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15 min 7 sec
0:00
What item 6 is
0:59
Income: the everyday labels
2:12
Income: amounts already taxed at the source
2:59
Income: distributions and specialised income
4:12
Expenses: many accounts, few labels
6:40
Cost of sales, and contractors
7:44
Superannuation and bad debts
9:14
Leases, rent, interest and royalties
10:21
Depreciation
11:22
Motor vehicle, repairs, and revaluations
11:57
All other expenses, and the totals
13:07
Example: Saltbush's item 6
14:19
From Step 1, and in Beeswax
14:50
Close
The Company Tax Return, Explained
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Step 2: the return
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Episode 4
Item 6, profit or loss, label by label
Every income and expense label at item 6, which a small company really uses, and how Saltbush’s accounts map onto them.
item 6
income
expenses
cost of sales
depreciation
Do it in Beeswax
Tax Returns
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Transcript
0:00
Item 6 is the company's profit and loss, as shown in its financial statements. Every amount here is an accounting figure. Tax adjustments happen in item 7, never here.
0:11
The one exception is depreciation for small business entities on the simplified rules, which we'll come to. For a company registered for the goods and services tax, GST, amounts exclude it: income leaves out the GST payable, and expenses leave out the credits the company can claim.
0:29
A company that isn't registered shows its expenses including GST. There are thirteen income labels and a total, and seventeen expense labels followed by total expenses and the profit or loss.
0:42
A typical small company uses perhaps four of the income labels and eight to ten of the expense labels. For a small service company, chapters 1 and 4 to 11 are the ones that matter.
0:53
As before, this is general information, not tax advice. Other sales of goods and services, label C. Gross earnings from services, and gross sales of trading stock and other goods.
1:07
It's reported gross, before anything is netted off. This is where a service company's fee income goes. Saltbush's design fees, 640,000 dollars, go here. Gross interest, label F.
1:21
Interest from all sources, including from shareholders and associates. It can't be a loss. Gross rent and other leasing and hiring income, label G. Total dividends, label H.
1:34
Franked and unfranked, including foreign dividends and deemed dividends. The franking credits attached to them don't go here. They're added at item 7. Other gross income, label R.
1:46
This label collects what the others don't, for example: insurance recoveries; bad debts recovered; royalties received; profit on selling a depreciating asset, or an investment that isn't trading stock; extraordinary revenue.
2:00
R can be a loss, shown with code L. Saltbush's 12,000-dollar accounting gain on some shares it sold goes here. Two labels hold income that someone else has already withheld tax from.
2:16
Gross payments where the Australian business number, ABN, is not quoted, label A. This is when a payer withheld tax because the company didn't quote its ABN. Gross payments subject to foreign resident withholding, label B.
2:32
This is only for non-resident companies, on payments such as construction contracts or entertainment and sports activities. Both take the gross amount, including the tax withheld.
2:43
That tax is then claimed back as a credit in the calculation statement: label H3 for A, and H2 for B. Both also need a non-individual pay as you go, PAYG, payment summary schedule.
2:59
Gross distribution from partnerships, label D. It can be a loss. Gross distribution from trusts, label E. It can't be a loss, needs a trust income schedule, and takes a code for the type of trust, such as T for a discretionary trading trust.
3:16
Capital gains through a trust go to item 7 instead. Forestry managed investment scheme income, label X. Fringe benefit employee contributions, label I. Amounts employees paid towards their own fringe benefits.
3:31
Assessable government industry payments, label Q. Grants, wage subsidies and fuel tax credits. Code D flags fuel tax credits, the wine equalisation tax producer rebate, and the product stewardship benefit for oil.
3:46
Grants that aren't assessable stay out of Q. Unrealised gains on revaluation of assets to fair value, label J. Total income, label S, can be a loss. If it's more than zero, the instructions require an entry at the depreciation expenses label, even if it's zero.
4:06
Saltbush's total income is 654,400 dollars. On the paper, the expenses take one page: seventeen labels, then the total. A small company's chart of accounts might have dozens of expense accounts, and a small service company typically uses eight to ten of the labels.
4:26
Ideally each account flows to one label; a mixed account has to be split. Rent goes to rent, and motor vehicle running costs go to motor vehicle. Most of the rest goes to all other expenses, label S: software; insurance; phone and internet; bank fees; accounting and legal fees; advertising; travel; salaries, wages and directors' fees, unless they're part of cost of sales.
4:51
The detail stays in the company's own books. The return asks for only a few figures. A figure gets a label of its own where the ATO uses it, or where it has its own tax rule; the rest is simply all other expenses, and the ATO can ask to see the detail.
5:08
Some background on why the return splits expenses this way. The labels broadly line up with what the Australian Taxation Office, the ATO, compares. Its small business benchmarks set five ratios against turnover: total expenses; cost of sales; labour; rent; motor vehicle expenses.
5:27
The labour ratio, for example, is built from the contractor label here plus two figures from item 8: total salary and wages, less payments to associated persons.
5:38
They cover 100 industries, built from more than 2 million small businesses. That's why the ATO wants the split: it compares these figures with the benchmarks, alongside other risk checks, to find businesses that may not be reporting all their income, though never on the benchmarks alone.
5:55
It works out a business's industry from its industry code and the description of its main activity. Each ratio is published as a range for an industry and a turnover band.
6:05
For Saltbush, the nearest industry is printing support services, which covers graphic design. With turnover between 300,000 and 900,000 dollars, total expenses usually run at 68 to 83 per cent of turnover.
6:20
Saltbush's come to 53 per cent: its total expenses less payments to associated persons, against its sales at label C. That's below the range. Below isn't wrong: it can mean a higher margin, or expenses under the wrong label.
6:35
Either way, keep the records that explain it. Cost of sales, label A. The cost of goods produced, manufactured or bought for sale, including freight inwards. If the account is in credit, show the amount with code L, not in brackets.
6:52
A pure service company usually leaves A empty, as Saltbush does. Contractor, sub-contractor and commission expenses, label C. Labour and services under contract: contractors and consultants, including labour hire; commissions to people not on a retainer; agency, management and service fees.
7:13
Two things are excluded: accounting and legal fees, which go to S; external labour already counted in cost of sales. Salaries and wages aren't contractor expenses.
7:24
Item 8 asks for total salary and wages, with a code saying whether they sit in cost of sales, all other expenses, or both. Foreign resident withholding expenses, label B, sits first in the expenses list.
7:38
It's for foreign-resident companies only; residents leave it blank. Superannuation expenses, label D, is the accounting super expense for the year. But super is deductible only in the year the fund receives it.
7:53
So super accrued at 30 June, but received by the fund in July, sits in item 6 this year, is added back at item 7, and is deducted next year. That includes super sent through a clearing house.
8:07
A payment made on 28 June that reaches the fund on 2 July is next year's deduction. From 2026–27, the ATO's own small business clearing house is gone: it closed on 1 July 2026.
8:21
The super guarantee charge, for quarters up to 30 June 2026, isn't deductible, and nor are contributions offset against it. From 2026–27, under Payday Super, the charge becomes deductible.
8:35
The general interest charge and late payment penalty on it still aren't. Bad debts, label E. A debt must actually be bad, not merely doubtful, and it must have been written off as bad, in writing, before year end.
8:50
It must also have been counted as assessable income before, unless the company is in the business of lending money. As with losses, the company must pass the continuity of ownership test or the business continuity test.
9:03
A provision for doubtful debts doesn't go here. It goes to S, and is added back at item 7. Recoveries of bad debts are income, at label R. Several expense labels split by where the payment goes: Lease expenses for depreciating assets, such as vehicles and equipment: within Australia at label F, overseas at label I.
9:26
Hire purchase and leases of real estate are excluded. Rent expenses, label H, for land and buildings the company rents as a tenant, including the tenant's costs of setting up or ending the lease.
9:38
Interest expenses: within Australia at label V, overseas at label J. Royalty expenses: within Australia at label W, overseas at label U. Overseas interest and royalties require an international dealings schedule, and may carry withholding obligations.
9:57
A 2026 change: for income years starting on or after 1 July 2025, interest charged by the ATO itself is no longer deductible. That covers the general interest charge and the shortfall interest charge.
10:11
If it's in the accounts, it's added back at item 7. Saltbush's 350 dollars of interest charges sit in S and are added back. Depreciation expenses, label X, works differently depending on the company.
10:26
Most companies show book depreciation, from the accounts. At item 7, they add it back and claim the tax decline in value instead, even when the two figures are the same.
10:37
A small business entity using simplified depreciation shows the tax deduction itself here. It then completes item 10, and doesn't claim a tax decline in value at item 7.
10:48
For 2025–26, a small business entity on the simplified rules can immediately deduct each asset costing less than 20,000 dollars, if it was first used, or installed ready for use, for a taxable purpose between 1 July 2025 and 30 June 2026.
11:07
The limit applies per asset, and only the business-use share is deducted. Film 5 covers this in detail. Profit on selling a depreciating asset goes to income label R, and a loss goes to S.
11:22
Motor vehicle expenses, label Y. Running costs only: fuel, repairs, registration and insurance. Lease payments, interest and depreciation on the vehicle go to their own labels.
11:35
Repairs and maintenance, label Z, of plant, machinery and premises. Anything capital is added back at item 7. That includes improvements, and initial repairs to property just bought.
11:48
Unrealised losses on revaluation of assets to fair value, label G. This is the mirror of income label J. All other expenses, label S, takes everything not shown at another label.
12:03
That includes: accounting and legal fees; gifts and donations; provisions for doubtful debts; losses on selling depreciating assets. A gift, for a company, is money or property given freely to a deductible gift recipient, a DGR, such as a registered charity, with nothing of value back.
12:23
Check the charity's DGR status on ABN Lookup and keep the receipt. Since 1 July 2024 there's no 2 dollar minimum. Sponsorship that buys the company advertising isn't a gift: it's an ordinary business expense.
12:38
Raffle tickets, auction items and fundraising-dinner tickets aren't gifts either. And a donation to a body that isn't a DGR isn't deductible, so it's added back at item 7.
12:50
Total expenses, label Q, is the sum of B to S. Total profit or loss, label T, is total income less total expenses, with code L for a loss. T is carried to item 7 as its starting figure.
13:07
Saltbush's item 6, in round figures: Income: design fees 640,000 dollars at C, interest 2,400 at F, and the 12,000-dollar gain on shares at R. Total income is 654,400.
13:25
Expenses: contractors 48,000 at C, super 36,000 at D, rent 36,000 at H, depreciation 11,300 at X, vehicle running costs 7,200 at Y, and everything else, 335,900, at S.
13:47
Most of that is salaries and wages. Total expenses are 474,400. Profit, at T: 180,000 dollars. In Beeswax, nobody types these in: each account in the books is mapped to its label, and the return fills itself from the year's figures.
14:06
Some of those figures aren't what tax is charged on. The gain on the shares, the entertainment inside S, and the super still unpaid at 30 June all change at item 7.
14:18
In Beeswax, item 6 is filled from the ledger for the year, account by account. It's the profit and loss from Step 1's year-end accounts, mapped to labels. Two Step 1 checks sit under it: Accounts mapped to tax return labels.
14:33
An unmapped account would land in other sales or all other expenses. Depreciation posted, under label X. Each shows its status and links back to the check. The eye beside a figure lists the transactions behind it.
14:49
Item 6 ends with an accounting profit. The next film is item 7, where Saltbush's 180,000 dollars of profit becomes taxable income: what's added back, what's taken off, and why.
15:02
It also covers capital allowances at items 9 and 10.