Item 5 - Business income and expenses

Complete the Payment Summary schedule and amounts for the labels at items 5 and 6 will be integrated from that schedule. Refer to Payment summary schedule (PS). The Non-Individual Payment Summary is not deleted using Preparation > Delete schedules. To clear the payment Summary and values integrated to the return, open the schedule and delete the details from it. If you wish to retain the text, then delete the values from the $ amount fields only.

Show at label C and/or D gross income received by the trust that was subject to withholding where an ABN was not quoted. This includes amounts of tax withheld.

If an amount is shown at label C and D, complete a Non-individual PAYG payment summary schedule 2018 and lodge it with the return.

If either or both of labels C and/or D is to be completed, a Payment Summary schedule 2018 must be completed and the corresponding amount of tax withheld shown at item 6 Tax withheld where ABN not quoted.

Do not include any income distributions from other partnerships or trusts. Show these distributions at item 8 Partnerships or trusts.

CCH References

6-080 Net income of a trust

7-050 Small business entities - aggregated turnover

Do not include at this label amounts subject to Foreign resident capital gains withholding. The capital gains should be included at item 21 Capital gains and any credit for withholding capital gains included at item 21 label B.

You only complete this label if the trust is a non-resident trust. An Australian resident trust should not include an amount, such as, foreign sourced income at this label.

Show at label B gross payments to the trust that were regulated foreign resident income. Gross payments include amounts withheld.

Regulated foreign resident income refers to payments which are prescribed in the Taxation Administration Regulations 2017 (formerly the Tax Administration Regulations 1976) as being subject to the foreign resident withholding (excluding capital gains) measure.

Show gross distributions of foreign resident regulated income from other partnerships and/or trusts at item 8. A Non-Individual PAYG payment summary schedule 2018 is NOT required for these distributions because they do not have an associated payment summary

Do NOT include payments where the amount was varied to nil under the foreign resident withholding (excluding capital gains) measures because the income was not taxable under a tax treaty.

CCH References

6-080 Net income of a trust

7-050 Small business entities - aggregated turnover

22-000 Tax liability of non-residents

These labels are for assessable government industry payments received from all sources. Generally, government grants, credits, benefits, bounties and subsidies are assessable income in the hands of the recipient if they are received in, or in relation to, the carrying on of a business. This generally includes amounts of a capital nature. However, amounts relating to the commencement or cessation of a business may not be assessable.

Show at label E and/or F the following assessable government industry assistance:

• bounties

• employee subsidies

• export incentives grants

• fuel grant under the energy grants credits scheme

• fuel tax credit

• industry restructure and adjustment payments

• product stewardship (oil) benefit

• producer rebate (wine equalisation tax).

Action code: If the amount includes a fuel tax credits or product stewardship (oil) benefit, select D from the list. Otherwise, leave the action code blank.

If both Primary Production and Non-primary production amounts are entered an action code must be selected for each.

Do not show Medicare payments received by medical practices at this item. Show them at Income label H Other business income item 5.

CCH References

6-080 Net income of a trust

7-050 Small business entities - aggregated turnover

This is the amount of any other business income (or loss) derived by the trust and not already included at any of labels C, D, B, E and F.

Show at label G and/or H other income, such as revenue arising from the sale of goods, services rendered, disposal of depreciated assets, work in progress amounts assessable under s15-50 of the ITAA and royalties Even if the TOFA rules apply to the trust's financial arrangement show at G or H amounts which would be brought to account under the TOFA rules.

If the TOFA rules apply to the trust, include other business income from financial arrangements subject to the TOFA rules at G or H.

If an amount for profit or loss on the sale of depreciating assets is included at labels G and or H refer to Balancing adjustment amounts below.

Refer to Guide to the taxation of financial arrangements (TOFA) rules on the ATO website.

Balancing adjustment amounts

Non-Small business entities

If the Trust ceases to hold or to use a depreciating asset, a balancing adjustment event may occur. For assets subject to the small business entity depreciation rules refer to the information at Small business entities.

For assets not subject to these rules, if a balancing adjustment event occurs, the trust will need to calculate a balancing adjustment amount to include in its assessable income or to claim as a deduction. Show an assessable balancing adjustment amount as an income add back at Reconciliation items, label A Income reconciliation adjustments, item 5. Show a deductible balancing adjustment amount as an expense subtraction at Reconciliation items, label B Expenses reconciliation adjustments, item 5.

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 which is attributable to that non-taxable use.

If a balancing adjustment event occurred to a depreciating asset of the Trust during the income year, you may also need to include an amount at label O, item 48, label H Termination value of intangible depreciating assets or label W, item 48, label I Termination value of other depreciating assets.

Small business entities

• Low-cost assets: If the Trust has disposed of a low-cost asset for which it has claimed an immediate deduction this year or in the prior year, include the taxable purpose proportion of the termination value at Reconciliation items, item 5. For example: for a low-cost asset used only 50% of the time for an income-producing purpose which was sold for $200 (excluding GST), only $100 will be assessable and included as a reconciliation adjustment.

• Assets allocated to Small business pools: If the Trust disposes of depreciating assets that have been allocated to either the general or long-life small business pools, the taxable purpose proportion of the termination value is deducted from the closing pool balance. For example: for a pooled depreciating asset used only 50% of the time for an income-producing purpose which was sold for $3,000 (excluding GST), only $1,500 will be deducted from the closing pool balance.

If the balance of a pool (after taking into account any additions and disposals but before calculating the deductions) is less than $1,000 but more than zero, the Trust can claim an immediate deduction for this amount.
If the closing pool balance is less than zero, the amount below zero is included in assessable income at Reconciliation items, item 5.
If expenses are incurred in disposing of a depreciating asset these expenses may be taken into account.

• Other depreciating assets:

Refer to the Guide to depreciating assets 2018 for information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets and include balancing adjustment amounts at Reconciliation items, item 5.

Total business income

The application calculates the total for each type of income; the total for primary production income; the total for non-primary production income and the overall total income.

Do not include:
Dividend income, income from rents, income from capital gains, interest income, net foreign income, foreign exchange profit or loss and a share of income from another partnership or trust. Include these types of income at the specific income items.

CCH References

6-080 Net income of a trust

7-050 Small business entities - aggregated turnover

You will not have any Primary Production amounts and the label has been removed.

Show at label P Non-Primary production all expenses directly relating to gaining the income shown at item 5 label B- Gross payments subject to foreign resident withholding (excluding capital gains).

These amounts should not be shown or included at any other expenses label at item 5.

Do not include any expenses that were incurred in gaining income that is not assessable in Australia.

CCH References

6-080 Net income of a trust

7-050 Small business entities

22-000 Non-resident withholding

Show at label C the expenditure incurred for labour and services provided under contract other than those in the nature of salaries and wages. For example:

• payments to self-employed people such as consultants and contractors

• commissions paid to people not receiving a retainer

• agency fees - for example, advertising

• service fees - for example, plant service

• management fees

• consultant fees.

Do NOT include the following at C:
* expenses for external labour which are incorporated into the amount shown at Expenses, E Cost of sales
* expenses for accounting or legal services. Show these at Expenses, N All other expenses.

Record keeping

Keep a record of the following:

• name and address of the payee

• nature of the services provided

• the amount paid.

CCH References

6-080 Net income of a Trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

Show at D the employee superannuation expenses incurred for the income year.

Employers are entitled to a deduction for contributions made to a complying superannuation, provident, benefit or retirement fund, or retirement savings account (RSA), if the contribution is to provide superannuation benefits for eligible employees or to provide benefits to the employee's dependents on the employee's death. Superannuation benefits mean payments for superannuation member benefits or superannuation death benefits.

Employers can claim a deduction for eligible superannuation contributions made in respect of a former employee within four months of the employee ceasing employment and at any time after the employee ceases employment for defined benefit interests. Contributions are deductible in the financial year they were made.

A deduction is allowable in the income year in which the contributions are made.

NO deduction is allowable if the fund is a non-complying fund.

In addition, contributions made to a non-complying fund do not count towards superannuation guarantee obligations. The superannuation guarantee charge is payable on the superannuation guarantee shortfall. As such, it is neither a superannuation contribution nor tax deductible.

Under the superannuation guarantee legislation an employer needs to provide a minimum level of superannuation for employees or pay the superannuation guarantee charge (SGC) payable on the superannuation guarantee shortfall.

The SGC is not a superannuation contribution and is not tax deductible. Employers may not claim a tax deduction for any late contribution which they make to reduce the amount of SGC they have to pay under the superannuation guarantee late payment measures.

There is no limit on the amount of contributions that can be claimed as a deduction by an employer contributing to a complying superannuation fund or RSA in respect of employees under the age of 75 years. However, the employee may be liable to pay additional tax if their concessional contributions exceed the concessional contributions cap. For more information, see Super contributions – too much can mean extra tax on the ATO website.

If the employee has reached the age of 75 years, there is a restriction on the deduction that can be claimed for an employer contribution to a complying superannuation fund or RSA. For contributions made after the 28th day of the month following the employee's 75th birthday, the deduction claimable is limited to the amount of the contribution required under an industry aware, determination or notional agreement preserving State awards.

Refer to Key super rates and thresholds on the ATO website.

Contributions paid by an employer for employees to a non-complying superannuation fund may be fringe benefits and, as such, may be subject to tax under the Fringe Benefits Tax Assessment Act 1986.

CCH References

6-080 Net income of a trust

7-050 Small business entities

13-710 Deduction - contributions by employers

16-015 Expenses Necessarily Incurred in Carrying on a Business

Small business entities

If the trust is a small business entity using the simplified trading stock rules, it will need to know the value of its closing stock in order to calculate cost of sales. Small business entities only need to account for changes in the value of their trading stock in limited circumstances.

If the trust does not need to account for the change in value of closing stock, its closing stock will equal its opening stock value. If the trust does need to account for the change in value of closing stock, or chooses to do so, refer to Item 40 - Closing stock for information about how to calculate the closing stock value.

For further information on cost of sales, read on.

All trusts

Show at label E the cost of anything produced, manufactured, acquired or purchased for manufacture, sale or exchange in deriving the gross proceeds or earnings of the business. This includes freight inwards and may include some external labour costs - if these are recorded in the cost of sales account in the normal accounting procedure of the business.

If the cost of sales account is in credit at the end of the income year - that is, a negative expense - precede the amount with a negative.

For more information on the circumstances in which packaging items held by a manufacturer, wholesaler or retailer are 'trading stock' as defined in section 70-10 of the ITAA 1997 see Taxation Ruling TR 98/7 Income tax: whether packaging items (i.e. containers, labels, etc) held by a manufacturer, wholesaler or retailer are trading stock.

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

If the TOFA rules apply to the trust, include all the trust's bad debts from financial arrangements subject to the TOFA rules at F item 5.

Show at label F the bad debts expense incurred for the income year.

* Show recovery of bad debts at G and/or H Other business income item 5.

* You cannot claim a deduction for bad debts unless the debt which is bad has previously been included in assessable income, or is for money lent in the ordinary course of the business of the lending of money by a trust carrying on that business.

* Under the trust loss provisions of Schedule 2F to the ITAA 1936, certain rules have to be satisfied by a trust before the trustee can deduct bad debts or debt/equity swap amounts. For more information refer to Trust loss provisions on the ATO website.

* Do not include accounting provisions for doubtful debts at F. Show these at Expenses, N All other expenses then add them back at Reconciliation items, B Expense reconciliation adjustments. To calculate the amount of the expense reconciliation adjustment, use the Reconciliation Schedule A which will integrate the correct values to the relevant labels in the Trust return.

*Before a bad debt can be claimed, it must be bad and not merely doubtful. The deduction depends upon the facts in each case and, where applicable, the action taken for recovery. Refer to Taxation Ruling TR 92/18 Income tax: bad debts.

* You can claim a deduction for partial debt write-offs where only part of a debt is bad and is written off. You can claim a deduction for the amount written off.

* Deductions for bad debts may also be reduced by the commercial debt forgiveness provisions.

* You can also claim a deduction for losses incurred in debt-for-equity swaps for debt written off. You may be able to claim a deduction for a debt-for-equity swap by the trust, if the provisions of sections 63E to 63F of the ITAA 1936 are satisfied. Under these provisions a deduction may be allowable for the difference between the amount of the debt extinguished and the greater of the market value of the equity or the value at which the equity is recorded in the creditor's books at the time of issue. The market value of the equity is the price quoted on the stock exchange or, if the equity is not listed, the net asset backing of the equity.

* If the trust is NOT in the business of lending money, the deduction is limited to the amount of the debt that has been included in assessable income.

Even if the TOFA rules apply to the trust, show at F item 5 all the trust's bad debts. This includes amounts from financial arrangements subject to the TOFA rules.

Record keeping

If the trust writes off bad debts during the income year, keep a statement for all debtors in respect of which a write-off occurred, showing:

• their name and address

• the amount of the debt

• the reason why the debt is regarded as bad, and

• the year that the amount was returned as income.

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

16-580 Deductions for bad debts

Enter the expenses incurred through both finance and operating leases on leasing assets, such as for leasing motor vehicles, plant or other equipment. Both financial and operating leases are included here. Do not include the cost of leasing real estate or capital expenditure incurred to terminate a lease or licence.

Although capital expenditure to terminate a lease or licence is not deductible in one year, a five-year straight-line write-off may be allowable under section 25-110 of the ITAA 1997. For certain capital expenditure incurred to terminate a lease or licence if the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business.

Expenses incurred under a hire purchase or instalment sale agreement of goods, are not lease expenses. Such expenses are referred to in Appendix 6 in the ATO Trust return instructions.

In some circumstances lease expenses may be debt deductions for the purposes of the new thin capitalisation rules. For information on thin capitalisation, refer to Appendix 3 in the ATO Trust return instructions.

In certain cases, an amount of tax - withholding tax - is withheld from amounts paid or payable under equipment leases to non-residents and overseas branches of residents, and must be remitted to the ATO. This is also subject to the operation of any relevant tax treaties.

If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report by 31 October 2018. If an amount of lease expense is not allowable as a deduction, such as amounts disallowed under the thin capitalisation rules, add back the amount at Reconciliation items, Expense reconciliation adjustments.

Limited Recourse Debt

Under Division 243 of the ITAA 1997, the limited recourse debt rules, you must include excessive deductions for capital allowances as assessable income if expenditure on property has been financed or refinanced wholly or partly by limited recourse debt. This will occur if:

• The limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor, and

• Because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply in working out whether the debt has been fully paid.

Limited recourse debt is a debt where the rights of the creditor against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to the property that has been financed by the debt, or is security for the debt, or rights in relation to such property. A debt is also a limited recourse debt if, notwithstanding that there may be no specific conditions to that effect, it is reasonable to conclude that the creditor's rights against the debtor are capable of being limited in that way. Limited recourse debt includes a notional loan under a hire purchase or instalment sale agreement of goods to which Division 240 of the ITAA 1997 applies (refer to section 243-20). The rules in section 243-75 apply where Divisions 243 and 245 (commercial debt forgiveness - refer to Appendix 4 in the ATO Trust return instructions) both apply to the same debt.

Record keeping

If a deduction is claimed for the cost of leasing depreciating assets, keep a record of the following:

• A description of the items leased

• Full particulars of the lease expenses for each item - including motor vehicles - showing:

• To whom the payments were made

• The terms of the payments including details of any prepayments or deferred payments

• If any assignment, defeasance or re-direction to pay the payments was entered into, full particulars of the arrangement including to whom the payments were made

• Details of use other than for producing assessable income, and

• Any documentation on or relating to the lease of the items.

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

Enter expenses as a tenant on rental of land and buildings used in the production of income.

Related Topics

Rental Schedules (B and BR)

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

16-650 Landlord’s or lessor’s expenses

20-510 Construction expenditure

Show at label I the interest incurred on money borrowed within Australia and overseas to acquire income-producing assets, to finance business operations or to meet current business expenses.

Even if the TOFA rules apply to the trust, show at I all interest incurred on money borrowed within Australia and overseas to acquire income-producing assets, to finance business operations or to meet current business expenses. This includes interest from financial arrangements subject to the TOFA rules.

Do not include interest expenses claimable against rental income. These expenses are shown at label G Interest deductions item 9 Rent.

* An amount of tax - withholding tax - is generally withheld from interest paid or payable to non-residents and to overseas branches of residents. You must remit this to the ATO. If you have withheld amounts from payments to non-residents and overseas branches of residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report by 31 October 2018.

* The thin capitalisation rules may apply to reduce interest deductions. These rules place a limit on the amount of interest and other loan costs that can be deducted for Australian tax purposes. Refer to Appendix 3 in the ATO Trust return instructions. Include the disallowed amount at Reconciliation items, label B Expense reconciliation adjustments.

* Distributions made by the issuer of a non-share equity interest are not deductible to a trust.

* You may not be able to claim interest in certain situations, for example. If it has been incurred for private or domestic purposes.

Refer to Guide to the taxation of financial arrangements (TOFA) rules on the ATO website.

Show the amount of interest not allowable at Reconciliation items, label B Expense reconciliation adjustments.

Record keeping

If interest is paid to a non-resident or to an overseas branch of a resident, keep a record of the following:

• Name and address of recipient(s)

• Amount of interest paid or credited

• Amount of withholding tax withheld and the date on which it was remitted to the ATO.

Interest expenses overseas - item 29 label D cannot exceed total interest expenses at item 5 label I.

Related Topics

Interest Income worksheet (int) - entities

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

17-090 Adjustments to cost

17-640 Termination value of depreciating assets

23-000 Taxation of financial arrangements - TOFA

Show at J the royalty expenses for the income year. Include royalties paid to residents and non-residents.

An amount of tax - withholding tax - is generally withheld from royalties paid or payable to non-residents and to overseas branches of residents. You must remit this to the ATO. If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report by 31 October 2018.

For more information phone the ATO Business Tax Infoline on 13 28 66

Record keeping

Keep a record of the following:

• Name and address of recipient(s)

• Amounts paid or credited

• Nature of the benefit derived - for example, a copy of the royalty agreement

• Details of tax withheld where applicable and the date on which it was remitted to the ATO.

Royalty expenses overseas - Item 29, label E cannot exceed total royalty expenses at item 5, label J.

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

Use the Tax Depreciation worksheet (d) to manage all depreciating assets under the Small business simplified depreciation rules, the UCA or Pooling.

If the trust is an eligible small business entity and has chosen to use the simplified depreciation rules, refer to Small Business Entities below. Otherwise read the information for All other trusts below.

All other trusts

Show at label K the book depreciation expenses for depreciating assets, other than for pool assets (including assets reallocated to the pool from a former long life small business pool). For assets allocated to the pool, include at K the amount of the pool deduction to be claimed for tax purposes. For information about small business entity depreciation deductions, Refer to Small business entities in the ATO Trust return instructions.

This amount does not include:

• profit on sale of depreciating assets-shown at labels G and H-Other business income

• loss on sale of depreciating assets-shown at label N-All other expenses.

Small Business entities

If the trust is an eligible small business entity and has chosen to use the simplified depreciation rules, show at label K the total depreciation deductions being claimed under the simplified depreciation rules and the UCA rules. The trust does NOT need to complete a capital allowances schedule.

Recent changes to the law mean that from 1 January 2014 the instant asset write-off threshold has reduced from $6,500 to $1,000 and the special depreciation rules for motor vehicles have been removed.

New laws have passed that allow small businesses to claim an immediate deduction for assets they first acquire and start to use, or have installed ready for use, provided each depreciable asset costs less than $20,000. This will temporarily replace the previous instant asset write-off threshold of $1,000.

This measure started 7:30pm (AEST) 12 May 2015 and will end on 30 June 2018.

The balance of the general small business pool is also immediately deductible if the balance is less than $20,000 at the end of an income year that ends on or after 12 May 2015 and on or before 30 June 2018 (including an existing general small business pool).

The 'lock out' laws have also been suspended for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they have opted out) until the end of 30 June 2018.

A small business entity choosing to use these simplified depreciation rules must use both the immediate write-off and the pooling where applicable. You can’t choose to use one and not the other.

Some depreciating assets are excluded from these simplified depreciation rules, but you may be able to claim a deduction under the UCA rules, for example horticultural plants (including grapevines) are excluded from the small business entity depreciation rules and are deducted under special UCA provisions. Refer to Appendix 6 in the ATO Trust return instructions.

CCH References

7-050 Small business entities

17-000 Overview of uniform capital allowance system

17-005 Deduction for depreciating assets

17-325 Small business simplified depreciation rules

17-480 Choice of method to calculate decline in value

Show at label L motor vehicle running expenses only. These expenses include fuel, repairs, registration fees and insurance premiums. They do not include the following expenses shown at:

• Expenses, label G Lease expenses.

• Expenses, label I Total interest expenses

• Expenses, label K Depreciation expenses.

Show any adjustment for tax purposes to the motor vehicle expenses included in the profit and loss statement at Reconciliation items, label B Expense reconciliation adjustments.

Use the Reconciliation worksheet Schedule A to calculate the values to integrate to the relevant labels at Item 5.

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

16-310 Deductible motor vehicle expenses

Show at label M the expenditure on repairs and maintenance of plant, machinery, implements and premises.

Write back any non-deductible expenditure, such as items of a capital nature or amounts relating to private use of an item shown at label M, at Reconciliation items, B Expense reconciliation adjustments. The following information will help you work out whether you should make an expense reconciliation adjustment.

Repairs

If it is not expenditure of a capital nature, you may deduct the cost of repairs to property, plant, machinery or equipment used solely for producing assessable income or in carrying on a business for that purpose. You can only deduct expenditure on repairs to property used partially for business or income-producing purposes - for example, if the property is also used for private purposes, or in the production of exempt income - to an extent that is reasonable in the circumstances.

If items are newly acquired, including items acquired by way of a legacy or gift, the cost of remedying defects in existence at the time of acquisition is generally of a capital nature. Expenditure incurred in making alterations, additions or improvements is of a capital nature and is not deductible.

For more information on deductions for repairs, see Taxation Ruling TR 97/23 - Income tax: deductions for repairs.

Record keeping

To support any claim for repairs, keep source records showing full details of the nature and cost of repairs to each item.

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

16-700 Deductions for Repairs

Show at label N the total of all other business expenses for the income year which have not already been included at Expenses labels C to M - for example, travel expenses.

Write back capital and other non-deductible items included at label N at Reconciliation items, label B Expense reconciliation adjustments.

If you have included an amount for a loss on the sale of a depreciating asset at label N, refer to Appendix 6 in the ATO Trust return instructions.

Calculation of some deductions may be affected by the commercial debt forgiveness provisions, refer to Appendix 4 in the ATO Trust return instructions.

Expenses listed here that are costs associated with borrowing and servicing debt may not be allowable under the thin capitalisation rules. Refer to Appendix 3 in the ATO Trust return instructions.

Include the non-deductible amount at Reconciliation items, label B Expense reconciliation adjustments.

Include the non-deductible amount at Reconciliation items, label B Expense reconciliation adjustments.

Expenses listed here that are costs associated with borrowing and servicing debt may not be allowable under the thin capitalisation rules. Refer to Appendix 3 in the ATO Trust return instructions.

Include the non-deductible amount at Reconciliation items, label B Expense reconciliation adjustments.

If what you show at label N includes an amount which is brought to account under the TOFA rules, also complete item 31 Taxation of financial arrangements (TOFA).

Refer to Guide to the taxation of financial arrangements (TOFA) rules on the ATO website.

CCH References

6-080 Net income of a trust

7-050 Small business entities

16-015 Expenses Necessarily Incurred in Carrying on a Business

17-090 Adjustments to cost

17-640 Termination value of depreciating assets

23-000 Taxation of financial arrangements - TOFA

Show at label A the net income related reconciliation adjustment. The amounts included here fall into two classes that either increase or reduce the net adjustment:

• income add backs - amounts not shown in the accounts, but which are assessable income, including timing adjustments. These items increase the total amount shown at label A. Examples of Income add-backs are:

• any excess of the tax value of closing stock over the tax value of opening stock (other than small business entities using the simplified trading stock rules).

• assessable balancing adjustment amounts on depreciating assets

• limited recourse debt amounts

• other assessable income not included in the accounts.

• income subtractions - income shown in the accounts, which is not assessable income, including timing adjustments. These items reduce the total amount shown at label A. Examples of Income subtractions are:

• exempt income, including income exempted from Australian tax under a double tax agreement (DTA)

• profit on the sale of a depreciating asset

• personal services income included in the assessable income of an individual (attributed amount)

• other income shown in the accounts which is not assessable for income tax purposes.

If the income subtractions exceed the income add backs, the total is a negative amount and a /L will be printed on the return to the right of the amounts shown at label A.

Show at label B the net expense related reconciliation adjustment. The amounts included here fall into two classes that either increase or reduce the net adjustment:

Expense add-backs - expenses shown in the accounts which are either not tax deductible or are only partly tax deductible, including timing adjustments. These items increase the total amount shown at label B. Examples of Expense add-backs are:

• additions to provisions and reserves

• capital expenditure

• certain expenses relating to personal services income that are not deductible

• debt deductions denied by the thin capitalisation provisions

• depreciation expenses (Only add back amounts of depreciation expenses if the trust is not a small business entity. However, exclude any small business pool deductions shown at label K Depreciation expenses.)

• expenses relating to exempt income, including expenses relating to DTA exempt income

• hire purchase payments

• income tax expense

• loss on the sale of a depreciating asset

• luxury car lease payments

• part of prepaid expenses not deductible this year

• penalties and fines

• other non-deductible expenses. Refer to Former STS taxpayers below.

Expense subtractions - amounts not shown as expenses in the accounts but which are tax-deductible, including timing adjustments. These items reduce the total amount shown at label B. Examples of Expense subtractions are:

• any excess of the tax value of opening stock over the tax value of closing stock

• deductible balancing adjustment amounts on depreciating assets

• deduction for decline in value of depreciating assets (other than partnerships or trusts using the small business entity depreciation rules)

• deduction for environmental protection expenses any expenditure incurred under Subdivision 40-J of the ITAA 1997 to establish trees in carbon sink forests

• deduction for electricity connections and telephone lines (trusts only)

• hire purchase agreements - interest component

• deduction for project pool

• deduction for landcare operations (trusts only)

• luxury car leases - accrual amount

• part of prepaid expenses deductible this year, but not shown in accounts

• section 40-880 deduction

• other deductible items. Also refer to Former STS taxpayers below.

If the expense subtractions exceed the expense add backs, the total is a negative amount. And a /L will be printed in the box to the right of the amount at label B.

If the trust is eligible and is continuing to use the STS accounting method, you may need to make additional adjustments:

You will need to make adjustments at Reconciliation items, item 5 if:

• The trust is using the STS accounting method, and the amounts shown at the income and expense sections of item 5 are not based on the STS accounting method, or

• The trust is changing from using the STS accounting method.

These adjustments are explained in more detail below.

Trading stock on hand (other than small business entities using the simplified trading stock rules)

Reconciliation adjustments will be required where the tax values of trading stock on hand have not been used in calculating the amount shown at Expenses, label E Cost of sales. Any excess of the tax value of closing stock over the tax value of opening stock would be an income add-back. Any excess of the tax value of opening stock over the tax value of closing stock would be an expense subtraction. If you have used accounting values for trading stock on hand in calculating the amount shown at label E Cost of sales, you will need to take further reconciliation adjustments from those amounts.

For more information on the tax value of trading stock, refer to Item 38 Label C-Opening stock and Item 40 Label D-Closing stock.

Prepaid expenses (immediate deduction)

Small business entities are entitled to an immediately deduction for prepaid expenses if the expenditure is incurred for a period of service not exceeding 12 months and the eligible service period ends on or before the last day of the next year of income. If the eligible service period is more than 12 months, or end after the next year of income, you must apportion the deduction for this expenditure over the eligible service period or 10 years, whichever is less. Refer to the publication Deductions for prepaid expenses available on the ATO website.

If expense labels include prepaid expenses that differ from the amounts allowable as deductions in the current income year, make the reconciliation adjustment at label B Expense reconciliation adjustments.

Prepaid expenses (apportionment)

The trust's total deduction for prepaid expenses in the current income year may comprise two components:

• the part of prepaid expenses incurred in the current income year which relates to that income year, and

• that part of the earlier income year's expense that was not deductible in that income year, but which is deductible in the current income year under the prepayment rules.

Refer to the publication Deductions for prepaid expenses available on the ATO website.

If expense labels include prepaid expenses that differ from the amounts allowable as deductions in the current income year, make the reconciliation adjustment at label B Expense reconciliation adjustments.

Trade Debtors and creditors as at 30 June 2018

If the trust is eligible and has chosen to continue using the STS accounting method, and has included at any income label at item 5 amounts of ordinary income that have been derived but not received in current, the amounts not received are not assessable - for example, trade debtors as at 30 June 2018.

Show these amounts as income subtractions at label A Income reconciliation adjustments.

If the trust is eligible and has chosen to continue using the STS accounting method, and has included at any expense labels at item 5 amounts of general deductions, repairs or tax-related expenses that have been incurred but not paid in the current income year, the amounts not paid are not deductible - for example Trade creditors as at 30 June 2018.

Show these amounts as Expense add backs at label B Expense reconciliation adjustments.

Adjustments when changing from the STS accounting method

If the trust discontinued using the STS accounting method and changed to an accruals accounting method this year, read below.

If the trust has previously not included any income label at item 5 amounts of ordinary income that were derived but not received while using the STS accounting method, these amounts are assessable this year - for example Trade Debtors as at 30 June 2018.

Show these amounts as income add-backs at label A Income reconciliation adjustments.

If the trust has previously not included at any expenses labels at item 5 amounts of general deductions, repairs or tax-related expenses that were incurred but not paid while using the STS accounting method, these amounts are deductible this year - for example Trade Creditors as at 30 June 2018.

Show these amounts as expense subtractions at B Expense reconciliation adjustments, unless they are tax-related expenses. Include tax-related expenses at item 18 on the tax return.

Disposal of depreciating assets

If the trust has disposed of depreciating assets during the income year, the following amounts (if any) are income add backs at A Income reconciliation adjustments:

• taxable purpose proportion of the termination value of low cost assets disposed of for which an immediate deduction has been claimed, and

• if the closing pool balance of a small business pool is less than zero, the amount below zero, and

• assessable balancing adjustment amounts on the disposal of depreciating assets not subject to the small business entity depreciation rules.

Show any deductible balancing adjustment amounts on the disposal of depreciating assets not subject to the small business entity depreciation rules as expense subtractions at B Expense reconciliation adjustments.

The trust's net income or loss from business is the amount of the trust's net income or loss for tax purposes that is from business. It is the total business income less total expenses incurred in producing that income in accordance with the accounting systems, adjusted by any tax reconciliation items.

These amounts are calculated by the Tax program and the amounts so calculated will be included at the following labels:

• Q for primary production, and

• R for non-primary production

If the amount at Q or R is a loss, a negative sign will precede the value on the data entry screen and a slash L (/L) printed to the right of the amount.

Label S is the sum of Total business income, minus

• Total expenses, plus or minus

• A Income reconciliation adjustments and B Expense reconciliation adjustments.

CCH References

6-080 Net income of a trust

7-050 Small business entities

9-040 Accounting Profits and Taxable Income

11-350 CGT event K7 - Balancing adjustments for depreciating assets

A beneficiary who is an individual may be entitled to a tax offset on the tax payable on their share of net small business income earned by a trust that is a small business entity.

Trusts that are small business entities will need to work out the trust’s net small business income and the beneficiary’s share of that income.

An individual is only entitled to the offset in respect of a share of net small business income received from a small business entity trust in which they are a beneficiary, where the business income was derived by that trust from carrying on its own business activities.

Trustees and beneficiaries who are prescribed persons (under 18 years of age and not excepted persons) are not entitled to the offset.

Is the taxpayer a Small Business Entity?

This question must be answered and eligibility re-affirmed each year in order that the Net small business income can be calculated and the beneficiaries of the partnership receive their distribution share of the small business entity trust net income. Eligibility is also required so that small business entities may use the small business simplified depreciation rules.

Press [Enter] at this question to open the Small Business Entity worksheet (sbe). The answer to both eligibility questions in the worksheet must be Y. Press [Alt+S] at question 2 to open the Small business entity aggregated turnover worksheet (sat). You may also access the sbc worksheet from the depreciation worksheet (d) and if you have done so the eligibility question will already be answered.

The trust must work out the net small business income. Beneficiaries who are individuals need to know their share of net small business income to claim the small business income tax offset on their own tax return if they are entitled to it.

The net small business income is the trust's assessable income from carrying on a small business, less any deductions to the extent that they are attributable to that assessable income. If the trust carries on multiple businesses, combine the trust's assessable income and attributable deductions to work out the net small business income.

If you have indicated that the taxpayer is a small business entity, values will be defaulted from labels X and Y to the fields in the Small business income worksheet (sbc). The amount at 5V will be passed to the distribution statement to be distributed to beneficiaries so that they may claim the small business tax offset (SBTO) when they lodge their 2018 individual returns.

The worksheet is self-explanatory.