Tax Refund Allocation

I have received a tax refund for the first time and wondering where the money should be allocated in manager, as it is not really income. Any help would be greatly appreciated.

It should be in tax liability ac

Ok thanks

How it is accounted for depends on what sort of a tax refund it is - can you be a bit more specific?

I pay PAYG and BAS quarterly. After all my expenses, loss on disposal, immediate tax write off on new equipment, the ATO gave me some money back.

In this case this should be recorded as a reduction in taxes paid ie a negative expense as you have previously overstated your tax paid

The exact accounting transaction will depend on your structure - I will leave that to someone more au fait with Australian tax rules

@Matt Do you have an accountant. I think you need one. I’m I suspect you have made tax reporting errors.

I assume what has happened is

  1. You sold your old car and didn’t declare the difference between book and sales price as income (which the ATO will not allow)

  2. You bought a new car and used the 100% immediate depreciation, hence your current refund

  3. When you sell your current car 100% of the sales price will be taxable income, something you will need to budget for

To answer the question you asked though, you should put it un the same account you have taken it out from every other year, the transaction just has a different sign this year. From memory you are a sole trader so you have probably been using owner equity or something similar

FYI - I sold the car for less than the book value. I claimed 60% of the total purchase price of the new vehicle as immediate tax write off (estimated for work use) and yes, I have already taken into consideration any income from the vehicle if or when I sell it.

Back to the point: I have been allocating tax money paid under Equity (Tax Paid). Are you saying I should allocate the tax refund back into this same account? Or under Equity with a different name (Tax Refund) or elswhere?

If this is a refund of GST, then the receipt should be posted to your tax payable account.

This was not specifically a GST refund. This was just tax income refund. Should it go elsewhere?

That depends on your organizational structure. If you are a sole trader, income tax is not an expense of the business, but a personal tax on the owner. Same for partnerships, which pass income through to the partners for taxation. If you are some form of “corporate” organization, the tax refund should be posted back to the expense account where it was posted when paid.

Yes, I am a sole trader. The refund went into my business account. Was this a mistake? Should it have gone into my personal account? (for future reference). But since it went into my business account, it needs to be allocated somewhere. I’m still not clear as to where the funds should be allocated!
Thanks again

Yes, it should have gone to a personal account. Since it didn’t, it represents a contribution of capital. It should be posted to an equity account. Which ones depends on the structure of your chart of accounts. A capital account would be appropriate, as would an owner’s equity account.

Thanks Tut. I’m thinking the owner’s equity account would be best. I have an account “Current (Tax Paid)” which shows total tax paid over the years. Would it be good to allocate it there (reducing total tax paid) or should I just put it under “owner’ equity”?

If the current tax paid is personal, you should not have that account in your business accounts at all.

Tut, I wouldn’t be using if this was personal. I run a small business as a sole trader, however, in Australia, sole trader tax is calculated the same as personal tax. But just so we are on the same page, I am only referring to Business tax.

If the tax was calculated only on activity of the business and paid as a business expense, then the refund should not go to any equity account. It should go either to the same expense account where the tax was posted as a contra entry or an appropriate income account.

In my opinion, your Tax Paid account should not be an equity account either. Taking money from an equity account means you are withdrawing capital from the business. That is not what you do when paying a tax that is levied on the business itself.

I set this up (allocation of TAX Paid) in 2016 after a thread on this particular topic. Tony seemed to understand Australian ATO law and said “As a sole trader in Australia the payment of your personal income tax assessment should be classified as personal drawings under your Capital Account. You can create a specific Capital sub-account under settings if you would like to track your regular drawings separately.” That made sense to me and that is what I did.
So, I guess a Tax refund should be allocated to the same account that Tax Paid was allocated to? Correct?

You have wandered back and forth. @tony’s old explanation means the tax is not an expense of the business. By posting it to a capital account as a drawing, you are effectively taking money from the business, then paying tax as a personal expense. So the refund should not appear in the accounts of the business.

Thank you my friend. As a Sole Trader and small business, I just need to keep it simple. After evaluating all the comments and your earlier one, I can see that the refund should simply be allocated the Tax Paid account under equity.