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Tax Accounting

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24 views8 pages

Tax Accounting

Uploaded by

joehe2625
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TAX ACCOUNTING FOR INCOME

RECEIPTS

1
Introduction
• Accounting for income tax purposes is different to financial
accounting. Timing differences arise.
• Taxpayers are required to pay income tax each “income
year”, which is generally the financial year: s 4-10.
• Consequently, the key issues in this topic are:

Tax accounting

Timing of deductions
Derivation of income
When is a loss or
When is a gain outgoing deductible?
“derived”?
(covered later in unit)
Derivation of income:
Meaning of “derive”
• Taxpayer’s assessable income includes the ordinary income or
statutory income that is “derived”: s 6-5.
• Term “derived” is not defined in statute, however in Brent v FCT
(1971), Gibbs J comments that it should be determined by:
– Application of ordinary business and commercial principles.
– Method of accounting that reflects the taxpayer’s true income.
Derivation of income:
Cash vs accruals accounting
• For tax purposes, “accruals” or “cash” basis can be adopted.

Derivation of income
Recognition of when income is received:

Accruals basis Cash basis


When invoice sent to When cash actually received
customer from customer

• Which method?
– Nothing in statute to compel use of a particular method,
however case law suggests cash basis for professional
practices and small businesses: Henderson v FCT (1970).
Derivation of income:
Cash vs accruals accounting
• Illustration:

Invoice issued Payment


$10,000 received

30 June 20X1 30 June 20X2

• Under the accruals method, the $10,000 would be “derived” in


the year ended 30 June 20X1.
• Under the cash method, the $10,000 would be derived in the
year ending 30 June 20X2.
Derivation of income:
SBE taxpayers & large firms
SBE taxpayers
• Businesses eligible to be a Small Business Entity (SBE) can
account on a cash or accruals basis
– An SBE must have an average turnover of less than $10
million (previously $2 million).
Large firms and businesses
• The accruals method is the appropriate method for large
professional firms: Henderson v FCT (1970).
Derivation of income:
Switching between cash and accruals
• Worked illustration: impact of changing from cash to accruals:
Cash Accruals
Year 1 $200,000 $500,000
Year 2 $800,000 $600,000

Year 1 on a cash basis: $200,000 taxable income. Year 2


switched to an accruals basis: $600,000 taxable income.
$200,000 is not included in year 2’s taxable income.
• Switching accounting methods (eg as a business grows) is
permitted and the uncollected amounts earned in a prior year
are untaxed earnings: see Henderson v FCT (1970).
– Continual method switching could trigger anti-avoidance
provisions in Part IVA and impose penalties.
Derivation of income:
Prepayments & “lay-by” sales
• Moneys received in advance of goods or services being
supplied, does not constitute income to be “derived”.
– See, Arthur Murray (NSW) Pty Ltd v FCT (1965) where
prepaid dance lessons were not “derived” until provided.
Prepayment by Services
customer rendered

30 June 20X1

– In the above illustration, income would not be derived in


20X1, but the income year when the services are rendered.
• Consistent treatment applies to “lay-by” sales where derivation
occurs when title to the goods passes to the customer.

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