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Question about tax deduction on wages

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I have 2 senarios below as a small business owner

Senario 1.

If wages is for period 25th June 2018 - 2nd July 2019, paid in 2nd July 2019, $1000. $1000 is tax deductible in 2019 Financial Year.

Senario 2.

If wage if for period 20th Jan 2018 - 30th Jan 2018, paid in 2nd July 2019, $1000. is $1000 tax deduction in 2018 FY or 2019?

BAS should report the Jan wages if it's in accural basis, if cash basis, should not report. Am I correct?

 

Thanks

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Hi @dan181210,

 

Thanks for your patience whilst we received specialist information regarding your query!

 

Generally, a business expense is deductible when it's ‘incurred’ and not just at a later time when it's paid. For wages, a liability to pay wages will normally be incurred when the employee services have been performed and the employees are entitled to be paid, such as the end of the wages period. It doesn't matter if the actual payment of the wages occurs at a later time.
 
Scenario 1 
In this case the end of the wages period was the 2 July 2018. This means that the expense was incurred on 2 July and is deductible in the 2019 year.
 
Scenario 2 
In this case the wage period ends on the 30 June 2018 and is the date on which the expense is incurred. Hence the deduction for wages paid is in the 2018 financial year. The pay date was expected in 2018.
 
For income tax purposes, the accounting ACCRUAL or Cash distinction applies to income received, not to deductible expenses, such as wages incurred by the employer. You can find general information about Salary, wages and super for business deductions on our website.

 

Hope this helps, JodieH.

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Hi @dan181210,

 

Thanks for your patience whilst we received specialist information regarding your query!

 

Generally, a business expense is deductible when it's ‘incurred’ and not just at a later time when it's paid. For wages, a liability to pay wages will normally be incurred when the employee services have been performed and the employees are entitled to be paid, such as the end of the wages period. It doesn't matter if the actual payment of the wages occurs at a later time.
 
Scenario 1 
In this case the end of the wages period was the 2 July 2018. This means that the expense was incurred on 2 July and is deductible in the 2019 year.
 
Scenario 2 
In this case the wage period ends on the 30 June 2018 and is the date on which the expense is incurred. Hence the deduction for wages paid is in the 2018 financial year. The pay date was expected in 2018.
 
For income tax purposes, the accounting ACCRUAL or Cash distinction applies to income received, not to deductible expenses, such as wages incurred by the employer. You can find general information about Salary, wages and super for business deductions on our website.

 

Hope this helps, JodieH.

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Devotee Registered Tax Practitioner

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@dan181210 @JodieH 

 

Wages are normally recorded in the accounting records on the day of payment.

An employees income is according to the day of payment.

 

My understanding is that most Accountants would not do an accrual for Wages.

It is best for smaller entities if the Wages box in the Company Tax Return agree with the PAYG Summary Statement provided to the ATO.

 

Duncan  

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We process casual employee payroll monthly based on timesheets. Payroll is paid on the 30th of the following month. We invoice customers at the end of month (dated at EOM) based on the hours worked.
Using Xero Payroll and the following example of 100 hrs @$100/hr being worked on June 2019.
However, note that the impact to Balance Sheet / P&L is currently posted by Xero is on 30 July 2019 (not 30 June 2019).
ie. 1. 30 July 2019 (Xero Payroll posting for June Hours)
DR PL: Wages Expense                            $10000
CR BS: Employee PAYGW Payable to ATO                       $2000
CR BS: Wages Payable to Payable to Employee                $8000
DR PL: Superannuation Expense                     $950
CR BS: Employee Superannuation Payable                      $950
 
As these costs related to hours worked by a casual employee in June, is it valid to post the following accrual adjustments?
 
i.e 2. 30 June 2019 (Manual Accrual Adjustment)
DR PL: Wages Expense                            $10000
CR BS: Wages Accrued Liability                            $10000
DR PL: Superannuation Expense                     $950
CR BS: Superannuation Accrued Liability                     $950
 
3. 1 July 2019 (Reverse Manual Accrual Adjustment)
DR BS: Wages Accrued Liability                  $10000
CR PL: Wages Expense                                     $10000
DR BS: Superannuation Accrued Liability                     $950
CR PL: Superannuation Expense                     $950

Making this accrual would also assist from a management accounting perspective in evaluating profitability within the correct financial period given that casual wages are a variable cost. So if this a valid for the financial year, I would also look to adjust similarly for each month payroll during the year.
 
We are a small business and as mentioned by another poster, our registered tax accountant does not post accruals for wages or superannuation expense.
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Devotee Registered Tax Practitioner

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@cedric42 

 

Many large companies have had payroll issues reported by the media in recent times.

 

My initial reaction from the facts you provided is -

  Why are casuals paid 30 days from the end of the month?

 

Deduction of payroll expenses is normally determined by payment date.

This is certainly the case for Superannuation which is due by the 28th following the end of the quarter.

My clients pay Super for April, May and part June in June to get a deduction in that FY.

 

Let us know.

 

Duncan 

 

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Thanks for the reply @DuncanS during this festive period. I think it is one of the drawbacks of being a small business owner is that when we do have downtime, our mind wanders to things like tax obligations and other such matters...

 

>Why are casuals paid 30 days from the end of the month?

In practice, I tend to pay employees within 14 days (cashflow permitting) but 30th is on the payslip generated from Xero and so that is when it posts to the ledger

 

We provide IT services to large corporate customers who generally require us to provide monthly invoices with Net 30 day payment terms. Unfortunately, a couple of our customers pay on the 30th of the month following the month of invoice. For this reason, we have always invoiced on the 30th - so that we see all funds come back in 30 days later. If we invoiced on the 1st, we would not see the funds for 60 days.

 

Our subcontractors issue invoices to us at EOM and that works well (Month of Sale aligns to Month of Cost of Sale). The problem is with casual employees (who perform the same services as subcontractors but do not have an ABN) . Xero posts their costs through payroll on the 30th of the following month, and so it is hard to evaluate who we are tracking month-to-month and quarter-to-quarter.

 

I'm thinking the only solution may be to invoice on the 1st of the month and get all our subcontractors to do the same. It does mean that our cash flow will get stretched (due to some customers paying 60 days later), but at least we will be able to evaluate profitability month to month from a management accounting perspective.

 

Many thanks 

Cedric

 

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Devotee Registered Tax Practitioner

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@cedric42 @JodieH 

 

Cedric,

 

I would be speaking with your Tax Accountant/Xero Certified Consultant.

 

My understanding is that Single Touch Payroll requires reporting to the ATO on the day of payment.

The Pay Slip should reflect this date.

 

I would not change to 1st of the month as suggested.

The matching principle in Accounting is important.

 

Hope this helps.

 

Duncan

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Thanks Duncan

 

I did find your response helpful and appreciate it. 

 

It seems that when SMEs choose Accrual (as opposed for Cash Accounting) for tax returns it applies to all revenues and expenses except  - for reasons that I do not understand - Wages or Super.

 

However, Large Enterprises are allowed to accrue Wages and Super. Why would that be so?

 

As an SME managing our cash flow, I need to align my revenues (invoices to customers) to expenses (payments to casual employees) and thus would need to invoice in the same month (eg 1st) that I pay my employees. Our casual employees are paid based on their billable hours to customers and these vary significantly month to month.  The paradox here is that in trying to manage better our cash flow (invoicing on the 1st, pay employeee on the 20th), we stretch our cash flow getting paid in 60 days for those customers that pay on the 30th of the month following the invoice date. 

 

Nonethe less, I've decided that understanding the cash flow is most critical and this will mean some short term pain. Fortunately, most of our customers pay in 30 days of invoice date. In the medium term, I will renegotiate with these customers to be standard Net 30 and move away from casual employees to independent contractors.

 

I'm not entirely happy that the ATO having such a policy that disadvantages SMEs. I think there is a strong argument for changes to business practices requiring small businesses to being paid within 30 days. I know some state governments are moving towards this, but this really needs to be within the private sector as well.

 

Thanks again 

Cedric. 

 

 

 

I think this is a flaw in the approach taken by the ATO that disadvantages SMEs.