Income Tax Planning Idea

Cash to accruals gets taxed

In ATOID 2014/1 ( the Commissioner considers the following facts…

“The taxpayer carries on a business of providing services to clients.

The taxpayer had previously accounted for the income of the business on a cash basis.

Due to the nature and growth of the taxpayer’s business, the taxpayer decides it is more appropriate for the business to convert to an accruals basis of accounting and render its income tax return on that basis.

Accordingly, the taxpayer lodges a return on an accruals basis in the current income year.

There are outstanding debts owing to the taxpayer in relation to services rendered in the previous income year. The taxpayer receives these amounts in the current income year. These amounts were not included in the taxpayer’s assessable income in the previous income year because of the chosen method of accounting”.

So it is just the classic Henderson Case and the income is tax free right? Maybe not.

This ATOID states that a debt owed to the taxpayer is a CGT asset. When the debt is satisfied it disappears and so event C2 applies.

The capital proceeds from discharging the debt are the amounts paid to the taxpayer by the debtor.

As the cost base is zero, the entirety of the income avoid from the income tax rules by the change from cash to accruals, is now subject the CGT rules.

So tax is payable… Oh well!

By Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.

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