Speed
0.75×
1×
1.25×
1.5×
2×
27 min 14 sec
0:00
Opening
0:26
How item 7 works
1:27
Permanent differences
5:15
Timing differences
7:19
Capital gains
10:33
The other add-backs
12:11
The other subtractions
14:18
Tax losses deducted
16:42
Worked example: Saltbush, profit to taxable income
18:00
Item 9: Capital allowances
20:46
Item 10: Simplified depreciation
25:30
Background: the car limit
26:19
Close
The Company Tax Return, Explained
·
Step 2: the return
·
Episode 5
From accounting profit to taxable income
Item 7’s add-backs and subtractions, permanent and timing differences, capital gains and tax losses, worked through for Saltbush. Then items 9 and 10: capital allowances and simplified depreciation.
item 7
taxable income
non-deductible expenses
capital gains
simplified depreciation
Do it in Beeswax
Tax Returns
↗
Transcript
0:00
Item 6 ended with an accounting profit. Tax isn't charged on accounting profit. It's charged on taxable income, and item 7 is where one becomes the other. This film covers item 7 label by label, then the two depreciation items, 9 and 10.
0:16
A small company needs chapters 1 to 4, 7, 8 and 10. As before, this is general information, not tax advice. Item 7 starts from the profit or loss at item 6, the accounting figure.
0:31
It then works in two blocks. Add-backs increase the figure: assessable income that isn't in the accounts, such as a net capital gain, and expenses in the accounts that aren't deductible, such as entertainment or fines.
0:45
Subtractions reduce it: income in the accounts that isn't assessable, such as an accounting gain on selling shares, and deductions that the accounts don't show, such as last year's June super that reached the fund this year.
0:58
Each of these comes up in more detail later in this film, with Saltbush's figures. The result is taxable or net income or loss, label T. It's mandatory, even when it's zero.
1:10
A loss carries code L. Four letters appear twice in item 7: C, E, U and W, once as an add-back and once as a subtraction. "7 W" alone is ambiguous, so always say which side.
1:27
Some differences never reverse. The expense is in the accounts, and it's never deductible. Entertainment. Saltbush's 3,200 dollars of client lunches and event tickets is a real business cost, but it isn't deductible.
1:42
It's added back at non-deductible expenses, add-back label W. Penalties and fines are added back at W. Saltbush paid 400 dollars of fines. For the 2026 return, the law has changed: the interest charges of the Australian Taxation Office, the ATO, are no longer deductible: the general interest charge and the shortfall interest charge, if incurred on or after 1 July 2025.
2:09
Saltbush's 350 dollars is added back at W. On the paper, W is one box. In Beeswax it's one figure. Beeswax pre-fills it with the interest charges, from an account named for them.
2:22
Two checks from Step 1, the year-end review, point at it: Accounts that usually need a tax adjustment, for entertainment and fines, and Super paid, and when, for June super paid in July.
2:34
These checks only flag the accounts to look at. They don't work out any amounts, so the preparer calculates each one and adds it to W. The leave provision isn't flagged by either check, so the preparer has to remember it.
2:47
A leave provision is the annual leave staff have earned but not yet taken. The accounts record it as an expense as the leave is earned, but tax only allows the deduction when the leave is taken or paid out.
2:59
For example, Saltbush's staff earned 22,000 dollars of leave this year and took 18,000 dollars of it, so the provision rose by 4,000. That 4,000 is an expense in the accounts but isn't deductible yet, so it's added back at W.
3:15
It becomes deductible in the year the leave is taken. Income can be permanent too. Exempt income comes off at subtraction label V, and the costs of earning it are added back at add-back label U.
3:28
Exempt income is rare for an ordinary trading company: it's income a specific law exempts from tax. If a company had 5,000 dollars of exempt income and spent 800 dollars earning it, the 5,000 comes off at V and the 800 is added back at U.
3:44
Saltbush has none. Income that is non-assessable but not exempt, a separate legal category, comes off at subtraction label Q instead. For example, dividends from a foreign company that the business owns at least 10 per cent of.
3:59
Q also takes accounting gains that are taxed at another label: Saltbush's 12,000-dollar accounting gain on shares comes off at Q, and the taxable gain goes in at A.
4:10
That's in the capital gains section. Some background on why entertainment is added back. Entertainment has been non-deductible since 19 September 1985. The main exception is entertainment given to employees as a fringe benefit: the company pays fringe benefits tax, FBT, on it, and the cost is then deductible.
4:33
Say Saltbush takes its staff to a 400-dollar-a-head end-of-year dinner. That's over the 300-dollar minor benefit limit, so it's a fringe benefit. Saltbush pays about 390 dollars a head in FBT, and can deduct both the dinner and the FBT.
4:51
Client entertainment has no FBT, so it stays non-deductible. Here's where the return stands. Item 7 starts from the 180,000-dollar profit, and add-back label W holds 3,950 dollars so far.
5:07
That figure will go up, but we'll get to that later. Not every difference between the accounts and the tax return is permanent. The rest only move an amount between years, so they're called timing differences.
5:23
The expense is in this year's accounts, but the deduction comes in another year. There's no separate label for them: they use the same add-back and subtraction labels, mostly W and X.
5:34
For example, superannuation is deductible in the year the payment lands in the super fund's account, not when it's expensed. Saltbush accrued 6,800 dollars of super for June that reached the fund in July.
5:48
That's added back at W this year. Last year's June super, 5,900 dollars, reached the fund in July this year, so it's deducted now, at other deductible expenses, subtraction label X.
6:01
Provisions, such as annual leave, are deductible when paid. A net increase in a provision is added back at W, and a net decrease comes off at X. Saltbush's leave provision rose by 4,000 dollars.
6:15
Prepaid expenses are generally spread over the service period, or ten years if shorter. A business with aggregated turnover under 50 million dollars can deduct them at once if the service period is 12 months or less and ends by the end of the next income year.
6:31
Differences go to W or X. Depreciation is often the largest timing difference. That's covered with item 9. From 2026–27: under Payday Super, an employee's super must reach the fund within seven business days of each payday.
6:47
Super is still deductible when the payment lands in the fund's account, so the super unpaid at 30 June should shrink to the last payday or two of June. And the super guarantee charge, for paydays from 1 July 2026, becomes deductible.
7:02
Here's where the return stands. W rises to 14,750 dollars with the June super and the leave provision, and subtraction label X shows 5,900. Capital gains tax, CGT, is worked out at item 7, not in its own item.
7:25
Label G asks whether the company had a capital gains tax event during the year, a CGT event, such as selling shares or other assets. For Saltbush, it's Yes: it sold some listed shares for a gain of 12,000 dollars.
7:40
The answer is also Yes if the company received a capital gain from a trust. If capital gains or capital losses for the year are more than 10,000 dollars, a CGT schedule is attached.
7:52
The accounting gain is in item 6, usually at other gross income. It comes out at subtraction label Q, and the tax figure goes in at net capital gain, add-back label A.
8:03
That's the year's gains, less the year's losses and earlier unused net capital losses. Companies get no CGT discount. For 2025–26, Australian-resident individuals and most trusts get 50 per cent off a gain on an asset held for at least 12 months.
8:21
A company is taxed on the full gain. So the timing that matters for an individual, holding the asset for at least 12 months, makes no difference to a company: its gain is taxed in full whether it held the shares for a week or for ten years.
8:36
From 2027–28: that discount is legislated to give way to indexation of the asset's cost for individuals and trusts, with a 30 per cent minimum tax on gains for resident individuals.
8:48
Companies never had the discount, and the new indexation doesn't extend to them. A net capital loss isn't deducted here. It's carried forward at item 13. Label M asks whether the company has applied a CGT exemption or roll-over, which can reduce or defer a capital gain.
9:05
If it has, the answer is Yes, with a code: codes A to D are the small business CGT concessions, and T is the small business restructure roll-over. Saltbush hasn't applied one, so it answers No.
9:19
Back to Saltbush's 12,000-dollar gain on its shares. It comes out at Q and goes back in at A: 12,000 dollars each way. Because the gain is over 10,000 dollars, Saltbush also attaches a CGT schedule.
9:33
That can look pointless at first: take 12,000 off, then put 12,000 back on. But the two figures are worked out under different rules. The 12,000 at Q is the accounting gain, which is already inside the profit.
9:46
The 12,000 at A is the gain as tax law works it out: what the shares sold for, less what they cost, less any capital losses. Item 7 swaps the accounting version for the tax version.
9:59
For Saltbush the two happen to be the same, so they cancel out and the gain is taxed once, as part of the profit. But if Saltbush had 4,000 dollars of capital losses carried forward from earlier years, A would be 8,000 while Q stayed 12,000, and taxable income would be 4,000 dollars lower.
10:19
Here's where the return stands. G is answered Yes, add-back label A shows 12,000 dollars, and subtraction label Q shows 12,000. Franking credits, label J. Credits on dividends received directly from Australian companies.
10:39
Most small businesses never complete this label. An architecture practice or a florist almost never holds shares in other companies. Investing the business's money in shares brings complexity and tax questions.
10:52
For example, if more than 80 per cent of a company's income is passive, such as dividends, it loses the lower 25 per cent company tax rate. And with several owners or directors, they all need to agree.
11:04
If you're considering it, get advice first. For a company that does hold shares, the dividend is at item 6; the credit is added here, and claimed back as a tax offset in the calculation statement.
11:16
Each credit is capped at the most the paying company could have attached. To get the credit, the company must hold the shares at risk for 45 days, or 90 for preference shares.
11:27
The small shareholder exemption from that rule is for individuals, not companies. Australian franking credits from a New Zealand company, add-back label C. Taxation of financial arrangements income, add-back label E: income under those rules that isn't already in item 6.
11:45
Other assessable income, label B. Assessable income the accounts don't show. That includes foreign income grossed up for foreign tax, assessable balancing adjustments when depreciating assets are sold, and a small business pool balance that has gone below zero.
12:00
Accounting expenditure subject to the research and development tax incentive, label D. It must equal label D on the research and development schedule. Most companies won't need much of this section.
12:14
It covers the remaining subtractions for completeness, but nearly every company leaves most of these labels blank. If a label doesn't apply to your business, leave it blank and move on.
12:24
Deduction for decline in value of depreciating assets, label F. Tax depreciation for a company not on the simplified rules. If F is used, capital works at label I must be completed, even if zero, and so must item 9.
12:40
Capital works deductions, label I, for buildings and structural improvements. Label Y shows the build-to-rent part at 4 per cent, for information only. It's already inside I.
12:52
Section 40-880 deductions, label Z, for certain business capital costs that no other provision covers, generally deducted over five years. Other deductible expenses, subtraction label X.
13:05
Deductions not in the accounts, and not at another label: super received this year for last year, a net decrease in provisions, deductible borrowing costs. Project pools and other specialised deductions, labels H, E, N, O and U, cover project pools, mining and quarrying capital expenditure, landcare and water facilities, environmental protection, and forestry managed investment schemes.
13:32
Where any of these was expensed in item 6, it's added back at W and claimed at its own label. How common are these? In the ATO's 2023–24 statistics, about three companies in ten used label F, and one in five used X.
13:48
About 2 in 100 used capital works at I, mostly companies that own or fit out buildings, and about 1 in 100 used section 40-880 at Z, for costs such as setting up, restructuring or ending a business.
14:03
Labels H, N, O and U were used by about 1,100 of about 1.3 million companies: mainly miners and quarries, farmers, forestry investors, and businesses with pollution clean-up costs.
14:18
Tax losses deducted, label R, is where prior-year tax losses are used. The company chooses how much to deduct. It might deduct less than it could, for example to keep enough tax paid to frank its dividends.
14:32
Losses are used oldest first. Suppose a company made a 10,000-dollar loss in 2022–23 and a 15,000-dollar loss in 2023–24, broke even in 2024–25, and has 20,000 dollars of income in 2025–26 before losses.
14:51
If it uses 20,000 of losses, all 10,000 from 2022–23 goes first, then 10,000 of the 15,000 from 2023–24. Taxable income is nil, and the 5,000 left over carries forward.
15:07
To deduct a loss, the company must pass either the continuity of ownership test, which also looks at who controls the company, or the business continuity test. Capital losses never go here.
15:19
If losses are deducted, a losses schedule may be needed; the thresholds are in Film 7. Taxable income, label T, is the result. If it's a loss, the calculation statement shows zero taxable income, and the loss is carried forward at item 13.
15:35
From 2026–27, loss carry-back is coming back. A company that isn't a significant global entity can carry a tax loss back against tax paid in either or both of the two previous years, with the refund capped by its franking account balance.
15:51
It's first claimed in the 2026–27 return, so tax paid on this 2026 return can come back if 2026–27 is a loss year. For example, say a company had taxable income of 120,000 dollars in twenty twenty-five twenty-six and paid 30,000 dollars of tax, at 25 per cent.
16:12
In 2026–27 it makes a tax loss of 80,000 dollars. It carries the loss back to 2025–26: 80,000 at 25 per cent is a 20,000-dollar refundable tax offset. That's within the 30,000 of tax it paid, and within its franking account balance, so it gets the full 20,000 back.
16:34
If its franking account held only 15,000 dollars, the refund would be capped at 15,000. Saltbush's accounting profit, from item 6, is 180,000 dollars. Add-backs total 26,750 dollars: the net capital gain, 12,000; non-deductible expenses, 14,750, made up of entertainment, unpaid June super, the leave provision increase, the interest charges, and fines.
17:05
On the paper form, that's label A, 12,000, and label W, 14,750. Subtractions total 17,900 dollars: the accounting gain, 12,000, as other income not assessable; last year's super received this year, 5,900, as other deductible expenses.
17:26
On the form, those are label Q, 12,000, and label X, 5,900. Taxable income is 188,850 dollars. That figure becomes the first line of the calculation statement in Film 7.
17:42
Here's where the return stands: item 7 is complete. The subtotal is 206,750 dollars, and taxable income at label T is 188,850. Item 9 is about depreciating assets: things like equipment, vehicles, computers and software that a business uses up over several years.
18:09
It's an information section. Nothing written here is deducted. The deduction is claimed elsewhere: the depreciation in the accounts is in item 6, and the tax figure, called decline in value, is claimed at subtraction label F in item 7.
18:23
Item 9 just tells the ATO about the assets behind those figures: the cost of assets claimed for the first time this year, and what all the assets are worth for tax at year end.
18:34
Most companies leave item 9 blank. A small business using simplified depreciation, which item 10 covers, skips it entirely. In 2023–24, only about one company in twenty reported assets here: mostly larger companies, with turnover of 10 million dollars or more, and smaller companies that chose not to use simplified depreciation.
18:56
Intangible and other depreciating assets first deducted, labels A and B: the cost of assets deducted for the first time this year. The ATO notes a common error: writing the deduction here instead of the cost.
19:10
Self-assessed and recalculated effective life, labels C and D: whether any effective life was self-assessed, or recalculated this year. Total adjustable values at end of income year, label E: cost less decline in value to date.
19:26
For example, say a company not using simplified depreciation buys a 12,000-dollar machine on 1 July, with an effective life of five years from the ATO's table. On the prime cost method, its decline in value this year is 2,400 dollars.
19:42
Label B shows the cost, 12,000, not the 2,400. C and D are both No, because the ATO's effective life was used. If the machine is its only asset, label E is 9,600: 12,000 less 2,400.
19:59
And the 2,400 itself is claimed at subtraction label F in item 7. Disposals, labels F to I: balancing adjustments and termination values when assets are sold or stop being held, mostly for intangible assets.
20:14
Backing business investment, label N: later-year deductions for assets that used the Backing business investment accelerated depreciation. Mining and exploration, labels J, K and L, are for mining, exploration and prospecting.
20:29
For most companies, the depreciation path is: book depreciation in item 6, added back at add-back label W, and the tax decline in value claimed at subtraction label F.
20:42
That happens even when the two figures are the same. Item 10 is only for small business entities. That's an ATO definition: a business with aggregated turnover under 10 million dollars, which counts the turnover of connected entities and affiliates too.
20:59
In 2023–24, about 97 in every 100 companies had total income under 10 million dollars, so most companies could qualify. A small business entity can choose simplified depreciation.
21:13
It then puts the tax figure straight into item 6, at depreciation expenses, label X. It completes item 10. And it makes no claim at subtraction label F in item 7.
21:24
The instant asset write-off threshold has moved often. It was 1,000 dollars just before May 2015, when it rose to 20,000. It rose to 25,000 dollars in January 2019, 30,000 in April 2019, and 150,000 in March 2020.
21:43
From October 2020 to June 2023, temporary full expensing let businesses write off eligible assets with no cost limit. It has been 20,000 dollars since 1 July 2023, extended one year at a time.
21:58
The 2025–26 extension became law in December 2025. From 2026–27, the 20,000-dollar threshold is permanent. It was announced in the May 2026 Budget and became law in August 2026.
22:14
Deduction for certain assets, label A, is the instant asset write-off. For 2025–26, an asset qualifies if it: costs less than 20,000 dollars; is first used, or installed ready for use, for a taxable purpose between 1 July 2025 and 30 June 2026.
22:34
The limit applies to each asset, not to a total. The deduction is reduced for any private use. Saltbush's laptop and printer, 6,800 dollars together, go here. Deduction for general small business pool, label B.
22:49
Assets costing 20,000 dollars or more go into one pool: in their first year at 15 per cent, whenever in the year they were bought; in later years at 30 per cent of the opening pool balance.
23:01
If the pool balance at year end is under 20,000 dollars, the whole balance is written off. Saltbush's ute cost 30,000 dollars, was first used in May, and is used only for business.
23:13
It adds 4,500 dollars at B. What happens to the ute's balance after that? It stays in the pool. In 2025–26 the pool deducted 4,500 dollars, leaving 25,500. In 2026–27 the pool deducts 30 per cent of that, 7,650 dollars, leaving 17,850.
23:38
In 2027–28 the balance is under 20,000 dollars before that year's deduction, so the whole 17,850 is written off. Over three years, the full 30,000 is deducted. This assumes the ute is the only asset in the pool, with nothing added or sold.
23:57
Two cross-checks: A plus B can't exceed the depreciation figure in item 6. For Saltbush they're equal, at 11,300 dollars. And the five-year lock-out. Normally, a company that stops using simplified depreciation can't choose it again for five income years.
24:15
That rule has been suspended by law, not by the ATO: Parliament switched it off alongside the instant asset write-off, and has extended the suspension each time it extended the write-off.
24:26
So for this return, a company can leave and come back without waiting. The 2026 instructions say the suspension runs until 30 June 2026. From 2026–27, it's extended to 30 June 2027.
24:41
After that, unless it's extended again, the five-year wait applies. So in practice, a company on simplified depreciation usually uses both labels: each asset under 20,000 dollars is written off at A, and anything costing 20,000 or more goes into the pool at B.
24:59
What it can't do is mix in the general rules: once it chooses simplified depreciation, that covers all its depreciating assets, with a few exceptions, such as assets it mainly leases out.
25:11
Saltbush shows the usual mix: its laptop and printer at A, and its ute at B. Here's where the return stands. Item 10 shows 6,800 dollars at label A, and 4,500 at label B.
25:30
With a 20,000-dollar write-off, most of what a small business buys falls under the threshold. A vehicle is the usual exception. Had Saltbush bought a 45,000-dollar car instead of the ute, it couldn't be written off at once.
25:44
Its business-use share would go into the pool, at 15 per cent in the first year and 30 per cent after that. The car limit caps the cost of a car for depreciation, including the amount that goes into the pool.
25:56
For 2025–26 it's 69,674 dollars, and cost above the limit is never deductible. For tax purposes, a car is built to carry less than a tonne and fewer than nine passengers.
26:11
A vehicle built to carry a tonne or more, like Saltbush's ute, isn't a car, so the limit doesn't apply to it. Here's where the return stands at the end of this film.
26:22
On page 5, item 7 starts from the 180,000-dollar profit, and G is answered Yes for the capital gain. The add-backs, 12,000 at A and 14,750 at W, bring the subtotal to 206,750.
26:39
Then the subtractions come off: 12,000 at Q and 5,900 at X. On page 6, taxable income at label T is 188,850. And on page 7, item 10 shows 6,800 at A and 4,500 at B.
26:59
Item 7 turns profit into taxable income, and items 9 and 10 explain the depreciation inside it. The next film goes back to item 8: Saltbush's balance sheet, salary and wages, the director's loan, and the franking account.