Lodging your business’s annual income tax return

Tax time is when all the efforts you have made over the financial year to keep the right records pays off. Lodging your annual income tax return starts by gathering all the information you will need to give us – incoming amounts, outgoings, evidence of claimable expenses, documents to back up offsets and rebates, and so on.

But remember; the assessable income of your business is more than just what passed through the cash register – that is, money made in the ordinary course of carrying on a business, such as selling trading stock or providing services. The ATO will also want to know about amounts your business has received from other sources.

So, your “income” can also include:

• isolated or one-off transactions outside the ordinary course of business
• any profit on the sale of depreciating assets
• commission income
• dividends and franking credits on business investments
• bad debts that are finally paid, which you had previously written off and claimed as a deduction
• grants, such as the apprenticeship incentive
• some incentive payments (like cash paid as an enticement to lease premises)
• interest received on early payment or over payment of tax, and interest from business accounts
• payments for leases, and plant hire charges
• capital gains (net) from selling assets such as buildings or land that are subject to the CGT rules
• payments for certain types of receipts for the rights to use intellectual property or personal expertise
• cash prizes or awards made to your business
• profit from disposing of leased cars and equipment

• refunds of rates and taxes
• rental income (from business-owned property)
• receipts which replace something that would have been income, such as compensation payments for loss of earnings
• some types of compensation (like worker compensation or for loss of stock)
• royalties (such as from the use of a patent)
• some subsidies for carrying on a business.

What else is “income”, and what’s not?

If you took some trading stock for your own use or gave it away for non-business reasons, then the market selling value of that stock is to be included in your assessable income as well. Any excess of the value of stock on hand at year end over the value of stock on hand at the start of the year is assessable income too (to offset the upfront deductions available for purchasing that stock during the year).

And just in case you made some sort of “barter” arrangement over the year, and swapped goods or services that you deal in for other goods or services from another business, the market value of that swap is also viewed by the ATO as assessable income.

But make sure you include gross earnings or proceeds, not just your profit. This is because the costs incurred in earning that gross income are dealt with separately in considering deductions. There are exceptions to this general rule, such as depreciating assets or CGT assets.

So that’s quite a list of what to include when totalling your assessable income. But there is another list (a much shorter one) of items that are not included — that is, what is not considered to be “income”. These can include:

• amounts earned from a hobby
• gifts or amounts bequeathed
• lottery winnings
• prizes not related to your business
• betting and gambling wins (unless that’s your line of business)
• GST you have collected
• any money you have borrowed
• child support and maintenance
• exempt government pensions, allowances and payments, such as family tax benefit payments.

Whether you operate as a sole trader or through a partnership, company or trust, it is advisable to have a separate bank account for all your business transactions to keep your business income separate from your personal income.

Deductions

When thinking about what we will need to be able to lodge your annual tax return, don’t forget that you are likely to be able to claim most expenses you incur in running your business as deductions to reduce your taxable income. The main proviso is that any expense claimed needs to be directly related to earning assessable income before it will qualify as a deduction. We can help guide you through allowable deductions.

However, if the business expenditure is considered to be “capital” in nature, chances are that you won’t be able to claim the full amount in the year of the expenditure, but you will often be able to claim a portion per year over a number of years (to depreciate it).

With trading stock, if your situation is the reverse of that mentioned above (and the value of stock on hand at year end is less than at the start), that value is deductible.

You may also be able to reduce the tax you have to pay by using tax credits or offsets, such as the foreign income tax offset or remote area offset. Ask this office for guidance.

Sole traders

If you operate your business as a sole trader, your business income and deductions is mixed in with your personal tax affairs when lodging your return. What you include in your individual tax return includes:

• your assessable business income less the business deductions you can claim
• any other assessable income, such as salary and wages (shown on a payment summary), dividends and rental income, less any allowable deductions against this income.

Partnerships

If you operate through a partnership, the business lodges a partnership tax return to show its net income. This includes the partnership’s income less expenses and deductions.

However, the partnership itself does not pay any tax – each partner pays the tax on their respective share of the net income. So, as one of the partners, you must also report the following on your individual tax return:

• your share of any partnership net income or loss
• any other assessable income, such as salary and wages (shown on a payment summary), dividends and rental income, less any allowable deductions against this income.

Trusts
If you operate your business through a trust, it lodges a trust tax return to show its net income or loss. This is the trust’s income less expenses and deductions. Any beneficiary of the trust who receives a distribution (which may include you and/or your family members) from the trust must report the following on their personal income tax return:

• any taxable income received from the trust
• any other assessable income, such as salary and wages (shown on a payment summary), dividends and rental income, less any allowable deductions against this income.

The trustee pays tax on any taxable income that it does not distribute.

Companies
If you operate a business through a company, remember that the company’s income is separate from your personal income. The company must lodge a company tax return showing taxable income and the amount of tax it is liable to pay on that income by:

• reducing its assessable income by the deductions it can claim to arrive at its taxable income
• multiplying its taxable income by the company tax rate of 30% to work out the tax it is liable to pay.

Offsets and rebates may be available as well.

The forms we will use to report your business’s taxable income and claim your deductions depends on the way you operate your business. Also note that by using the services of this office, you will generally ensure a much later deadline for lodging your tax return than if you were to do so off your own bat.

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