on hand as long as you have the ability to dispose that stock. Trading stock that will be in-transit is generally when the business has the power because the risks and power would be fallen on your hand already.
Non-arm’s length transactions – bring it to the market value
Value of the stock – Opening stock = the closing stock of the prior year; closing stock = 1) cost price; 2) market-selling price 3) a replacement value
Obsolescence – when the stocks are no longer useful; no longer relevant; this will be deductible
Disposals of trading stock – 1) ordinary income / deductible ; 2) gifted – deductible to the extent that is to a deductible recipient, such as a charity 3) change of ownership – notional disposal; no income/deduction impacts 4) changes purpose – deemed disposal or deemed acquisition; 5) property becomes the trading stock
State taxes – detailed understanding is generally not required.
Tax administration – PAYG Installments (salary to remit to the ATO); Self-assessment system; Sometimes individual or companies need to amend. ATO has the ability to request the information;
Record-keeping – 5 years required