Tax accounting refers to the accounting methods focused on taxes instead of focusing on the preparation of public financial statements. Tax accounting follows the country’s tax body, which dictates the specific rules that individuals and companies must follow when preparing their tax returns.
Tax accounting is the accounting method for tax purposes. The rules apply to everyone that needs to file income tax returns – individuals, businesses, and other entities. Even individuals and entities who are not required to pay taxes must be involved in tax accounting. Its purpose is to track funds – funds in and funds out – associated with individuals and entities that will pay taxes.
Tax accounting uses two sets of principles: tax accounting principles and financial accounting also referred to as the generally accepted accounting principles. Australian accounting standards are set by the Australian Accounting Standard Board (AASB), which is an independent government agency.
The accounting standards of Australia are comparable to the requirements of the International Financial Reporting Standards, with the AASB modifying certain standards. The AASB has made additional interpretations in order to guide and accommodate the country’s specific legislative and economic environment or to meet the reporting requirements of some entities like nonprofit organizations.
The Australian Taxation Office
The Australian Taxation Office is the Australian sole statutory and collection body for revenues due the government. It administers the Australian government’s taxation system, superannuation legislation, and other related matters.
The tax year in Australia begins on July 1st and ends on June 30th. Individuals and corporations may adopt an alternative tax year subject to the approval of ATO.
Tax accounting for an individual
Tax accounting for an individual taxpayer is focused solely on income, allowable deductions, investment gains or losses, and all other transactions affecting his tax liability. Gains or losses in investments affect the individual’s tax liability, which has limited the information that is required for him to manage an annual tax return, while a tax account may be used by an individual, it is not a legal requirement.
In comparison to tax accounting, general accounting involves tracking all funds coming in and out of the person’s possession regardless of the purpose, including personal expenses that do not have any implications on his taxes.
Tax accounting for corporations and other entities
Companies and foreign company branches operating in the country are taxed the same way as other companies. They pay taxes only on their income that is sourced from the country. Other taxable items include taxes on fringe benefits, land tax, payroll tax, and stamp duty.
From the point of view of a business perspective, a lot of information needs to be analyzed in line with the tax accounting process. The company’s incoming funds or earnings must be tracked just like for the individual, there is an additional level of complexity when it concerns outgoing funds directed towards business obligations. This may include funds for specific business expenses and funds directed towards shareholders.
There is no requirement for a business to use a tax accountant in performing these duties, it is common in larger organizations because of the complex records involved.
Even for organizations that are not required to pay taxes, tax accounting is still a necessity. This is because all organizations, for-profit or nonprofit, must file annual returns, which require providing information regarding any incoming funds, including grants or donations, and how the funds are used during the organization’s operation. The practice ensures that the nonprofit organization adheres to the laws and regulations governing its proper operation as a tax-exempt entity.