Understanding How to Fill the Company Tax Return

company tax return

Table of Contents

The major sections of a company tax return typically include:

  1. Company information: This includes identification details of the company such as the company name, Australian Business Number (ABN), tax file number (TFN), and address.
  2. Income: This section details the various sources of income for the company, such as trading income, other business income, and any investments.
  3. Deductions: Here, the company can claim allowable business-related expenses, such as operating costs, employee wages, and depreciation.
  4. Tax offsets and credits: This part includes any available tax offsets, imputation credits from franking credits on dividends, or foreign tax credits the company is eligible for.
  5. Calculation of taxable income: It involves calculating the net taxable income by subtracting total deductions from total income.
  6. Tax payable or refundable: This section calculates the tax the company needs to pay or the refund it may claim after considering prepayments, tax offsets, and credits.

Please note that these are general sections and might vary based on the specific requirements of a tax period or laws at that time.
Consider using Tax Genii to help you check your situation.

Capital Gains

The  Capital Gains  section of a Company Tax Return deals with reporting any profits or gains that the company has realized from the disposal of capital assets during the income year. This section is relevant to the company’s tax liability because capital gains can significantly affect the amount of tax the company is required to pay.

Here’s a rundown of the primary purposes and components of the Capital Gains section of the Company Tax Return:

  1. Reporting Capital Gains and Losses: Companies must report any capital gains or losses made from the sale, transfer, or disposal of assets. Capital assets include shares, property, and intangible assets, among others.
  2. Calculating Taxable Capital Gains: If a company sells an asset for more than its cost base, it makes a capital gain, which is potentially subject to tax. This section of the return calculates the amount of these gains that are taxable after applying any applicable discounts or concessions.
  3. Applying Discounts and Concessions: Depending on factors such as the length of time an asset was held and the type of asset, certain discounts and concessions may apply. For example, assets that are held for more than 12 months may be eligible for a 50% Capital Gains Tax (CGT) discount for individuals and trusts, though this does not apply to companies in Australia.
  4. Offsetting Capital Losses: If a company has capital losses, these can be offset against capital gains, reducing the amount of taxable capital gains. Capital losses that exceed capital gains in a tax year can be carried forward to future years to offset against future gains.
  5. Adjusting the Cost Base: In cases where capital improvements have been made to an asset (like property), the cost base of the asset may be adjusted upwards, potentially reducing the capital gain on disposal.
  6. CGT Event Record Keeping: Companies are required to keep records of CGT events as these affect the capital gains and losses that need to be reported. This includes documentation related to acquisition, cost base adjustments, and disposal of assets, amongst others.
  7. Compliance with CGT Legislation: The Capital Gains section ensures that the company remains compliant with current CGT legislation outlined in the Income Tax Assessment Act 1997 (ITAA 1997). Amendments and interpretations like ATO ID 2004/150 provide specific guidance on how certain capital costs are treated.

In the CTR, companies use the information in the Capital Gains section to disclose any net capital gains, which are included in assessable income and subject to corporate tax rates. Properly filling out this section is crucial as it ensures that the company pays the correct amount of tax and avoids potential penalties for underreporting income.
As reporting Capital Gains is quite involved, consider using Tax Genii to help you check your situation.

Personal Services Income (PSI)

For a company that receives Personal Services Income (PSI), there are specific reporting requirements that must be followed when completing the Company Tax Return (CTR). The PSI is income that is mainly a reward for an individual’s personal efforts or skills (or would mainly be such a reward if it was derived by the individual). Even if a company (a personal services entity) receives the PSI, it is still considered for tax purposes as the income of the individual who performed the work.

When it comes to the CTR, there are important sections to be filled out if the company’s income includes PSI:

Item 14 – Personal Services Income (PSI)

  • At label N, indicate whether the company’s income includes PSI.

Label A – Total amount of PSI included at item 6 income labels

  • Report the total PSI that has been included in the income labels from item 6.

Label B – Total amount of deductions against PSI included at item 6 expense labels

  • Report the total deductions against PSI that have been included at the expense labels from item 6.

Additional details related to the PSI reporting may include:

Label C – Results Test

  • Indicate whether the results test has been satisfied for any individual whose PSI is included in the company’s income.

Label D – Personal Services Business (PSB) Determination

  • Specify if the company holds a PSB determination for any individuals whose PSI is included in the company’s income.

Labels E1, E2, and E3 – Personal services business tests

  • Answer questions related to the unrelated clients test (E1), employment test (E2), and business premises test (E3).

If the PSI rules apply to the company, certain types of deductions may be limited, and the net PSI may need to be attributed to the individual who provided the services. This income is not assessable to the company and may be reported at specific sections in the CTR such as “Other income not included in assessable income” and “Non-deductible expenses.”

When the PSI rules apply, additional Pay-As-You-Go (PAYG) withholding obligations might be required for any net PSI that is attributed to an individual, and the company may also be restricted in terms of deductions it can claim.

For a company that has net PSI losses, these amounts are transferred to the individual who performed the services. In such cases, a reduction in the company’s total deductions is made to the extent of the net PSI loss amount.

It’s important to consider each individual’s circumstances and the type of work they’re doing to determine whether PSB tests are satisfied and if the PSI rules apply.

As reporting PSI is quite involved, consider using Tax Genii to help you check your situation.

Depreciation

Depreciation is an accounting method that allows a company to allocate the cost of an asset over its useful life. For taxation purposes, depreciation is reflected on a Company Tax Return (CTR) as a deductible expense, which can reduce the taxable income of a company.

In Australia, the Australian Taxation Office (ATO) provides specific rules for depreciation known as ‘Capital Allowances,’ which include different methods and rates for depreciating assets. Companies can claim a deduction for the decline in value of their depreciating assets (e.g., machinery, equipment, vehicles) that are used to produce assessable income.

The way depreciation is reported on a CTR depends on the company’s turnover, with different rules for small and larger businesses.

Small Business Entity Depreciation Rules:

Small Business Entities (SBEs) have simplified depreciation rules that differ from those applied by larger businesses. These simplified measures include:

  1. Instant Asset Write-Off: SBEs may be eligible to immediately deduct the business portion of most new or second-hand asset purchases if the asset costs less than a specified threshold. This threshold has changed over the years, and it is important to refer to the relevant ATO guidance for the applicable year to determine the correct threshold.
  2. General Pooling: SBEs can pool their depreciating assets that don’t qualify for immediate write-off and claim a 15% deduction in the first year, regardless of when the assets were purchased during the year, and a 30% deduction each year thereafter.
  3. Temporary Full Expensing: For certain periods, temporary full expensing measures may enable SBEs to deduct the full cost of eligible new and second-hand depreciating assets in the year they are first used or installed ready for use.

When completing the CTR, an SBE will include the deductions they have claimed for the depreciation of assets under these simplified rules in the relevant sections of the return. The ATO provides details on how to complete this reporting in the instructions for the CTR.

Depreciation for Businesses with a Turnover Exceeding the SBE Threshold:

Companies that do not qualify as SBEs due to their higher turnover use the general depreciation rules specified by Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997). Under these rules, businesses:

  1. Cannot Claim Instant Asset Write-Off: Instead, they must calculate the diminishing value or prime cost depreciation for each eligible asset.
  2. Must Maintain a Depreciation Schedule: This schedule will detail the depreciation rates and methods for each asset, subject to the ATO’s Uniform Capital Allowances system.
  3. Utilize Effective Life: Companies must use the ATO’s determinations of the effective life for different asset classes to calculate depreciation.

For businesses using the general depreciation rules, the annual depreciation deductions are calculated for each qualifying asset and reported on the CTR. Specific sections of the tax return instructions guide companies on how to report these deductions.

In summary, SBEs with turnover below the stipulated threshold can access more immediate deductions and simpler pooling rules, while larger businesses must navigate the more complex depreciation rules and report their deductions accordingly on their CTR. It’s important to consult the current ATO guidance or a tax professional to understand the rules and thresholds relevant to the financial year being reported.

Consider using Tax Genii to help you review your situation with respect to depreciation.

Research & Development (R&D) Schedule

The reporting of the Research & Development (R&D) Schedule in the context of the Company Tax Return (CTR) is essential for companies that have undertaken eligible R&D activities and wish to claim the R&D Tax Incentive. The purpose of the R&D Tax Incentive is to encourage companies to engage in R&D activities that might otherwise have been deferred or not pursued due to the associated financial risks and uncertainties.

Here is an outline of how companies report their R&D activities in the CTR:

  1. R&D Tax Incentive Registration: Before a company claims the R&D Tax Incentive in their CTR, they must first have their R&D activities registered with AusIndustry. The registration must occur annually, and it is generally required within ten months after the end of the income year in which the activities are conducted. This process involves submitting detailed information about the specific R&D activities undertaken, including technical descriptions and expenditure incurred.
  2. R&D Schedule Preparation: Once registered, the company prepares the R&D Schedule, which provides detailed information about the eligible R&D activities and the associated expenditure. This schedule accompanies the company’s CTR and is integral to the company’s claim for the R&D Tax Incentive.
  3. Reporting R&D Expenditure: In the R&D Schedule, the company must report all expenditures linked to the eligible R&D activities. Expenditure could include R&D staff wages, direct costs, overheads allocated to the R&D activities, and any other relevant expenses that are directly connected to the R&D efforts.
  4. Calculating the R&D Tax Offsets: The total eligible R&D expenditure reported in the R&D Schedule is used to calculate the tax offsets available to the company. There are two types of R&D tax offsets: a refundable tax offset for certain small and medium-sized entities, and a non-refundable tax offset for all other entities. The offsets are determined based on the company’s annual aggregated turnover and other relevant factors.
  5. Disclosure of R&D Activities: Companies must disclose the nature of the R&D activities, being careful not to claim ordinary business activities as R&D. Misclassification can lead to penalties and the potential repayment of the benefits received.
  6. Compliance and Review: Both the AusIndustry and the Australian Taxation Office (ATO) can review the eligibility of the R&D activities and related expenditure. Companies should maintain robust documentation to substantiate their claims, as the ATO may request evidence to support the R&D activities and expenses declared.

By accurately reporting R&D activities and related expenses in the R&D Schedule attached to the CTR, companies can avail themselves of the tax incentives provided by the government to support innovation and development within various industries. It is important for companies to carefully assess and document their R&D activities to ensure compliance with the legislative requirements associated with the R&D Tax Incentive program.

As reporting R&D is quite involved, consider using Tax Genii to help you check your situation.

Company is a Partner in a Partnership

In the context of the Company Tax Return (CTR), if a company is a partner in a partnership, it must report its share of the partnership’s net income or loss. This is because a partnership is not a separate taxable entity; rather, it distributes the income or losses among its partners, who then report it in their own tax returns.

In the Australian tax system, partnerships calculate their net income or loss in much the same way an individual taxpayer would, but then the net amount is distributed to the partners according to their partnership agreement. Each partner’s share of the net income or loss of the partnership is reported in the company’s tax return and is included in the calculation of its taxable income.

The specific details regarding the reporting of partnership income in a Company Tax Return are as follows:

  • Partnership Schedule: Companies that are partners in a partnership are typically required to complete a separate Partnership Schedule, which details the income and deductions of the partnership and computes the partnership’s net income or loss.
  • Share of Net Income/Loss: The company’s share of the net income or loss from the partnership is calculated according to its partnership interest. This amount is then reported in the company’s tax return, specifically in the section designated for income earned from partnerships.
  • Distributions and Contributions: Any distributions received from the partnership or additional contributions made to the partnership during the income year may also need to be reported, depending on the tax rules and requirements in place for the year in question.
  • Non-Assessable Amounts: Certain types of partnership distributions may be non-assessable, meaning they are not subject to tax and do not form part of the company’s assessable income. Examples include certain distributions from tax-preferred amounts or capital returns.
  • Capital Gains and Losses: If the partnership disposes of a capital asset, the company’s share of any capital gain or capital loss must be reported in the tax return, potentially affecting the company’s capital gains tax (CGT) obligations.

As the company likely has other tax obligations beyond just reporting partnership income, other sections of the company tax return will take into account different forms of income, deductions, and credits to determine the company’s overall income tax liability. It is important for companies to maintain careful records and calculations of their share of partnership financial activity as incorrect reporting can lead to complications with the Australian Taxation Office (ATO).

Consider using Tax Genii to help you review your situation with respect to partnership income.

Beneficiary of a Trust

When a company is a beneficiary of a trust and earns income through that trust, it must report this income correctly in its Company Tax Return (CTR). Trust income can come in various forms, such as distribution of income from the trust, capital gains distributed by the trust, or franked dividends passed through the trust.

Here’s how to report the different types of trust income in the CTR:

trust income in the CTR

1. Trust distribution income:

The company must report its share of the net income of the trust that has been distributed or attributed to the company. This information is typically provided to the company on a statement of distribution or advice from the trust.

2. Capital gains:

If the trust distributes a net capital gain, this must also be reported. The company must show its share of the trust’s net capital gain, which may be eligible for certain concessions or exemptions, depending on the specifics of the asset and period of ownership.

3. Franked dividends:

If the trust passes on franked dividends to the company, the gross dividend and the attached franking credits have to be included on the tax return. This ensures that the company can claim the benefit of the franking credits against its income tax liability.

4. Unfranked dividend income, interest, and other investment income:

Other types of income that a trust might distribute, such as unfranked dividends or interest, should be reported in the appropriate sections of the CTR.

Key fields in the Company Tax Return for trust income reporting:

  • Item 6: Reconciliation to taxable income or loss
  • Trust income may be reflected in this section, which reconciles the accounting profit or loss to the taxable income or loss.
  • Item 7: Income
  • The company should report its share of the net income from trusts in item 7 labelled ‘Distribution from trusts’, which includes both the cash distribution and any attributed income.
  • Item 8: Deductions
  • If the company has any deductions related to its trust income, these would be reported here.
  • Item 24: Imputation credits
  • Credits from franked dividends distributed by the trust should be included under ‘Franking account credits’.

It’s important to note the details for each type of income may have specific lines or items on the Company Tax Return where it should be reported. Companies should rely on the instructions that accompany the CTR for the relevant year, as well as any advice provided by the trust or their tax advisor, to ensure proper reporting.

Moreover, the company should retain all necessary documentation, such as the statements of distribution from the trust, in case the ATO requires substantiation of the trust income reported on the tax return.

The specific line items and codes on the tax return may vary year by year, so it’s crucial to refer to the correct form and instructions for the tax year in which you are filing.

Consider using Tax Genii to help you review your situation with respect to trust income.

Dividends earned by a company

Dividends earned by a company that need to be reported in the Company Tax Return (CTR) can include:

  1. Franked dividends from Australian companies, which come with franking credits attached.
  2. Unfranked dividends from Australian companies, which do not have franking credits.
  3. Concessional dividends, such as those received from a Film Licensed Investment Company (FLIC).

When reporting dividends in the CTR, a company should consider:

  • The amount of the dividend – both the franked portion and the unfranked portion should be reported separately.
  • The franking credits attached to the dividend – these are also reported separately and may entitle the company to a tax offset.
  • Whether the dividends fall under specific provisions that may change their tax treatment, such as Division 7A dividends or demerger dividends.
  • Concessional capital distributions from entities such as FLICs need to be addressed according to specific guidelines.
  • Any dividends on which Family Trust Distribution Tax (FTDT) or Trustee Beneficiary Non-disclosure Tax has been paid should not be included in the assessable income.
  • Whether Tax File Number (TFN) amounts have been withheld from the dividends, as these would need to be reported and may affect the company’s tax liabilities or entitlements.

The company should also ensure that all details from the dividend statements are accurately transferred to Worksheet 4 and retained with the company’s tax records. The franking amount reported will be subject to verification with the Australian Taxation Office (ATO) records under the information matching program.

It’s also important to note that changes to the tax law can affect the way dividends are treated. For instance, changes to Division 6B and Division 6C for income years starting on or after 1 July 2016 might impact some trusts that were previously taxed as companies, affecting how distributions from those trusts are reported.

In the case of Dividends earned by a trust, these are typically reported under item 12 on the trust’s tax return, and specific lines (K, L, M, N) are provided to distinguish between franked and unfranked amounts, franking credits, and TFN amounts withheld. However, since the question is regarding a company’s reporting, if the company is the beneficiary of a trust that distributes dividends, these would also need to be reported in the company’s tax return in the appropriate sections.

Consider using Tax Genii to help you review your situation with respect to dividend income.

Reconciliation Section

The Reconciliation section of the Company Tax Return (CTR) is used to reconcile the accounting profit or loss of a company with its taxable income or loss for the year. Due to differences between accounting standards and tax law, the profit or loss shown in the company’s financial statements may not reflect the company’s taxable income. The reconciliation process adjusts for these differences.

The Reconciliation section typically involves the following steps:

  1. Starting with Accounting Profit or Loss: Begin with the total profit or loss from the company’s financial statements, which is reported at item 6 on the CTR.
  2. Additions for Non-Assessable Income: Add back any income that is included in the financial profit but is not assessable for tax purposes, such as non-assessable non-exempt foreign income or certain grants.
  3. Subtractions for Non-Deductible Expenses: Deduct any expenses that are included in the financial profit but are not deductible for tax purposes, such as entertainment expenses that are not allowable deductions under tax law.
  4. Adjustments for Depreciation and Capital Allowances: Because tax law may prescribe different rates and methods of depreciation compared to accounting standards, adjustments are made to align the depreciation expense with the tax-deductible decline in value of depreciating assets.
  5. Capital Gains Tax Adjustments: Include any net capital gain that needs to be reported for tax purposes, which may differ from capital gains or losses in the financial statements due to specific tax concessions or exemptions.
  6. Other Specific Adjustments: Add or subtract other specific tax adjustments. This could include, for example, foreign exchange gains or losses, or income and deductions relating to research and development activities.
  7. Tax Losses: Factor in any tax losses from previous years that are being used to offset current year income if the company meets the relevant loss recoupment tests.
  8. Final Taxable or Net Income or Loss: Determine the final taxable income or loss figure, which is reported at item 7 on the CTR. This is the figure on which the company’s tax liability will be calculated.

It’s important to note that the reconciliation items may change depending on the specific circumstances of the company and the relevant tax laws in place for the financial year in question. Companies may need to refer to the applicable tax legislation and guidance.

Consider using Tax Genii to help you review your situation with respect to reporting facts in the reconciliation section.

Tax Offsets

In the context of the Company Tax Return (CTR), tax offsets (also known as rebates) are concessions that reduce the amount of tax that a company has to pay. They are claimed against a company’s assessable income and can result in a lower tax liability. However, not all tax offsets are refundable.

Here are the steps to consider when reporting tax offsets on a CTR:

  1.  Identify Eligible Tax Offsets: Determine which tax offsets the company is entitled to claim. These can include offsets for franking credits (from franked dividends), research and development (R&D) activities, and other industry-specific incentives.
  2.  Apply Non-Refundable Offsets: Use non-refundable offsets to reduce the tax payable by the company to zero. Any excess non-refundable tax offsets cannot be refunded or carried forward.
  3.  Include Refundable Offsets: Some tax offsets, such as the R&D tax incentive, are refundable. This means that if the offset amount exceeds the tax liability, the excess can be refunded to the company.
  4. Correctly Enter Offset Amounts in the CTR: Use the designated fields to enter the tax offset amounts on the company tax return form. The specific labels for reporting tax offsets include:
  • Franking Credit Offsets: These are usually automatically calculated based on the franked dividends reported and should be included in the tax return.
  • Other Non-Refundable Offsets: Specific labels are provided on the tax return form for various offsets such as foreign income tax offsets. These should be reported in their respective sections.
  • Refundable Offsets: If the company is entitled to refundable offsets, such as the R&D tax incentive, these should be reported in the specific section provided for refundable offsets.

5. Reconcile PAYG Instalments: If the company has made PAYG instalments throughout the income year, these amounts should also be included in the tax return as they are offsets against the company’s final tax liability. Ensure that the PAYG instalments reported on the return match the total payments made during the year.

6. Review and Submit: Once all offsets are reported on the tax return, review to ensure accuracy and compliance with the tax law. The company tax return can then be submitted to the ATO, either electronically through the Business Portal or via a registered tax agent.

It’s important to note that companies must retain all documentation to substantiate their claims for tax offsets, as these may be requested by the ATO for verification purposes.

Consider using Tax Genii to help you review your situation with respect to reporting tax offsets.

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