Prepare and Present Tax Documentation

One of the essential aspects of preparing tax documentation is ensuring that the client’s tax obligations are calculated according to legislative requirements. The taxable amount and the final tax charged from the client's income are calculated per Australian legislative requirements. In addition, industry-accepted information-gathering practices should be followed while calculating these obligations.

Tax obligations for legal entities include tax liabilities, documentation, withholdings and reporting requirements. These obligations may include the following:

• Keeping or retaining required records
• Retaining and producing required declarations
• Providing access and reasonable facilities to authorised tax officers
• Applying for or cancelling GST registration as required
• Issuing required tax invoices or adjustment notes
• Lodging activity statements
• Paying amounts electronically when required

Legislative requirements are the requirements by the government or its agencies in the form of rules, regulations, Acts and legislation to inform the residents and citizens about their duties, rights and responsibilities. You must strictly follow the letter of the law while calculating your clients’ tax obligations. This is to ensure that clients do not face penalties or litigation due to an error or mistake of law. Information-gathering practices are industry-accepted methods put in place in a particular industry. They may not always be in written form but are customary by usage. These standard methods of gathering information for taxation purposes should be followed unless a legal provision contradicts them.

This subtopic will cover how to calculate your clients’ tax obligations. You will also understand how to do so while following legislative requirements and information-gathering practices.

You must calculate your client's tax obligations according to legislative requirements and information-gathering practices. Legislative requirements are laid out in the following:

• Primary legislation
  • Acts of parliaments or statutes
• Secondary legislation
  • Contained in rules, regulations, codes or orders

The legislative requirements of statutes help identify and compute the assessable income on which tax obligation will be computed.

Here are some references to the relevant legislation and ATO views that you might want to check out when complying with the tax documentation requirements of your client:

Item	Related Tax Provision	ATO References
Assessable Income	Division 6	Assessable income for business
Deductions	Division 8	Business tax deductions
Taxable Income	Division 4	Work out your business's taxable income
Tax Offsets	Division 13	Business concessions, offsets and rebates

For every industry, certain practices are widely followed by all or most of its members. Though they are not written-down standards and codes of conduct, following them makes them a convention. Industry-accepted practices for gathering information for computing tax obligations can be divided mainly into two methods:

• Formal
  These industry-accepted information-gathering practices refer to approaching formal sources to get the information. The formal method allows the organisation to get the best information for fulfilling its tax obligation. Financial statements and bank statements are the most common formal sources of information for calculating the tax obligation of legal entities. For instance, when calculating bank interest, getting the information formally from the bank in the form of an interest statement is best practice.
• Informal
  These practices refer to getting the information for fulfilling tax obligations from informal sources. These sources might not act as clear evidence for fulfilling tax obligations in audit but act as good sources to calculate tax obligations. For instance, when calculating allowable deductions, the receipt from the insurance provider for the premium paid is an informal source of information.

The following subtopics will explain how to calculate tax obligations for different legal entities and the legislative requirements you must adhere to in arriving at the tax obligation.

Income tax is imposed on the income earned within the financial year by individuals, companies, trusts, and other entities.

The general formula for computing Net Income Tax Payable is:

Gross Income – Exempt Income = Assessable Income
Assessable Income – Deductions = Taxable Income
Taxable Income × Tax Rate % = Tax Payable
Tax Payable – Tax Offset = Net Income Tax Payable

In actual practice, the taxable income is calculated by adjusting the accounting profit (i.e. profit reported in conformance with accounting standards). See the formula below:

Accounting Profit ± Reconciling Items = Taxable Income

Unless otherwise stated, all legislative references in this section are to the Income Tax Assessment 1997.

The main difference between the accounting profit and taxable income is outlined in the table below.

Accounting Profit	Taxable Income
This is the profit before tax reported on the profit or loss statement (income statement) of the entity.	This is the assessable income less allowable deductions reported on the entity’s tax return.

The amount of the accounting profit still needs to be adjusted accordingly because this amount was computed based on AASB (Australian Accounting Standards Board) standards. In contrast, the taxable income is calculated based on taxation laws. The table below explains the main difference between AASB standards and Australian taxation laws concerning their approach to income and expenses.

AASB Standards	Taxation Laws
Generally, revenues are recognised when earned, while expenses are recognised when incurred.	As a rule of thumb, income is assessable regardless of if there is a receipt of cash or none. Expenses can only be deducted if there is an actual outflow of cash.

Reconciling items are those amounts that are either added to or deducted from the accounting profit to arrive at the correct taxable income of the entity. Some of these reconciling items are outlined in the table below.

Reconciling Item	Effect
Assessable income not included in the income statement (e.g. net capital gain and franking credits)	Add
Non-deductible expenses (e.g. R&D expenditure subject to R&D tax incentive)	Add
Other allowable deductions not included in the income statement (e.g. tax loss)	Less
Income not included for tax purposes but is included in the income statement (e.g. exempt income)	Less

^{Based on 7. Reconciliation to taxable income or loss. © Australian Taxation Office for the Commonwealth of Australia}

Accounting methods refer to how an entity records its revenues and expenses. The accounting method that the entity employs may dictate whether the reconciling item is added to or deducted from the accounting profit to arrive at the correct taxable income. Entities may use either a cash based or accrual base accounting method.

To learn more about different accounting methods refer to Accounting methods for business income.

Learning Exercise

Here are some definitions of taxable transaction data and its source documents:

Taxable Transaction Data	Definition	Source of Information	Definition
Allowable Deductions	This refers to the expenses or purchases that can be subtracted from the assessable income for tax purposes.	Purchase invoice	This commercial document is issued to record the purchase of goods or services in exchange for a fixed amount of money.
Capital Gains	This refers to the profit generated from the sale of assets such as property, shares and so on.	Sales deed of land	This legal document showcases the transfer of title, rights, and ownership of a property from a seller to a buyer.
Financial Adjustments Such as Write-Offs and Revaluations	Financial adjustments refer to special financial transactions that are needed to compute taxation.	Tax rebate receipt	This written document contains details of the tax offsets.
Income	This refers to all income generated by conducting business activities on which tax needs to be paid. It includes income from sales, foreign income, capital gains and other profit-making transactions.	Tax invoice	This is a commercial document issued to record the transaction of the sale of goods or services in exchange for a fixed amount of money.
Payments	This refers to all spending of the business.	Payment receipt	This document shows proof of monetary transfer in exchange for purchasing goods or services.
Purchases	This refers to all the procurement transactions done for capital and non-capital expenses.	Supplier invoice	This is a commercial document issued to record the purchase of goods or services in exchange for a fixed amount of money.
Superannuation Payments	These refer to payment contributions for employees’ retirement. These are deductible from taxable income.	Super receipt	These are issued by super funds to acknowledge receipt of super contributions by employers.

Calculating a company's taxable income is generally the same as shown in the above sub topic above. However, the accounting profit of a company is reconciled with the correct taxable income. Although most general income tax regulations apply to companies, some matters will require your attention if you calculate a company's taxable income. These are discussed in this subtopic.

Tax Loss

A tax loss arises when the total amount of deductions the company can claim for an income year exceeds its total assessable income for the year. A company may only carry over its tax losses if it satisfies either of these tests (s. 165-A):

• Ownership test
• Business continuity test

Ownership test

Generally, a company may be able to meet the ownership test if all times during the ownership test period, there are persons within the company who hold more than 50% of the following (s. 165-12):

• Voting power
• Rights to dividends
• Rights to capital distributions

The ownership test period is the period that starts from the beginning of the loss year and ends on the last day of the year of recovery (s. 165-12). The loss year is the year in which the tax loss was incurred. If the company is only in existence after the beginning of the year, the starting point would be on the first day that the company came into existence. On the other hand, if the company ceases to exist before the end of the year, then the ending point of the ownership test period would be the day that the company ceases to exist (s. 165-255).

Learning Exercise

Learning Exercise

Business continuity test

If a company fails to satisfy the Ownership Test, it must pass the Business Continuity Test to carry over its previous tax losses. A company meets the Business Continuity Test if it carries on at all times during the period of recoupment the same business as the business it carried on at the change-over (TR 1999/9).

Here are some of the reasons why a company may fail the Business Continuity Test.

• It started a business that it did not carry on before the test time (s. 165–210).
• It entered into a kind of transaction that it had not entered into in the course of its business operations before the test time (s. 165–210).
• It derived assessable income from (a) and (b) (s. 165–210).

Learning Exercise

Bad Debts

Bad debts are expenses that a business incurs once the repayment of a credit extended to a customer is found to be uncollectible. Bad debts of a company are allowed as a deduction for income tax purposes when:

• The bad debts are written off
• The company satisfies either the Ownership Test (s.165-123) or Business Continuity Test (s.165-126)
• The deduction was not disallowed by the Commissioner (s.165-120)

The calculation of taxable income should only include those bad debts that are allowed as a deduction for income tax purposes. Adjustments must be made if necessary.

Learning Exercise

To learn more about deductions for bad debts refer to Deductions for unrecoverable income (bad debts)

Research and Development Expenditures

Companies engaged in research and development (R&D) activities may be granted a tax incentive upon meeting certain conditions. The incentive allows these companies to claim a tax offset on their research and development expenditures if it meets the eligibility requirements under Division 355 of ITAA 1997. The purpose of this incentive is to encourage entities to conduct research and development activities.

The steps to claiming research and development incentive are listed by ATO as follows:

1. Check that you meet the four initial eligibility requirements.
2. Work out if you are controlled by any exempt entities
3. Calculate your aggregated turnover
4. Work out which tax offset you can claim
5. Calculate your tax offset
6. Lodge your claim

To learn more about R & D tax offsets refer to Steps for claiming R & D tax offset.

As per ATO, the four eligibility requirements are:

• The taxpayer should have carried out eligible R&D activities.
• The taxpayer should be an R&D entity.
• The taxpayer has registered its R&D activities with AusIndustry.
• The taxpayer has qualified for notional deductions of more than $20,000.

An eligible R&D activity is either a core R&D activity or a supporting R&D activity.

• Core R&D activities (see s. 355-25)
• Supporting R&D activities (see s. 355-30)

An entity is an R&D entity if it is a corporation incorporated under(s. 355-55):

• Australian law
• Foreign law but is classified as an Australian resident for income tax purposes.
• Foreign law but is:
  • A resident of a foreign country that has a double tax agreement with Australia
  • Carrying on a business in Australia within the definition of permanent establishment set out in the relevant double tax agreement.

Notional deductions are determined to calculate the amount of tax offset an entity may claim. However, although the term is referred to as a deduction, ATO states that notional deductions are not treated as general deductions under Section 8-1 of ITAA 1997. Reference to relevant provisions of ITAA 1997 for each notional deduction are set out in the table below:

Notional Deductions	Other Relevant Provisions
R&D expenditures	s. 355-205
Decline in value	s. 355-305
Balancing adjustment	s. 355-315

The expenditures which are not to be included as notional deductions are set out in s. 355-225 of the Act.

Exempt entities include the following:

The R&D entity is said to be controlled by exempt entities if the exempt entities and their affiliates hold at least 50% of the following:

• The voting power in the R&D entity
• Rights to income or capital distributions in the R&D entity.

If exempt entities control the R&D entity, step 3 should be skipped. R&D entities controlled by exempt entities may only claim 38.5% of their total notional deductions as a non-refundable tax offset, regardless of the amount of their aggregate annual turnover.

As per ATO, the amount of tax offset that an entity can claim varies depending on certain circumstances. See the table below:

If:		Claimable Tax Offset
The R&D entity (both should be true)	It is not controlled by an exempt entity	43.5% of the notional deduction will be claimable as a refundable tax offset
	It has aggregated turnover of less than $20 million
The R&D entity (either applies)	It is controlled by an exempt entity	38.5% of the notional deduction will be claimable as a non-refundable tax offset
	It has aggregated turnover of less than $20 million

Learning Exercise

Learning Exercise

Dividends

A dividend is a company's profit distribution to its shareholders, which may also be in other forms besides cash. The distribution is from the company’s after-tax profit. The basic concept of dividends may be illustrated as follows:

You must remember that what is being paid as dividends to shareholders are portions of the company’s profit, net of income tax. Therefore, it is only logical to make appropriate adjustments when taxing the shareholders' dividend income to avoid double taxation.

The dividend imputation system (Parts 3–6 of ITAA97) was implemented to address this issue. Under the dividend imputation system, companies can attribute the income tax already paid on their profit to the dividend distribution made to their shareholders by franking the distribution. The shareholders earn the right to claim a tax offset through this system. This tax offset is appropriately referred to as the franking tax offset. A franking tax offset may only be claimed if a franking credit is imputed to the dividend distribution. A franking credit is the portion of the company income tax attributed to the particular dividend distribution. A franking credit attributed to a specific distribution should not exceed the maximum franking credit for that distribution.

Here is how the maximum franking credit may be calculated:

Learning Exercise

Any excess of the franking tax offset over the tax payable of the shareholder may be either claimed as a tax offset on other income or a refund. However, a shareholder who is a company is not allowed to claim a refund for this excess. Alternatively, the company may treat this excess as a tax loss.

Shareholders may choose to check the dividend distribution statement to see the number of franking credits imputed on the dividends they received. This dividend distribution statement may serve as evidence of the allocation of franking credits made to the dividend distribution.

A franking credit may also be referred to as imputed tax credit, imputed credit, imputation tax credit, Class C imputation credit, Class C imputed credit, and Australian imputed tax credit at the rate of 30%.

A corporate tax entity has the responsibility of maintaining a franking account. A franking account is a record that corporate tax entities shall maintain to track how much franking credits may be imputed on their dividend distributions (s. 200-15). The account is created just for tax purposes. It shall be appropriately utilised to account for franking credit and debit transactions.

The transactions to be debited or credited in the franking account are:

Transaction	Treatment	Amount
The company paid income tax	Credit the franking account	Amount of tax paid
The company received a franked dividend	Credit the franking account	Franked dividend ÷ (100% - Company tax rate) × Company tax rate
The company received a tax refund	Debit the franking account	Amount of tax refund
The company made franked distributions	Debit the franking account	Franked dividend ÷ (100% - Company tax rate) × Company tax rate

ITAA97 details the different kinds of transactions that may give rise to either a franking debit or credit entry. The table below may serve as your reference:

Transaction	Read
Transactions that give rise to a franking credit	s. 205-15 of ITAA97
Transactions that give rise to a franking debit	s. 205-30 of ITAA97

Learning Exercise

Suppose the franking account has a debit ending balance at the end of the period. This means there has been an over-imputation of franking credits during the period. A Franking Deficit Tax (FDT) shall be imposed in such cases. FDT is imposed on entities(s. 205-45):

• With a debit ending balance on their frank account
• Who cease to be franking entities

Suppose a company chooses to pay franked distributions even before it ascertained that there would be enough franking credits by the end of the period. In that case, the franking account will have a debit ending balance.

To determine the FDT to be paid, the franking deficit shown in the franking account at the end of the period should be adjusted to include only the franking debits arising from items 1, 3, 5 or 6 in section 205-30 or item 2 under certain circumstances. This adjusted franking deficit is the amount of FDT to be paid. All those transactions that give rise to a franking debit but are nonetheless uncontrollable by the company should be disregarded in accounting for the franking deficit.

The amount of the FDT paid may later be claimed as a tax offset for the relevant income year under certain circumstances (s. 205-70). The amount of claimable tax offset for the related FDT paid depends on whether there was an excessive over-franking or not. Excessive over-franking is when the franking deficit exceeds 10% of all franking credits accounted in the company’s franking account during the franking period.

The table below summarises how much tax offset may be claimed in certain instances:

Circumstance	Amount of Claimable Tax Offset
There was no excessive over-franking	The whole amount of the tax deficit may be claimed as a tax offset.
There was an excessive over-franking	Only 70% of the tax deficit may be claimed as a tax offset.

^{Based on © Australian Taxation Office for the Commonwealth of Australia}

Learning Exercise

The benchmark rule states that all frankable distributions made within the franking period must be franked to the same extent (s. 200-30). The franking period for a private company is the same as its income year (s. 200-45). On the other hand, a public company’s franking period shall be the period of six months beginning at the start of the entity’s income year and the remainder of the income year (s. 203-40).

As per the benchmark rule, the franking percentage for the first distribution in the franking period shall serve as the benchmark for all the succeeding distributions made during the franking period (s. 203-30).

The franking percentage is calculated as follows (s. 203-35):

Learning Exercise

The consequences of not adhering to the benchmark rule may be summarised as follows:

Breach	What Will Happen
Over-franking	The entity will become liable to pay an over‑franking tax.
Under-franking	The related shortfall will be deemed forfeited as a consequence of the breach, and a franking debit related to the forfeiture shall be accordingly recorded in the franking account.

The amount of over-franking tax is calculated as given below:

In practice, the partnership income or loss is computed as follows:

Net income or loss=Accounting profit ±Reconciliations

The main difference between partnerships and corporates is that the income is taxed in the hands of the corporate body. However, the net taxable income made by the partnership firms is distributed to the partners. It is then taxable in the hands of the partners. The basic concepts in reconciling the accounting profit with the taxable income are the same as all other entities. See the table below:

Reconciling Item	Effect
Assessable income not included in the income statement	Add
Non-deductible expenses	Add
Other allowable deductions not included in the income statement	Less
Income not included for tax purposes but included in the income statement	Less

Appropriate reconciliations should be made to reflect that prior year losses (Division 36 ITAA 1997) and each partner’s personal superannuation (s. 290-150 ITAA 1997) were not included in the computation of the partnership’s net income or loss.

Given below are some of the possible reconciliations done to the net income or loss of a partnership:

• Salaries of the partners
• Drawings
• Interest on capital
• Partnership advances from and to partners
• Capital gains and losses
• Superannuation and insurance premium

Salaries of the partners

These are the salaries paid to the partners, usually as a consideration for the efforts and services these partners render in managing the partnership. However, the partners of the partnership are not employees of the partnership. What the partners receive from the partnership does not particularly pertain to the salaries or wages of an employee; rather, what they receive is a form of distribution of partnership profit (See Ellis v. Joseph Ellis & Co TR2005/7).

Salaries should not be treated as an expense in the net income or loss computation. A partner’s salary, however, should be appropriately accounted for upon the distribution of the partnership’s profit.

Drawings

Drawing is the act of a partner taking out a certain sum of money from the business. Drawings should not be treated as an expense in the computation of the partnership’s net income or loss.

Interest on capital

Interest on capital is the consideration paid to certain partners for the amount of capital the partner maintains in the partnership. Interest on capital is also not to be treated as an expense in the computation of the partnership’s net income or loss.

Partnership advances from and to partners

Advances are some form of a loan which may be either of the following partnership advances:

• Made by the partners, which may incur interest expense
• Made to the partners, which may earn interest income

The interest income and expense on these advances should be accounted for in the computation of the partnership’s net income or loss.

Capital gains and losses

Capital gains and losses are not accounted for in the computation of the partnership’s net income or loss. Capital gains and losses are apportioned separately in accordance with the partnership agreement or, in its absence, the partnership law (s. 106-5(1)).

Superannuation and insurance premium

Superannuation contributions made to the partners and the insurance premium paid for the partner are not considered allowable deductions in calculating the partnership income.

Learning Exercise

After calculating the partnership net income or loss, you will have to allocate this profit to each partner. This is because the income is taxed in the hands of the partners and not the partnership firm. As you allocate, you will need to know their profit or loss ratio. The profit or loss ratio is normally found in the partnership agreement. If there are no provisions in the partnership agreement relating to their profit or loss ratio, the profit income or loss should be allocated equally to each partner.

Accordingly, a schedule of distribution should be prepared to properly present how the partnership net income or loss was allocated to each partner. The distribution to each partner and the allocation of partnership net income or loss may be presented as illustrated below:

Distribution	Partner A	Partner B	Total
Salaries (to be prioritised in the distribution)	xxx	xxx	xxx
Interest on capital	xxx	xxx	xxx
Interest on drawing	xxx	xxx	xxx
Allocation of net income or loss	xxx	xxx	xxx
Total	xxx	xxx	xxx

Learning Exercise

The general rules for computing the net income of a trust are set out in Division 6 of ITAA 1936. However, some trusts will be required to work out their net income in distinct ways under Division 266 of ITAA 1936 or Division 275 of ITAA 1997.

The net income of a trust may be computed as follows (s.95(1) of ITAA 1936):

Net Income or Loss=Assessable Income - Allowable Deductions

Necessary reconciliations shall be made if you are to work out the amount of net income (taxable income) from the amount of the trust’s income presented in its financial statements. Also, as per section 95 of ITAA 1936, the trust's net income is generally calculated as if the trust were a resident taxpayer.

Given below are the treatment to be applied for specific components:

Given below are the treatment to be applied for specific components:

Suppose the interest expense arises from a borrowing made to settle monetary distributions to the beneficiaries of a trust. In that case, the interest expense shall not be allowed as a deduction (Para 6 of TR 2005/12).

The interest expense incurred by the trustee shall only be allowed as a deduction if this interest expense is sufficiently connected with an assessable income arising from an income-generating activity carried on by the trustee (Para 7 of TR 2005/12).

To see sample situations illustrating the correct treatment for interest expense incurred by a trustee, check para 30-80 TR of 2005/12

Treatment for tax losses

The trust may use tax losses to reduce its net income if it satisfies certain conditions. These conditions will vary depending on the type of trust. Therefore, it is essential to categorise the trusts by their types appropriately. Depending on the kind of trust, the deductibility of a trust loss may be affected by events, such as: (s. 265-10):

• Abnormal trading
• Change in ownership of the trust
• Change in control of the trust

This table below will help you determine which tests apply to each specific type of trust.

Type of Trust
Non-fixed trust	✓	-	✓	✓	✓
Listed widely held trust	✓	✓	-	-	✓
Unlisted widely held trust	✓	-	-	-	✓
Unlisted very widely held trust	✓	-	-	-	✓
Wholesale widely held trust	✓	-	-	-	✓
Fixed trust other than a widely held unit trust	✓	-	-	-	✓
Excepted trusts	-	-	-	-	-
Family trust	-	-	-	-	✓
Excepted trust (other than a family trust)	-	-	-	-	-

To further understand how ATO expects you to apply the different tests relating to Trust Losses refer to How to apply the trust loss test.

Treatment for franking credits and refunds

Franking credits on a franked dividend also form part of a trust’s assessable income. Accordingly, Trusts are entitled to claim for franking tax offsets. However, trustees may only claim refunds from excess franking credits if:

• The trustee of a resident trust estate is liable to be assessed under s. 99 of ITAA 1936 on undistributed trust income (i.e. not on s.98 of ss.99(A))
• The undistributed income includes franked dividends paid on or after 1 July 2000
• The total franking credits on these dividends, plus any other tax offsets, exceeded the trustee’s basic income tax liability for the income year

If the trusts incurred loss under tax purposes, the refund on the excess franking credits cannot be claimed.

Treatment for capital gains and losses

Capital gains and losses also form part of the trust's net income. Trusts may either employ the 50% CGT (Capital Gains Tax) discount method or the small business entity capital gains tax concession where applicable. Suppose the beneficiaries have to include their share from the trust's capital gains. In that case, the amount should be first grossed up before the beneficiaries can finally apply the 50% CGT discount method.

Learning Exercise

General taxation on the net income of the trust

The tax payable on the trust's net income is either a liability of the trustee or the beneficiary. If the tax is to be paid by its beneficiaries, a methodology, commonly referred to as the proportional approach shall be applied (see TD 2012/22).

Under this approach, if the beneficiary is to have a 40% share of the trust’s income, then the portion of the trust’s net income assessable on the individual capacity of the beneficiary is also 40%.

Learning Exercise

The business structure of superannuation funds is that of a trust. However, special taxation laws apply to superannuation funds. These are referred to as superannuation laws in this subtopic and they need to be examined separately. You must understand what complying funds are before progressing further.

A superannuation fund is a complying fund if it satisfies all three tests listed below at any point in the income year:

The taxable income of the superannuation fund may be calculated as follows:

Taxable Income= Assessable Income – Allowable Deductions

Assessable income

Generally, the assessable income of both complying and non-complying superannuation funds is composed of the contributions made by its members during the year. It also includes the other income derived from various investment sources (e.g. interest income, dividend income, capital gains, rental income, etc.).

• Exempt income
  Income derived by a complying superannuation fund from segregated assets held to pay current pension liability is exempt from tax.
• Contributions
  These are assessable income for a complying superannuation fund if any of the following conditions are met: Contributions made on behalf of a spouse, government co-contributions, contributions made on behalf of a person who is a temporary resident of Australia, and contributions for which no deduction was claimed do not form part of the assessable income of a complying superannuation fund.
  Contributions are to be included as assessable income during the income year when the contribution amount was received (i.e. cash basis).
  • It was made by a contributor on behalf of the member, e.g. superannuation guarantee paid by the employer for the employee
  • It was made by a self-employed individual, and the person notified the fund that a deduction would be claimed
  • It is an amount transferred from a foreign superannuation fund to an Australian superannuation fund
• Capital gains
  The capital gains of both complying and non-complying superannuation funds are calculated similarly to how you would typically calculate capital gains.
  The capital gains of a superannuation fund may be reduced either through:
  • indexed cost base method
  • CGT discount method.
  The CGT discount method's applicable rate is 33 1/3% for complying superannuation funds and 50% for non-complying superannuation funds. For CGT purposes, assets owned by a complying superannuation fund as of 30 June 1988 will be treated as if the assets were acquired on that date. As a result, the cost base for these assets is indexed from 30 June 1988.
• Franked dividends
  The franking credit on a franked dividend derived by a superannuation fund should be included in the fund’s total assessable income. All superannuation funds are entitled to a franking tax offset. However, non-complying funds cannot claim a refund from excess franking credits.

Allowable deductions

Like any other taxpayers, superannuation funds are entitled to claim deductions for losses and outgoings incurred to produce assessable income and carry on a business. Only the portion of the total expenditures incurred to produce assessable income may be claimed as a deduction. Examples of the usual expenses incurred by a superannuation fund are as follows:

• General management expenses (e.g. trustee remuneration)
• Administrative expenses (e.g. costs incurred in collecting contributions)
• Marketing (e.g. advertising costs)
• Expenses incurred in complying with super law obligations (e.g. obtaining actuarial or legal advice)

As per s.295-495 of ITAA 1997, all superannuation funds are disallowed to claim deductions from the benefits they paid to their members.

The following ATO Interpretative Decisions (ID) provide guidance on some of the issues regarding the calculation of the deduction of superannuation funds:

ATO ID	Topic
ATO ID 2007/219	Deduction for an increased amount of superannuation lump sum death benefit
ATO ID 2008/111	Deduction for an increased amount of superannuation lump sum death benefit—earnings foregone
ATO ID 2008/112	Deduction for an increased amount of superannuation lump sum death benefit
ATO ID 2010/5	Deduction for an increased amount of superannuation lump sum death benefit
ATO ID 2012/10	Anti-detriment payments by a complying superannuation fund to a trustee of a deceased estate

Learning Exercise

Contributions Made to Superannuation Funds

These may be categorised into the following:

• Concessional
• Non-concessional

Concessional contributions are contributions made from before-tax income. On the other hand, non-concessional contributions are made from after-tax income. See the table below for some examples of concessional and non-concessional contributions:

Concessional	Non-concessional
Super guarantees (i.e. compulsory employer contributions) Salary sacrifice arrangements Contributions for which a tax deduction has been claimed	Personal contributions that have not been claimed as a deduction Spouse contributions Contributions that exceeded the before-tax cap

Super guarantees are the contributions employers must make to their eligible employees' superannuation fund. For the year ending 30 June 2023, the compulsory contribution is equivalent to 10.5% of the employee’s ordinary time earnings. A contribution is made every quarter. All other contributions that are not super guarantees are generally classified as non-mandated contributions. Concessional contributions are taxed at 15% after the fund receives the contributions. Concessional contributions have a cap amount every financial year. The annual cap amount for the 2022–2023 financial year is $27,500, regardless of the member's age. The excess is taxed at the effective marginal rate plus the Medicare levy of the individual. Still, such tax payable can be offset against the amount of the excess multiplied by 15%.

Non-concessional contributions are from after-tax income and not taxed by the super fund. From 1 July 2021, the non-concessional contributions cap was increased to $110,000, and the excess is taxed at 47%.

To further understand concessional and non-concessional contributions refer to Growing your super.

Learning Exercise

GST is a tax imposed upon the goods and services offered by a business. The consumer ultimately bears the final burden of GST. It is based on a New Tax System (Goods and Services Tax) Act 1999.

Currently, the GST rate for goods and services is at 10%. The seller is the one to charge and collect GST for taxable supplies.

GST Turnover

Calculating the GST turnover of your client is crucial in determining whether your client must register for GST or not. GST turnover refers to both the following:

• Current GST turnover
  The turnover for this month + turnover for the past 11 months
• Projected GST turnover
  Turnover for this month + turnover for the following 11 months

GST turnover is gross income excluding the following:

• GST included in the sales
• Input-taxed sales
• Sales that are not made for consideration
• Sales not connected with the business
• Sales not connected with Australia

GST is only payable on taxable supplies. You only consider taxable supplies in your calculation of gross income for GST turnover calculation purposes. A supply may only be regarded as a taxable supply when the following conditions are met (s.9-5):

• The supply is made in exchange for a consideration
• The supply is in the course of carrying on business
• The supply relates to the indirect tax zone. The indirect tax zone means Australia, excluding external territories and certain offshore areas. Supply relates to the indirect tax zone when either of the following conditions is met:
  • The supply was delivered or made available within the indirect tax zone
  • The supply was exported from or imported to within the indirect tax zone
• The business that produces the supply is required to be registered with GST
• The supply is neither GST-free nor input-taxed

GST Exemptions

The exemptions from charging GST include the following:

• Input-taxed sales
  These include the sale of certain types of products that are not subject to GST, although GST was included in the price of the inputs. If your client makes an input-taxed sale, they are not entitled to the credit for GST in the price of their input. Input here refers to the goods or services that they used to make the goods or services they sold. Input-taxed sales or supplies are set out in Div 40 (sec 9-5) and may include the following:
  • Financial sales or supplies, e.g. loans
  • Supply of residential premises for rentals or sale
  • Certain fundraising activities of charities
• GST-free supplies
  These are products or services that are also not subject to GST. However, the input-taxed credits related to these supplies are claimable. Part 3-1 Division 38 of the Act sets out what supplies are considered GST-free. Examples of these include the following:
  • Education
  • Vehicles for the disabled
  • Religious services
• Supplies outside the GST system
  GST does not apply to supplies made before 1 July 2000. Nor does it apply to supplies made by unregistered entities or transactions without connection with Australia. It also doesn’t apply to gifts.

After calculating your client’s GST turnover, you can determine if your client must register for GST by checking if your client’s GST turnover reached the threshold or went beyond it. The business should register for GST if the current or projected GST turnovers reach or go beyond the threshold.

GST Net Amount

When determining whether your client has a GST liability or a tax refund, you must calculate the net amount for the tax period. The formula for the net amount is as follows:

Net amount=Amount of GST-Input tax credit

The manner of calculating the amount of GST depends on whether the amount of the taxable supply or importation is inclusive of GST or not.

• The value of the taxable supply is exclusive of GST if it is only the value that is readily available. The formula for the amount of GST is as follows:

Amount of GST=Value ×GST Rate

• The price of the taxable supply is already inclusive of GST if it is only the price that is readily given. First, you will determine the value and then the amount of GST as shown below:

Value=Price ÷(100+GST Rate)
Amount of GST=Value ×GST Rate

Alternatively, you may calculate the amount of GST as follows:

As the current GST rate is 10%, the amount of GST works out to price divided by 11. Suppose your client made a taxable supply to an associate for a price less than the market price. In that case, the amount of GST is calculated based on the market price of the supply.

Learning Exercise

Input Tax Credit

Input tax credits may only be claimed from the following (s.7-1):

• Creditable acquisition
  You make a creditable acquisition when (s.11-5): The terms acquisition and creditable purpose are defined in s.11-10 and s.11-15 of the Act, respectively.
  • The acquisition is solely or partly for a creditable purpose
  • The supply acquired is a taxable supply
  • The acquisition is for a consideration
  • Your client who is claiming an input tax credit is GST-registered or at least required to be registered
• Creditable importation
  You make a creditable importation if (s.15-5):
  • The importation is solely or partly for a creditable purpose
  • The importation is a taxable importation
  • Your client who is claiming an input tax credit is GST-registered or at least required to be registered

The amount of input tax credit equals the GST charged on the supply acquired or imported. However, this amount shall be accordingly reduced if the related acquisition or importation is only partly creditable (s.11–25).

The amount of Input tax credit is calculated as shown below:

• Fully creditable
  • The amount of GST
• Partly creditable – Acquisition
  • Full input tax credit × extent of creditable purpose × extent of consideration
• Partly creditable – Importation
  • Full input tax credit × extent of creditable purpose

The full input tax credit is the amount of GST charged on the supply assuming the acquisition or importation is solely for a creditable purpose.

The extent of creditable purpose represents how much of the purchase is creditable. This means used for business. The extent of consideration represents how much of the consideration was paid in relation to the purchase with an attributable full input tax credit. The conditions giving rise to partly creditable acquisitions and importations are provided in Sections 11–30 and 15–25 of the Act, respectively.

Learning Exercise

Full input tax credit	$22,000 ÷ 11= $2,000
× Extent of creditable purpose	9000 ÷ 10,000= 90%
× Extent of consideration	100%
Input Tax Credit	$1,800

Some non-deductible expenses identified under ITAA97 will not give rise to a creditable acquisition or a creditable importation. Hence, there will be no input tax credit claimable from these expenses. These non-deductible expenses are enumerated below (s. 69-5):

• Penalties
• Relative’s travel expenses
• Family maintenance expenses
• Recreational club expenses
• Leisure facility expenses
• Entertainment expenses
• Non-compulsory uniforms
• Agreements for the provision of non‑deductible non‑cash business benefits

Input tax credits on meal entertainment and entertainment facilities may only be claimable to the extent of their amounts subject to fringe benefits tax. The creditable portion for this matter depends upon the elections made by your client under fringe benefits tax law.

GST Period

You have an option to report your client’s GST liability every quarter if (s.27-5):

• Your client has a GST turnover of less than $20,000,000
• The ATO did not specifically require your client to do monthly reporting

You will have to calculate your client’s GST liability every month if (s. 27-15):

• Your client voluntarily elects to do monthly reporting
• Your client has a GST turnover of $20,000,000 or more
• The ATO explicitly requires your client to do monthly reporting probably for reasons such as the following:
  • History of failing to comply with tax obligations
  • Carrying on business in the indirect tax zone for only less than three months

You may calculate your client’s GST liability only every year if:

• Your client only volunteered to be registered for GST

To correctly work out your client’s GST liability, you must know how to attribute each GST transaction to correct tax periods. This concept is called attribution. Most taxable supplies are attributed based on the taxpayer's accounting method. The accounting method can either be a cash basis or accrual basis.

Cash basis

Your client may employ this method if one of the following conditions is satisfied (s. 29-4):

• Your client is classified as a small business entity (SBE) under income tax legislation
• Your client’s annual turnover is below $10 million
• Your client is eligible to employ cash basis of accounting method under income tax legislation
• The commissioner expressed in writing that your client may employ cash basis for GST accounting

Special rules on the use of cash basis for GST accounting may be found in Divisions 157 and 158 of the Act.

Accounting for GST Using the Cash Basis
When will the amount of GST charged on the taxable supply sold be attributed?	When will the input tax credit be attributed?
On the tax period when the consideration for the related taxable supply was received Only to the extent that the consideration is received in that period	On the tax period when the consideration for the related taxable supply was paid out Only to the extent that the consideration is paid in that period

Accrual basis

Large businesses commonly employ an accrual basis of GST accounting. Your client may use the accrual basis of GST accounting if ATO does not provide otherwise.

Accounting for GST Using the Accrual Basis
When will the amount of GST charged on the taxable supply sold be attributed?	When will the input tax credit be attributed?
The charged GST may be accounted for immediately on the period when the invoice for the related taxable supply was issued or on the period when the consideration was received (whichever comes first).	On the tax period when the invoice for the related taxable supply was issued or on the period when the consideration was paid (whichever comes first)

Aside from the rules mentioned above, you may only attribute input tax credits if:

• A tax invoice has already been received
• A tax invoice is not required to be issued for the related creditable acquisition or importation

The cash and accrual method of GST attribution may be modified by:

• Specific provisions in the Act (see s.29-39)
• The Commissioner’s determination (s.29-25)

The Commissioner may only determine attribution rules that are not in conflict with the general rules and special rules already set out in the Act (s. 29-5).

Learning Exercise

Adjustments to Net Amount

The net amount for a specific tax period may either be increased or decreased (s.17-5):

• Under Subdivision 21‑A of the Wine Tax Act
• Under Subdivision 13‑A of the Luxury Car Tax Act 1999
• By any adjustments you may have during the tax period. These adjustments normally arise from what are called adjustment events.

The provisions relating to adjustment events are in Division 19 and Division 21 of the Act.

Learning Exercise

Some adjustments will require the issuance of an ‘adjustment note’. Adjustment notes are issued by suppliers to a business entity when the consideration amounts for taxable supplies change. The entity requires this documentation to claim more or less GST that was originally claimed.

One of the critical aspects of your role as a registered tax agent is filling out tax returns for your clients. When preparing tax documentation for your clients, you should ensure that you comply with all legal and organisational recording and reporting requirements. Identifying and establishing these requirements based on your client’s circumstances and the legal entity was discussed earlier in the module. The next section will discuss the legislative, regulatory and organisational requirements.

Tax returns must be in an approved form and should contain complete and reliable information. ATO publishes procedural instructions on how each part of different tax returns should be completed. This is to help taxpayers complete these tax returns and comply with other related lodgements. The instructions are classified based on the type of return and for which income year the instruction is applicable. You must ensure that you follow these instructions to avoid compliance issues.

Given below are some of the forms and related instructions published by the ATO:

	Form	Instructions
Company	Company tax return 2022	Company tax return instructions 2022
Partnership	Partnership tax return 2022	Partnership tax return instructions 2022
Trust	Trust tax return 2022	Trust tax return instructions 2022
Fund	Fund income tax return 2022	Fund income tax return instructions 2022
Fringe Benefit	2022 Fringe benefits tax (FBT) return	2022 Fringe benefits tax return instructions
Franking Account	Franking account tax return and instructions 2022
Capital Gains	Capital gains tax (CGT) schedule 2022	Part C – Instructions for companies, trusts and funds (entities)

These are only representative forms and instructions. You must access the forms relevant to the tax obligations that you had previously identified.

Below are guidelines you may follow when you prepare your client’s tax documentation:

• Access the latest form available on the ATO website.
• Ensure you have accessed the correct form applicable to the kind of tax documentation you are preparing and your client’s legal entity.
• Refer to all the recording and reporting requirements that you had established earlier based on your client’s circumstances.
• Read the latest instructions published by the authorities when completing the form.
• Seek clarifications from the client, ATO or specialists as required in case of need.
• Check and cross-check your computations and transcriptions.
• Prepare the tax documentation within established timeframes.
• Retain your tax working papers for use in case of a tax audit, query or dispute.

Legislative, ATO and Organisational Requirements

Parliament passes legislation in the form of the Act. This Act is the law that lays out the legal and policy principles about a subject, e.g. taxation. It describes the requirements and includes punishments and penalties for not adhering to the law. Legislation drives regulations. Regulations define and control how the regulatory authority, in this case, the Australian Taxation Office (ATO), operates to implement the law.

Organisational policies and procedures are the requirements applicable within the organisational framework. Organisational requirements include the accounting process, values, ethics, control, and responsibilities. These organisational policies, procedures and processes or practices provide protocols and guidelines for conducting a particular activity within the organisation and when dealing with stakeholders. Policies and procedures are crafted based on the organisation's objectives, purpose and mission and the external environment in which it operates. External factors, such as legislation, statutory requirements and competition, are considered when framing them.

The graphic below briefly explains these organisational requirements:

• Policies
  • These cover broad principles and set a directional tone within which an organisation or department must operate to meet business objectives.
• Procedures
  • These elaborate the policies into routine functions and job activities which need to be performed to meet the policy requirements.
• Practices
  • These are the processes contained within procedures and provide explanations on how to perform functions and detail standard functions, key control elements which need monitoring and reporting.

In simple terms, policies and procedures tell what the organisation or activity of a department aims to achieve and detail the steps to go about it. Practices are the series of actions or processes used in the organisation.

Apart from elaborating on what and how objectives are to be achieved, organisational policies and procedures cover mandatory regulatory requirements applicable to the organisation. They generally set more stringent norms to ensure strict compliance with regulatory parameters while achieving business objectives.

Business entities must incorporate the legislative and regulatory requirements in their policies and procedures to ensure compliance with the requirements of the law. The policies and procedures of the organisation will detail how to comply with these taxation recording and reporting requirements. These policies and procedures should be updated regularly to remain current.

The table below outlines some organisational policies and procedures and their key features applicable to preparing taxation documentation for legal entities:

	Requirement	Key Features
Policy	Organisational policy for collecting information for the preparation of tax documents	This policy may outline the following: The supporting documents to be reviewed The scope of financial data to be recorded
Procedures	Procedure for computing tax obligation	This procedure may include the following: The method for computing deductions from taxable income The list of accounting and tax calculation software to be used
	Procedure for verifying financial data	This procedure may include the following: The list of reliable sources of information to verify data The steps to be followed to report deviation in data

You covered the tax recording and reporting requirements in Topic 1. Some additional regulatory requirements have also been discussed in Topic 2, too. When preparing the tax documentation for your client review and sign-off, you must keep these requirements in mind. Some of the broad requirements are summarised below for the following types of taxes and reporting:

• Income tax
  The financial year in Australia is from 1 July to 30 June. All business entities need to lodge their income tax return for this period. Companies need to file their tax return and pay their tax. While trusts and partnerships need to file their tax returns, the income is taxable in the hands of the beneficiaries/trustees and partners. Sole traders can declare their business income along with their personal tax returns.
• Payroll reporting
  All businesses that employ staff need to report the details of the payments, including salaries, superannuation and PAYG withholding, to the regulators. This reporting must be done through the Single Touch Payroll (STP) software. This was commenced on 1 July 2018, initially for employers with 20 or more employees. From 1 July 2018, it became mandatory for all businesses, including those employing less than 20 employees. A critical point to remember is that payroll tax is not paid to the ATO but to the state revenue offices.
• Goods and services tax
  The main reporting requirement relating to the GST for a legal entity is the lodgement of a business activity statement (BAS). This form is lodged by registered businesses to ATO to report details on GST. It is also used to report details on other tax obligations such as PAYG and FBT instalments, luxury car and wine equalisation and fuel tax credits.
  As explained earlier, ATO requires entities to submit the BAS monthly, quarterly or annually. Once your clients register for GST and ABN, ATO will send them a BAS automatically when it is time to lodge it. Businesses not registered for GST need to submit an instalment activity statement (IAS) to pay their PAYG instalments.
• PAYG withholding
  Your clients will require to collect pay as you go withholding amount. These are from payments made to employees, contractors or workers, and businesses that have not quoted their ABN. This PAYG withholding is different from payroll tax which is a state tax. At the end of the financial year, they are required to lodge a PAYG withholding annual report. This needs to include details of all payments that have not been reported and finalised through the STP. It should contain all non-STP-reported payments during the year and the amounts withheld from them. In addition to lodging the annual report, your client will need to provide the withheld amount to the ATO and report them on their activity statements. They are also required to provide payment summaries to the payees.
  Small withholders who withhold $25,000 or less annually must pay the withheld amount to the ATO quarterly and report the withholding in the activity statement received every quarter. Medium withholders who withhold between $25,001 to $1 million annually must pay the withholding and report it on activity statements every month. Large withholders are those entities that withheld amounts exceeding $1 million in the previous financial year or belong to a group of companies that withheld amounts greater than $1 million in the previous financial year. They will need to pay the withholding twice a week.
• Fringe benefits tax
  Suppose your client has a fringe benefits taxable liability from 1 April to 31 March (FBT year). In that case, they need to lodge an FBT return. If you lodge this return for them in paper form, the due date for lodgement and payment is 21 May. However, if you do so electronically, the due date is 25 June. Suppose your client is registered for FBT but has a nil liability for the FBT year. In that case, you should complete a Fringe Benefits Tax – Notice of Non-Lodgement.
• Capital gains tax
  There is no separate tax return for capital gains tax liability. The net capital gains or loss is included in the relevant income tax return for the entity. The net capital gains are taxed at the marginal tax rate applicable to the entity. However, suppose the net capital gains for the entity exceeds $10,000 for the current year. In that case, a CGT schedule needs to be completed and lodged. This schedule is used with the relevant annual return. Companies and trusts but not partnerships, need to lodge a CGT schedule.

Some common requirements for tax agents to follow when preparing tax returns for clients, as prescribed by the ATO, include the following:

• Ask reasonable and direct questions from your clients to be able to arrive at your client’s income position and the permissible deductions and tax offsets.
• Ask clients for what kind of evidence they have to support deductions in case the substantiation rule applies. The substantiation rule is the requirement of the ATO for taxpayers to have written evidence to prove the expense for allowable deductions.
• Though it is not mandatory, you must examine receipts and records as part of tax preparation. Seek all documentary proof from your client and note the evidence you have sighted and those the client advises they have, though not provided to you.
• Do not include claims where you are aware the client did not incur the expense or that the claim is not allowable. If you do, it will mean a breach of the Code of Professional Conduct has occurred. The Tax Practitioners Board may apply sanctions in such cases of making false and misleading statements.
• Do not follow your clients’ instructions if they ask you to make a false claim. You must advise them of their responsibility to lodge correct tax returns in such cases. You must also explain the consequences of making false claims. If they persist, do not have anything further to do with preparing that claim.

As a tax agent, by law, you are also required to keep the business records:

• Either in paper or electronic
• Generally, for five years after they are prepared, obtained, or the transaction is completed, whichever is the latest
• In English or an accessible and understandable format

After you have prepared the tax documentation based on your calculation of your client’s tax obligation, you must present and confirm the documentation with them. This subtopic covers the legislative requirements you must comply with when presenting and confirming documentation to obtain your client's signature, authorisation and endorsement.

Your client is legally obliged to give a declaration every time any tax documentation is provided to the Commissioner of Taxation in the approved form. This tax documentation may include the following:

• Activity statements
• Tax returns
• Statements
• Applications
• Any other tax-related documentation

As per the Taxation Administration Act 1953:

• The declarations required to be included are as follows (s388-65(1)):
  • An assertion that the information presented in the approved form is true and correct.
  • If a tax agent completed the approved form, a statement declaring that the tax agent was authorised by the taxpayer to complete the approved form through the information supplied by the taxpayer.
• Oral declarations from the agent or the taxpayer will not be sufficient as a form of declaration. These declarations are required to be made in writing and should be signed by the appropriate signatories (s388-65). Written declarations may be provided in either of the following ways:
  • Electronically, e.g. through cloud-based accounting software or email
  • In paper form, i.e. through snail mail
• The taxpayer is required to retain a copy of its declarations for a period of five years after these declarations are made This period may be shortened subject to the discretion of the Commissioner(s.388-65(3)).

^{Based on Client declarations and lodgment online. © Australian Taxation Office for the Commonwealth of Australia}

You are also required to make a declaration when you submit the tax documentation to the Commissioner in the approved form, on behalf of your clients stating that (s388-70):

• You have prepared the documentation according to the information supplied by your client.
• You have received the declaration from the client asserting that the information is true and correct.
• You have been authorised by your client to give the Commissioner the document.

Learning Exercise

Learning Exercise

Present and Confirm Tax Documentation

When you have prepared the tax documentation based on your calculation of your client’s tax obligation, you must present and confirm the documentation from your client.

Presenting the documentation involves explaining to your clients the following:

• Treatment of income and expenses
• Computation of the client’s tax obligation
• Consequences of non-compliance
• Consequences of delayed filings and payments
• Obtaining pending clarifications, if any

When you present the tax documentation to get your client’s confirmation, you must keep in mind the requirements discussed in the previous subtopic. They are summarised here for easy recall. Do not include claims where you are aware the client did not incur the expense or that the claim is not allowable. Additionally, do not follow your clients’ instructions if they ask you to make a false claim. You must advise them of their responsibility to lodge correct tax returns in such cases. You must also explain the consequences of making false claims.

You may present and confirm the tax documents either:

• Electronically
  You may send the form electronically to your client if it is simple tax documentation with no complications. You may upload the documents if you have a file-sharing arrangement with your client or email them to your client. You may either document the key points in an email or discuss them telephonically.
• Physically
  For more complicated tax documentation involving interpretations and clarifications, it is recommended that you seek a face-to-face meeting with your client. You can take them through the discussion points in this meeting and get their agreement. When you present to your client, you should avoid using jargon and quoting the law to them. Remember, your clients are not taxation experts. You should explain in easy-to-understand and simple English. Impressing the client is not the key objective; getting them to understand is.

Confirming the documentation involves taking their signatures on the forms and obtaining required declarations from them authorising you as their agent and endorsing the accuracy of the information in the forms. These requirements were discussed in the previous subtopic. You may receive the confirmation electronically. In case of having presented the tax documentation in a physical meeting, you may also obtain the signature and authorisation when seeking their endorsement of the tax documentation.