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14 min 3 sec
0:00
Opening
0:31
Reading item 8
1:11
Trading stock
2:06
The balance sheet
3:06
Total debt and debt forgiveness
3:53
Dividends paid
4:48
The franking account
6:16
Aggregated turnover
7:05
Excess franking offsets
7:42
Loans to shareholders and Division 7A
10:40
Total salary and wage expenses
11:57
Payments to associated persons
13:01
Foreign income, currency and financial arrangements
13:51
Close
The Company Tax Return, Explained
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Step 2: the return
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Episode 6
The balance sheet and the disclosures
Item 8: trading stock, the balance sheet labels, dividends and the franking account, aggregated turnover, loans to shareholders, wages and payments to associates.
item 8
balance sheet
franking account
dividends
loans to shareholders
Do it in Beeswax
Tax Returns
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Transcript
0:00
Item 8 changes nothing in the tax calculation. It's financial and other information: balance sheet figures, and disclosures the Australian Taxation Office, the ATO, uses to check the return against information it already holds.
0:14
This film covers item 8 label by label, with Saltbush's figures. A small company needs chapters 1, 3, 5, 6, 7, and 9 to 11. As before, this is general information, not tax advice.
0:30
Two cautions before the labels. First, nine letters are used twice in item 8: B, D, G, H, J, K, N, S and U. Label D, for example, is all current assets and also total salary and wage expenses.
0:50
Name the label, not just the letter. Second, item 8 mixes two kinds of figure. Trade debtors through to total liabilities, and loans to shareholders, are accounting figures from the balance sheet at the end of the accounting period.
1:05
Stock, total debt and commercial debt forgiveness are tax values. These labels are tax values. Opening stock, label A. It must equal last year's closing stock. Purchases and other costs, label S, including freight inwards.
1:23
Closing stock, label B, with a code for the valuation method: C for cost, M for market selling value, R for replacement value. If more than one method is used, give the code for the method with the highest value.
1:38
A small business entity needn't account for changes in stock unless opening stock and a reasonable estimate of closing stock differ by more than 5,000 dollars. If it doesn't, closing stock is written as equal to opening stock.
1:52
A yes-or-no box records whether the company valued any stock below all three methods because of obsolescence or similar circumstances. A service company with no stock, like Saltbush, leaves these blank.
2:06
Six labels come straight from the balance sheet: Trade debtors, label C, gross, for goods and services provided in the year; All current assets, label D, which includes C; Total assets, label E, which includes D; Trade creditors, label F; All current liabilities, label G, which includes F; Total liabilities, label H, which includes G.
2:32
The nesting is the common error. Debtors are part of current assets, and creditors are part of current liabilities, so they're counted again in the larger totals.
2:42
For Saltbush: trade debtors 58,000 dollars, inside current assets of 262,000, inside total assets of 296,300. Trade creditors 14,500, inside current liabilities of 78,000, inside total liabilities of 84,500.
3:05
Total debt, label J, is a tax figure and an average: opening debt plus closing debt, divided by two. It includes every loan or instrument that gives rise to deductible finance costs: interest, hire purchase and lease interest, discounts and fees.
3:23
Saltbush has no borrowings, so J is blank. Commercial debt forgiveness, label K. If a lender forgives a debt on which interest would have been deductible, the net forgiven amount goes here.
3:36
It usually isn't taxed as income. Instead it reduces the company's tax attributes, in a fixed order: tax losses; net capital losses; certain undeducted expenditure; the cost bases of capital gains tax assets.
3:53
Franked dividends paid, the second label J, includes the franked part of a partly franked dividend. Unfranked dividends paid, the second label K, includes the unfranked part, and deemed dividends.
4:07
That includes deemed dividends under Division 7A, which we come to with loans to shareholders. They are generally unfranked. The franking rate is the corporate tax rate for imputation purposes; the next chapter explains it.
4:20
Saltbush paid its director a fully franked dividend of 60,000 dollars in December. At a franking rate of 25 per cent, that carried 20,000 dollars of franking credits.
4:31
A company that pays a dividend, or pays interest to investors such as shareholders who've lent it money, also lodges a dividend and interest schedule reporting each recipient, unless the same details go in an annual investment income report.
4:45
Saltbush lodges one. The franking account tracks the tax a company has paid that it can pass to shareholders as franking credits. Opening franking account balance, label P, at 1 July 2025.
5:00
Closing franking account balance, label M, at 30 June 2026. For Saltbush: it opened at 42,000 dollars. Tax paid during the year added 40,100 dollars: four instalments, the first of them for last year's June quarter, and the balance of last year's tax.
5:19
The dividend's credits took out 20,000, and it closed at 62,100. If either balance is in deficit, the label is left blank. A deficit at year end means the company must lodge a separate franking account tax return and pay franking deficit tax, by the last day of the month after year end: 31 July 2026 for most companies.
5:42
The franking rate can differ from the tax rate. It's worked out from the previous year's turnover and income. So a company can pay tax at 25 per cent this year and frank at 30, or the other way round.
5:55
Some background on where franking credits came from. Dividend imputation began on 1 July 1987. Before it, company profits were taxed in the company and again in shareholders' hands.
6:08
Excess franking credits became refundable to individuals and super funds from 1 July 2000. Aggregated turnover range, label X, runs from A, under 7.5 million dollars, to P, a billion dollars or more.
6:25
It's required from any company that relies on aggregated turnover for: the instant asset write-off; the small business capital gains tax concessions; the small business restructure roll-over.
6:37
Saltbush used the instant asset write-off, so it selects A. Either this year's or last year's aggregated turnover can be used. There's no penalty for a wrong range if a best attempt was made.
6:49
Aggregated turnover, label Y, is the figure itself, rounded to the nearest 100 million dollars. It's needed only from companies with turnover of a billion dollars or more, and from significant global entities.
7:05
Excess franking offsets, the second label H, arises when franking credits received exceed the tax the company would otherwise pay. The ATO's example is a base rate entity with 120 dollars of credits and 80 dollars of tax: an excess of 40.
7:22
An excess can't be refunded to a company. Instead it's converted to a tax loss: the excess divided by the company's franking rate. Here that's 40 dollars divided by 25 per cent, which is 160.
7:37
That loss is carried forward at item 13. Loans to shareholders and their associates, the second label N, is completed when three things apply: the company is a private company; at year end, a loan to a shareholder or associate has a debit balance; the borrower is a person, a partnership or a trust.
7:58
It takes the total of those balances, and a code for when the loans were made: A if all were made on or after 4 December 1997, B if all before, M if a mix. That date is the start of Division 7A.
8:14
Without it, a private company could lend its profits to its owners instead of paying taxed dividends. Broadly, Division 7A treats a loan from a private company to a shareholder, or their associate, as an unfranked dividend, up to the company's distributable surplus.
8:30
That's avoided if the loan is repaid, or put on a complying loan agreement, before the return's lodgment day: the earlier of the due date and the date the return is actually lodged.
8:41
Other payments are treated the same way unless they're converted into such a loan in time. A complying loan agreement: is in writing; charges at least the benchmark interest rate in each year after the loan is made.
8:54
For a loan made in 2025–26, that's 8.77 per cent for twenty twenty-six twenty-seven; runs for at most seven years, or 25 if it's fully secured by a registered mortgage over real property worth at least 110 per cent of the loan.
9:10
Minimum yearly repayments are then due in each later year, and any shortfall is itself a deemed dividend. A deemed dividend is taxed to the shareholder, unfranked, in their own return.
9:22
Saltbush's director, who is also its shareholder, took 6,000 dollars of drawings in March and hadn't repaid them at 30 June. So Saltbush shows 6,000 dollars here, with code A.
9:34
Unless the drawings are repaid or put on a complying loan agreement by the lodgment day, they're a deemed dividend. In Beeswax, label N is hidden in Simplified mode.
9:44
Step 1's check points to it, and "Show all fields" shows it on the return. "Director and shareholder loans (Division 7A)" stays red until someone records that the loan was repaid or put under a written agreement, as Film 3 showed.
9:59
Saltbush's director signed one. Some background on Division 7A's history, and a recent High Court case. The Board of Taxation reviewed Division 7A in 2014. Reform was announced in the 2016–17 Budget and consulted on in 2018, but hasn't been legislated.
10:18
In June 2026 the High Court decided Commissioner v Bendel: a company's unpaid entitlement to a trust distribution isn't, on its own, a loan for Division 7A. That rejected the view the ATO had applied since 2009.
10:34
The ATO says other anti-avoidance rules can still apply to those arrangements. Total salary and wage expenses, the second label D, is total labour cost as shown in the income statement, including directors' remuneration.
10:49
It includes: directors' fees; wages inside cost of sales; holiday pay, sick pay and long service leave; overtime, bonuses and lump sums. It excludes: superannuation; contractors, consultants, agency, service and management fees; travel reimbursements and allowances.
11:10
A code says where the wages sit in item 6: C for cost of sales, A for all other expenses, B for both, O for elsewhere. Saltbush's 304,000 dollars of wages and leave sit in all other expenses, so its code is A.
11:28
Wages aren't deductible if the company didn't withhold the tax on them, or didn't report it. Either failure is enough, unless the company corrects it voluntarily before the ATO starts a review.
11:40
The ATO compares this figure with the wages reported through pay as you go, PAYG, withholding. It also uses it, with contractor expenses and payments to associated persons, to build the labour ratio in its small business benchmarks.
11:56
Payments to associated persons, label Q. An associated person is a current or former shareholder or director, or an associate of one. Q includes salaries, wages, commissions, superannuation and allowances paid to them.
12:12
Salaries and wages here are also counted in total salary and wages. Superannuation is counted here, but not there. Saltbush's director was paid a salary of 120,000 dollars plus 14,400 of super, so Q is 134,400.
12:31
Remuneration above what's reasonable for the work may not be deductible, and the excess can be treated as an unfranked dividend. Keep evidence of the hours, duties and pay.
12:41
In Beeswax, label Q is hidden in Simplified mode. Step 1's "Payments to directors and associates" asks who the associates are each year and works out their wages and super, 134,400 dollars for Saltbush, and the preparer enters that at Q.
13:00
The remaining labels apply to few small companies: Gross and net foreign income, labels G and R. Gross is grossed up for foreign tax; net is after expenses. Attributed foreign income, labels B, U and V, from controlled foreign entities in listed and unlisted countries, and from transferor trusts.
13:23
Functional currency, labels N and O. Only for a company that keeps its accounts mainly in a foreign currency and has chosen it for working out taxable income. Taxation of financial arrangements, labels T, U and S, for gains and losses under those rules.
13:40
They apply mainly to large entities, for example those with turnover of 100 million dollars or more, and to entities that elect in. That's the information statement.
13:52
The last film covers items 11 to 30, the schedules, and the calculation statement, where Saltbush's taxable income becomes the amount it pays.