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Master Member
Group: Forum Members
Last Login: Today @ 5:08:28 AM
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Hi,
The ATO supervisory levy is a deductible expense to the fund. Up to the 2007 tax year this was a separate payment and so for the 2007 year I entered nothing for the 2007 $45 levy until it was paid (in the 2008 year) - which was fine.
From 2008 the $150 ATO supervisory levy is included in the Annual Return and forms part of the "Total Amount Due or Refundable" at Section D, item I, of the Annual Return.
It therefore seems to make sense to me to include it in the Current Liabilities of the fund, and therefore reduce the members balances accordingly. As this is likely to be ongoing, I would create a new Liability account: 2107 Supervisory Levy Payable to handle this.
Whilst this is similar to the issue of the PAYG installment http://www.mysf.com.au/members/Topic4260-24-1.aspx, it is different in that whilst I want to recognise the Liability in the 2008 year, the deductible expense needs to be recognised in the year that it is paid (2009).
What I am not sure about is which account to use against the levy in 2008 - it seems to me that it needs to be an expense account that gets taken into account by the profit split (so that the member balances are adjusted correctly) but a non-taxable account (so that the expense is not deducted in 2008). The levy would then be balanced from this account to the taxable expense account in 2009 when the actual payment is made. As this is just a temporary allocation, it seemed to me that the 5999 Expense suspense account would be suitable.
The transaction sequence would then be:
1) Create the liability for 30 June:
General Journal Type: neither
CR 2107 Supervisory Levy Payable
DR 5999 Expense Suspense
Which should have the Liability correctly recognised in 2008 without affecting the 2008 tax calculation. Then when the payment is made (in July):
2) Pay the amount due:
Cash payment to ATO:
CR 1101 Bank Account
DR 5115 Administration Costs
3) Clear the liability:
General Journal Type: neither
CR 5999 Expense Suspense
DR 2107 Supervisory Levy Payable
Which clears the liability. The net expense doesn't change since the DR 5115 and CR 5999 balance out but the deduction is recognised in the 2009 tax calculation.
So, my query is:
1) Is this a correct and sensible approach to recognise the liability for the levy whilst preserving the correct tax treatment?
2) Is the 5999 Expense Suspense the correct account to use?
Regards
Neil H.
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MySF Administrator
Group: Administrators
Last Login: 4/11/2010 3:24:01 PM
Posts: 464,
Visits: 633
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Hi,
This approach is close to correct.
This scenario should be handled using accrual accounting entries similar to those you outlined to recognise the expense and the liability so that member balances are reduced, and recognise the cash flow at the time it actually occurs.
The entries should be:
1) record the liability when it is incurred
Date: 30th June
General Journal, Type: Neither
DR 5115 Administration Costs
CR 2107 Supervisory Levy Payable
2) record the actual flow of cash when it happens
Date: sometime in the new financial year
General Journal, Type: Neither
DR 2107 Supervisory Levy Payable
CR 1101 Bank
This way the expense entry is recorded and the liability is recorded in FY1 but the actual movement of cash is recorded in FY2. Note that there is no posting to any expense accounts in FY2 so there is no effect on that year's P/L.
Regards,
MySF
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Master Member
Group: Forum Members
Last Login: Today @ 5:08:28 AM
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Hi,
I'm a little confused here - my understanding is that we use cash based not accrual accounting - as stated in Note 2 of the notes to accounts.
It was also my belief that the tax deduction could only be claimed in the year that the expense was incurred ie FY2.
Last years accounts, as per MySF, which the auditor was happy with had:
Accounting basis as cash based.
Unpaid income tax shown as a liability.
If I understand your suggested approach, the tax deductions would be claimed in FY1 ie included on FY1 tax return - which I didn't think we could do and which seems to be contrary to Note 2 of the notes to accounts.
I realise I may be missing the point here, but why can't we recognise the liability in FY1 (since, like the tax, we know we will have to pay it) but recognise the deductible expense in FY2 which is when we pay it?
Regards
Neil H.
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MySF Administrator
Group: Administrators
Last Login: 4/11/2010 3:24:01 PM
Posts: 464,
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Hi,
If you want to record an expense for the current year so that it forms part of the tax calculation and also reduces the members balances, and you want to record that the actual cash flow of the payment of the expense occurs in the following year then you need to record it as an accrual entry.
If you were to record it strictly as a cash entry then you would just record the payment of an expense in the new year using the cash payment screen. However this would have no effect at all on the current year calculations.
Superfunds in most cases cannot use 100% cash accounting as there are often income or expenses (in most cases dividends still payable to them) that are deemed to be income in one year even though the actual flow of cash occurs in the following financial year (after June 30). This is very common and the only way to handle it is a pair of accrual entries. One transaction in Y1 to record the income and the expectation that the cash will flow in (entry to accounts receivable or dividends receivable); and then another transaction in the new year to record that the cash has flown in and to clear this from accounts receivable. Your accountant or auditor will see this as well.
Using clearing accounts will not get around the problem as clearing accounts under expense are really just another expense account so anything recorded to them will still be allocated to members.
Therefore, if you want to record a liability as a provision for future payment of an expense you have incurred in the current year then you will need to use the pair of accrual entries provided above, or something very similar. If you dont want to record anything for Y1 and only want to record the cash flow of the expense in Y2, in which case it will be included for the expenses of that year in the P/L, then you can simply record a cash payment of an expense in Y2.
Regards,
MySF
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MySF Administrator
Group: Administrators
Last Login: 4/11/2010 3:24:01 PM
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It was also my belief that the tax deduction could only be claimed in the year that the expense was incurred ie FY2.
Income is not quite the same as cash flowing in and expense is not quite the same as cash flowing out. Income can falls due at a time when you reasonably expect to receive it, and expenses are incurred when you reasonably expect to have to pay them. One example is rent that is due to you on June 25 (FY1) from a property, but the tenant forgets and only transfers the money on July 10 (FY2). For you the income is taxable in Y1 and for them the expense (if they are a business) is going to be in their p/l and be a deductible expense in Y1 also, despite the fact that cash flows take place in Y2. This would be recored for both yourself and the tenant as a pair of accrual entries.
Another example of this is the dividend item mentioned previously. There are many cases where a dividend or distribution falls due sometime in late June, but the money actually arrives in early July. In such a case investors must use a pair of accrual entries to record the income. Other alternatives would be incorrect. You could record the dividend as normal for late June, but then your bank balance would be overstated in the end of year reports; or you could record the dividend as normal for early July in which case your income would be understated for the previous financial year. Obviously these are both wrong and would likely result in a failed audit or problems with the ATO.
Both income and expenses in most cases are accounted for in the year in which they are incurred, which may not be the same year in which they are paid (when the cash flow occurs). This is true whether or not the fund normally accounts for items on a cash basis as per Note 2.
Regards,
MySF
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Master Member
Group: Forum Members
Last Login: Today @ 5:08:28 AM
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Visits: 1,919
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OK, Thanks for that information.
I can now see my two options are really:
1) Just treat the levy as a cash expense in FY2 - which is what happened for the previous year return.
OR
2) Chose to treat the levy as an expense incurred in FY1 (since it is charged by the ATO as part of the FY1 return) - in which case I use the accrual entry approach which you outlined.
The approach I was considering was a sort of hybrid of the two which, I now see, would lead to problems.
Thanks again for the clarification.
Regards
Neil H.
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Junior Member
Group: Forum Members
Last Login: 3/11/2011 8:44:29 PM
Posts: 1,
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Another example of this is the dividend item mentioned previously. There are many cases where a dividend or distribution falls due sometime in late June, but the money actually arrives in early July. In such a case investors must use a pair of accrual entries to record the income. Other alternatives would be incorrect. You could record the dividend as normal for late June, but then your bank balance would be overstated in the end of year reports; or you could record the dividend as normal for early July in which case your income would be understated for the previous financial year. Obviously these are both wrong and would likely result in a failed audit or problems with the ATO.
Both income and expenses in most cases are accounted for in the year in which they are incurred, which may not be the same year in which they are paid (when the cash flow occurs). This is true whether or not the fund normally accounts for items on a cash basis as per Note 2. So even if the accounts are made up on the cash basis, dividends should be dealt with on the accruals basis? Is this correct? This appears on the individual's area of the ATO website:- Dividends If you own shares in a company, you may receive a dividend or distribution. In any income year you may receive both an interim and a final dividend. In most circumstances, you will be liable to pay income tax for that income year on the dividends you are paid or credited. You must include in your assessable income dividends paid or credited to you. Your shareholder dividend statement or distribution statement should contain details of the date a payment was made to you, generally referred to on the statement as the payment date or date paid. It is this date that will determine in which income year you include the dividend in your assessable income. Where the dividend is paid by cheque, it is deemed to have been paid to you on the date the cheque was posted to you by the company, not on the date the cheque was received, banked or cleared. A dividend can be paid to you as money or other property, including shares. |
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Are superfunds treated differently? If they are, then maybe MySF should generally be designed for the accruals basis of accounting and not the cash basis.
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MySF Administrator
Group: Administrators
Last Login: 29/01/2012 4:16:49 PM
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Hello,
MySF is designed to work on an accrual basis, and users can opt to record an accrual for a date when the dividends are assigned to them, and record the cash movement for the date on which the cash actually arrives in their bank account.
So, users can opt for accruals for everything. However in the case of most dividends (and other events) there is little value in recording the accrual and then the cash receipt separately. This would double the amount of data entry required for most events, and would not usually make a material difference (from a taxation or performance analysis perspective).
The only exceptions are events where the accrual and the cash movement dates fall into different financial years. In such cases you must record the accrual and the cash entries separately, as described above, to ensure that your end of financial year reports reflect the correct balances, and that your tax calculations are correct.
Regards,
MySF
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