Accounting for income

There are two broadly accepted methods for determining when “income” is derived for income tax purposes: the cash basis and the accruals basis.

Under the cash basis, income is derived each time cash (or its equivalent) is received. By contrast, income is derived under the accruals method when it is earned, which is usually when an invoice has been issued after the relevant goods or services have been delivered.

Unfortunately, there is no bright line test as to when business taxpayers should use the cash accounting method. However, former simplified tax system (STS) taxpayers may continue to use the STS accounting method if they were:

• were STS taxpayers and used the method until the end of the 2006–07 income year
• used the STS accounting method for the 2007–08 to 2021–22 income years
• are a small business entity for 2022–23.

For business taxpayers not eligible to use the STS accounting method, as a broad principle, the cash basis is only typically applied by a sole trader or practitioner rendering personal services. Whereas, other businesses which have substantial assets, employees and business activities (e.g. multiple partners in a partnership, and creditors and debtors) should report income on an accruals basis.

Therefore, if a business ordinarily reports income on an accruals basis for accounting purposes, it should similarly report income for income tax purposes on the same basis.

Thus, the accounting method chosen should reflect the underlying nature of the business.

Cars and FBT

Whether cars and vehicles used for work-related purposes are exempt from fringe benefit tax (FBT) is currently causing consternation.

Both cars with a carrying load of less than one tonne or other vehicles with a carrying load of one tonne or more may be respectively exempt from FBT as either a car or residual fringe benefit for FBT purposes where certain conditions are met.

However, all such vehicles will only be FBT exempt where “private travel” is limited to: travel between an employee’s place of residence and place of employment; incidental travel undertaken while performing employment duties; and any other travel that is “minor, infrequent and irregular”.

Most importantly, the ATO applies a very narrow definition of when travel will be regarded as being minor, infrequent and irregular.

It stresses in its FBT Guide for Employers that all three of these requirements must be met. Accordingly, non-work-related travel must be small or insignificant in distance and time and should rarely happen and not at regular or fixed intervals.

For example, using a vehicle to move furniture on one occasion during the year would be regarded as minor, infrequent and irregular use, whereas using the vehicle to drop off children to childcare on several occasions during the year would not be regarded as such.

Practitioners need to stress to employers that if they wish to rely on this FBT exemption they need to have a policy in place to ensure that any non-work-related travel is strictly policed and that such a policy is rigorously enforced.