This resource explains the important accounting and tax implications of disposing of business assets, specifically focusing on the concept of “balancing adjustments” as outlined by Australian Taxation Office (ATO) guidelines.
A balancing adjustment occurs when a business sells, loses, or disposes of an asset they’ve claimed depreciation on. Depreciation refers to the deduction businesses claim each year as the value of an asset reduces over time. When you dispose of this asset, you need to calculate if there’s a difference between its value at disposal (termination value) and its value in your accounts (written down value or undeducted cost).
The Australian Bookkeepers Network explains clearly:
“Essentially, therefore, where an item of plant is disposed and you have claimed depreciation on that plant during its life, you need to compare the termination value (e.g., sale proceeds) with the plant’s written down value or undeducted cost at the time of disposal”.
Balancing adjustments typically happen when:
These events require adjustments because they directly affect your asset’s accounting value.
Consider this practical example:
Example:
Darren’s business purchased equipment for $6,000, depreciating at 25% per year. After three years, he sells the equipment for $1,800.
Date | Description | Amount ($) |
30 June 2012 | Purchase cost | 6,000 |
30 June 2013 | Depreciation (25%) | -1,500 |
30 June 2014 | Depreciation (25%) | -1,125 |
30 June 2015 | Depreciation (25%) | -844 |
| Written Down Value at Sale | 2,531 |
| Termination (sale) Value | 1,800 |
The termination value ($1,800) is less than the written down value ($2,531), resulting in a balancing adjustment deduction of $731 ($2,531 – $1,800).
If the asset has private use (personal/non-business use), adjustments must be made.
Example:
Using the same example above, if Darren’s equipment had 10% private use:
The balancing adjustment becomes:
If the termination value exceeds the written down value, you must report this profit as income:
Example:
Darren sells the asset for $3,000 instead:
This amount can’t exceed the total depreciation claimed. Since Darren’s total depreciation claim is greater ($3,469), the full $469 is assessable.
Special rules apply if an asset is lost, destroyed, or compulsorily acquired (e.g., government purchase):
Example (Factory Fire):
According to the Australian Taxation Office, these balancing adjustment rules ensure taxpayers correctly account for gains or losses upon disposal. Depreciation claims during the asset’s life must be accurately balanced upon disposal, ensuring proper reporting on tax returns.
ATO Reference: Balancing Adjustments (ATO Website)
Understanding these concepts ensures accurate financial records and tax compliance, ultimately benefiting the financial health of your business.
This second part explores essential payroll responsibilities businesses must understand to maintain compliance with Australian taxation and employment law. We will cover registering for PAYG withholding, allowances, various leave entitlements, and reporting obligations clearly and practically, using examples and referencing guidelines from the Australian Taxation Office (ATO).
Definition:
PAYG withholding (Pay As You Go) is the system businesses use to withhold tax from payments made to employees and certain other payees. This ensures tax is collected progressively throughout the financial year, reducing potential tax liabilities at year-end.
Businesses must register for PAYG withholding if they:
The Australian Taxation Office clearly states:
“You must register for PAYG withholding before you’re first required to withhold an amount from a payment.”
(ato.gov.au)
Example:
Emma starts a café and hires two part-time staff. She must register for PAYG withholding before paying her employees their first wages.
Employers are required to report withheld amounts to the ATO. This is typically done via two methods:
The ATO emphasizes:
“Single Touch Payroll (STP) requires you to report salary and wages, pay as you go (PAYG) withholding and superannuation information to us each time you pay your employees.”
(ato.gov.au)
Example:
ABC Construction pays employees weekly. Each payday, their payroll software automatically sends payment details, including withheld tax, directly to the ATO through STP.
Definition:
Allowances are payments made to employees to cover specific expenses or as compensation for working conditions (e.g., uniform allowance, travel allowance). Allowances must be correctly classified, as this affects their tax treatment.
Types of Allowances:
The ATO clarifies:
“Most allowances are taxable and must be included on your employee’s payment summary. However, some allowances may not have tax withheld depending on specific criteria.”
(ato.gov.au)
Example:
Jessica, a salesperson, receives a monthly car allowance of $300. This allowance is taxable and included in her annual payment summary.
Definition:
Annual leave (holiday pay) is paid time off work provided to full-time and part-time employees. The minimum entitlement under the Fair Work Act is four weeks of paid leave per year.
Key points for payroll:
The ATO notes:
“Payments for unused annual leave are subject to withholding when an employee leaves your employment.”
(ato.gov.au)
Example:
Tom earns $1,200 weekly and accrues four weeks annual leave each year. Upon taking leave, he receives payment at his normal rate ($1,200 per week), including applicable leave loading.
Definition:
Long Service Leave is additional leave entitlement accrued after extended employment (typically after 7-10 years, depending on state/territory legislation).
Important payroll considerations:
The ATO states:
“Long service leave payments made on termination of employment must be included on your employee’s payment summary and have tax withheld.”
(ato.gov.au)
Example:
Rebecca has worked for the same company for 10 years and is entitled to 8.67 weeks of long service leave. When she takes this leave, she is paid at her current weekly salary, with PAYG tax withheld.
Definition:
PAYG payment summaries (formerly known as “group certificates”) summarise the total payments made to employees and the total tax withheld during the financial year. Single Touch Payroll has largely replaced traditional payment summaries; however, summaries are still relevant for specific situations, such as Employment Termination Payments (ETP)
The ATO explains:
“You must provide your employee with a payment summary if you’re not yet reporting through STP or you made ETP payments.”
(ato.gov.au)
Example:
Michael leaves his job mid-year and receives an Employment Termination Payment. His employer issues a PAYG payment summary outlining his total earnings, tax withheld, and ETP details.
Employers must thoroughly understand and fulfill their payroll responsibilities to remain compliant. Proper knowledge of PAYG withholding, reporting methods, allowances, leave entitlements, and payment summaries ensures accurate payroll management, reduces risk, and promotes a positive employment environment.
Always consult official ATO resources or professional advisors for specific guidance.
Information accurate as of March 2025. For updated regulations, always refer to the Australian Taxation Office.
Navigating the intricacies of employment classifications and their corresponding tax obligations is crucial for both employers and workers in Australia. This guide delves into key distinctions and arrangements, providing clarity on terms and obligations.
Employee: An individual who works under an employment contract, performing duties as directed by the employer. Employees are integral to the business, have set working hours, and receive entitlements like leave and superannuation.
Independent Contractor: A person or entity engaged to perform services under a contract for service. They operate their own business, have control over how tasks are completed, and are responsible for their own tax and superannuation obligations.
Key Differences:
The Australian Taxation Office (ATO) emphasises the importance of correctly determining a worker’s status:
“It’s important to get the working arrangement right because it affects your tax, super and other obligations.”
Example:
Sarah works as a graphic designer. At Company A, she has set hours, uses company equipment, and receives paid leave—indicating an employee relationship. For Company B, she uses her own tools, decides her work hours, and invoices for completed projects—indicating an independent contractor relationship.
Labour Hire Firm: An entity that supplies workers to clients. The firm pays the workers and is responsible for tax obligations, even though the workers perform tasks for the client.
Obligations:
The ATO clarifies:
“Labour-hire firms must withhold tax from payments to workers, whether they’re an employee or independent contractor.”
Example:
TechTemps Ltd. supplies IT professionals to various businesses. They pay the professionals directly and handle all tax withholdings, even though the professionals work on-site at client companies.
Definition: A written agreement between a payer and an independent contractor to bring payments into the PAYG withholding system. This helps contractors meet their tax obligations.
Key Points:
The ATO notes:
“You and a contract worker (payee) can enter into a voluntary agreement to withhold an amount of tax from each payment you make to them.”
Example:
John, a freelance writer, enters into a voluntary agreement with a magazine publisher. The publisher withholds tax at John’s instalment rate from each payment, simplifying John’s tax process.
Definition: Lump sum payments made to an employee upon termination of employment. ETPs can include payments for unused leave, redundancy, or gratuities.
Tax Treatment:
The ATO specifies:
“If you have paid an employment termination payment (ETP) to a worker you must give them a PAYG payment summary – employment termination payment (NAT 70868) within 14 days of making the payment.”
Example:
Maria receives a redundancy package, including payment for unused annual leave and a gratuity. Her employer provides her with an ETP payment summary detailing these amounts.
Understanding these classifications and arrangements is vital for compliance with Australian tax laws. Correctly distinguishing between employees and contractors, recognising the responsibilities of labour hire firms, utilising voluntary agreements appropriately, managing employment termination payments, and comprehending personal services income are all essential components of effective tax management.
For comprehensive information, consult the ATO’s guidelines and seek professional advice when necessary.
Note: This guide is based on information available as of March 2025. For the most current regulations, refer to the Australian Taxation Office.
Definition: Income earned mainly from an individual’s personal skills or efforts, rather than from selling goods or using assets.
Implications:
The ATO explains:
“Personal services income (PSI) rules don’t affect your obligation to withhold from payments to individual workers. However, they do affect how a worker reports their income in their own tax returns and the deductions they can claim.”
Example:
Alex, an IT consultant, earns income solely from his expertise. He assesses his income against PSI rules to determine allowable deductions.
A Hire Purchase (HP) is a financing method businesses use to buy assets such as machinery, vehicles, or equipment. In an HP agreement, the buyer takes immediate possession of the asset but pays it off in instalments over an agreed period.
Importantly, ownership of the asset does not transfer until all payments (including interest) are completed. This differentiates hire purchase from leasing, where ownership typically remains with the lessor (the provider) rather than the lessee (the user).
Key Components of Hire Purchase:
Accurate accounting involves clearly recognising the asset, GST, liability, and unexpired interest.
Example: A business purchases machinery under an HP agreement with:
Initial Journal Entry:
Account | Debit ($) | Credit ($) |
Machinery (Asset) | 50,000 |
|
GST Paid (Asset) | 5,000 |
|
Unexpired Interest (Liability) | 5,000 |
|
Hire Purchase Liability |
| 60,000 |
Explanation:
Recording the Deposit:
| Account | Debit ($) | Credit ($) |
| Hire Purchase Liability | 10,000 | |
| Bank | 10,000 |
Explanation:
Ongoing Monthly HP Payments
Each monthly payment reduces your liability and unexpired interest progressively.
Interest and Principal Breakdown Example:
Assume interest is evenly distributed (straight-line method):
Monthly Journal Entries:
Recording Interest:
| Account | Debit ($) | Credit ($) |
| Interest Expense | 100 | |
| Unexpired Interest | 100 |
Recording Payment:
| Account | Debit ($) | Credit ($) |
| Hire Purchase Liability | 1,000 | |
| Bank | 1,000 |
Explanation:
Reconciling Hire Purchase Balances
Regular checks ensure accuracy:
Early Payouts of Hire Purchase Agreements
Sometimes businesses may pay off the HP loan early (sale of asset, refinancing, etc.). When this occurs, adjustments are necessary to reflect actual interest paid.
Example of Early Settlement:
Adjustment Entry:
| Account | Debit ($) | Credit ($) |
| Unexpired Interest | 500 | |
| Interest Expense | 500 |
Explanation:
GST Considerations for Hire Purchases
The Australian Taxation Office (ATO) guidelines state clearly:
“For hire purchase agreements entered on or after 1 July 2012, all components of the transaction are subject to GST including upfront purchase price, interest charges, and associated fees.”
Key GST Rules (from 1 July 2012 onwards):
GST Claim Example:
Interest portion payments going forward also contain GST and must be recorded accordingly.
Fundamental Lessons and Facts Summary:
Verification with ATO Guidelines
This guide’s information has been cross-checked against the Australian Taxation Office (ATO) to ensure accuracy. According to the ATO:
ATO Reference:
Practical Tips for Accurate Record-Keeping:
Conclusion
Understanding hire purchase agreements is crucial for businesses acquiring assets with financing. Proper accounting includes accurate recognition of assets, liabilities, and interest expenses. GST rules must be carefully observed to ensure compliance. By following these guidelines, businesses ensure precise financial management and maintain compliance with taxation laws.
Please Note:
This guide has been carefully compiled and cross-checked. However, always consult the most recent guidelines from the ATO or a tax professional when applying these principles to specific cases or scenarios.
A fringe benefit is an extra benefit or perk an employer gives to an employee, apart from their regular salary or wages. Common examples of fringe benefits include:
When employers provide these extra benefits, there may be tax implications called Fringe Benefits Tax (FBT).
Goods and Services Tax (GST) is usually charged on most goods and services sold in Australia. The relationship between GST and FBT can sometimes be complex. According to the article:
“The provision of a fringe benefit by an employer to an employee is deemed a supply for the purposes of the Goods and Services Tax Act.”
This means providing a benefit can sometimes trigger a GST liability, depending on the type of benefit provided.
GST becomes payable when an employee makes a contribution towards a fringe benefit that would otherwise attract GST. The employee’s payment is considered the value of the supply, and GST is calculated accordingly.
For example:
“Mark purchases a freezer from his employer at the special employee price of $1,100, normally retailing for $3,300. As Mark contributes $1,100 towards the freezer, GST of $100 (1/11th) is payable by the company.”
However, if the employee does not pay anything towards the benefit, no GST applies even though it remains a fringe benefit.
GST is not charged on fringe benefits that are GST-free or input-taxed. GST-free items include essentials like basic food, education, and medical services. Input-taxed supplies usually include residential property rentals.
Two examples from the article illustrate this clearly:
Employers providing fringe benefits can usually claim input tax credits (GST paid when buying items) if:
Employers cannot claim input tax credits if the purchase was:
The article provides a simple example:
“Melissa’s employer buys two technical books from a garage sale (non-registered supplier). The company can’t claim any input tax credits for this purchase.”
Gross-up rates help calculate how much FBT is owed. There are two rates:
These rates increase the taxable value of the benefit, which is then taxed at the FBT rate of 47%.
For instance:
The article explains it as:
“A gross-up rate of 2.0802 applies if an input tax credit can be claimed (Type 1). A rate of 1.8868 applies if no input tax credit can be claimed (Type 2).”
The article gives a clear process to calculate the total FBT payable:
For example, if a company provides an employee a $4,400 holiday (GST-inclusive), and the employer can claim GST credits, this is a Type 1 benefit. You multiply by 2.0802, then by 47% to determine the tax payable.
When bookkeepers record these transactions, the FBT itself doesn’t involve GST reporting. However, the purchases themselves, like goods or services given as fringe benefits, usually include GST at the point of purchase. These need to be recorded correctly in the accounting system, as shown in the article’s examples.
Understanding these fundamental concepts helps ensure that both GST and FBT are handled correctly, preventing costly mistakes and ensuring tax compliance.
Stamp duty, often just called ‘duty’ or ‘transfer duty’, is a type of tax collected by state and territory governments in Australia. It’s charged when certain assets like property or vehicles are bought or transferred from one owner to another. This tax can be charged at a fixed rate or based on the value of the transaction.
For example, if someone buys a house, they pay stamp duty based on the price they pay for it. Each Australian state or territory has its own rules and rates for stamp duty. Because of this, the amount of stamp duty payable can vary significantly depending on where the purchase is made and how much the asset costs.
Stamp duty applies to many common transactions, such as:
Property transactions are one of the most common times when stamp duty becomes important. When a property is purchased, the buyer typically pays stamp duty, and the amount paid is based on the value of the property.
Here’s an example of what stamp duty might look like in practice:
“Fred purchases a vacant commercial investment property for $1,000,000. As the property is not deemed to be the sale of a going concern, GST of $100,000 is imposed. Fred’s lawyer Dennis sends Fred a bill for Stamp Duty $43,775.”
– Australian Bookkeepers
Network, Edition 101
This means Fred not only pays for the property itself and GST but also stamp duty calculated according to the rates in the state or territory he’s purchasing in.
A common question is whether bookkeepers, especially those who are BAS agents, can deal with stamp duty transactions. The good news for bookkeepers is that managing stamp duty transactions isn’t regulated by the Tax Practitioners Board (TPB). This means that BAS agents and bookkeepers can handle stamp duty tasks for their clients.
However, usually, lawyers handle the legal side of stamp duty transactions, such as during the purchase of property or business assets. Bookkeepers mainly need to be aware of the stamp duty payment, properly record it, and ensure that it’s correctly accounted for within the business’s financial records.
Stamp duty payments are not tax-deductible for businesses, but they do form part of the cost base of an asset. This means that the stamp duty paid is added to the cost of the asset in the business’s accounting records. For instance, if a business buys a vehicle or property, the stamp duty paid on that purchase becomes part of the total asset cost in the financial records.
For GST purposes, stamp duty generally doesn’t include GST itself. It’s classified under a special tax code that excludes it from BAS reporting, typically labelled as “BAS Excluded” or “N-T” (non-taxable).
There are strict rules to stop people or businesses from trying to avoid or reduce stamp duty payments. State and territory revenue offices can reverse any arrangement made specifically to lower the stamp duty payable. They closely examine transactions occurring within 12 months of a stamp-duty-liable transaction to ensure no attempts have been made to unfairly lower the stamp duty amount.
Understanding stamp duty helps bookkeepers keep accurate records, manage their client’s financial data effectively, and ensures compliance with relevant state or territory laws. This guide provides the foundational knowledge to handle stamp duty confidently and clearly.
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