Accrual based accounting (recording income and expenses based on when they're incurred rather than when paid) is the accepted best practice in strata.. but it can cause a headache when it comes to income tax.
This article explores the advantages of reporting income tax on a cash basis for strata companies and how this approach can alleviate some common issues.
Strata financial reporting occasionally necessitates adapting traditional accounting practices to better address the unique nuances of the sector. One area where this adaptation can prove beneficial is in the reporting of income tax. While most business entities prepare their financial reports and tax returns concurrently, allowing them to show any tax payable or refundable for the period in their year end reports, strata companies face the challenge of accelerated financial reporting deadlines for AGM purposes, as well as regular non-alignment of reporting and tax years.
The Challenge of Differing Deadlines
For many businesses, it is standard practice to prepare financial reports as at 30 June each year, aligning this process with their tax return preparations. In most cases, the return isn't due for lodgement for 10 months ore more, however, strata companies need to have their financial statements ready for the Annual General Meeting (AGM) well before then. This can create a slight problem: if the tax return isn’t prepared before the AGM, the income tax expense won’t be reflected in the financials, potentially leading to inconsistencies.
To illustrate, consider a strata company with a 30 June year-end. If the tax return is prepared early, the income tax expense and liability for that year can be recorded in the year end financials, as per standard accounting practices. However, if the tax return is delayed, the income tax expense won’t appear until the following year, creating year-to-year inconsistencies in the financial statements.
The Benefits of Cash Basis Reporting
To address these inconsistencies, we recommend recording income tax on a cash (rather than accrual) basis. This means recording income tax expenses when they are actually paid or received, rather than when they are incurred. Here’s why this approach can be beneficial:
- Consistency - Recording income tax expenses when they are paid, strata companies can maintain consistency in their financial reports, avoiding discrepancies that arise from differing preparation times for tax returns and financial statements.
- Reduced Pressure - Preparing financial statements for the AGM without the pressure of having the tax return ready can streamline the process, making it less stressful for strata managers and accountants.
- Transparency - This method can be clearly communicated in a note accompanying the financial statements, explaining that while accrual accounting is used for most transactions, income tax is recorded on a cash basis due to the differing deadlines.
Implementing Cash Basis Reporting
To implement this approach, strata companies should include a note in their financial statements explaining their accounting policy for income tax. An example note might read:
“We employ accrual-based accounting for most transactions, aligning expenses and levies with the year to which they apply. An exception is income tax, which is recorded on a cash basis due to the differing deadlines for financial statement preparation for the AGM and tax return submission, typically by 15 May of the following year.”
This explanation helps ensure transparency and provides clarity to the users of the financial reports, highlighting the pragmatic approach taken to address the unique timing challenges faced by strata companies.
Quick Takes:
- Recording income tax on a cash basis can help maintain consistency in strata financial reports.
- This approach reduces pressure on the manager during the financial statement preparation process.
- Transparency in accounting policies ensures clarity for all stakeholders.
For more information, please contact the Ascend office via your strata manager.
Links:
- Strata Income Tax Matters - FAQs
The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above. Please contact our office for more information.
(C) 2024 Ascend Strata Pty Ltd