Deemed Dividend: debtors included in distributable surplus where private company accounts on a cash basis

Are the debtors of a private company, as recorded in invoices, cashbooks and accounting software, included in the company's assets (according to the company's accounting records) under subsection 109Y(2) of the Income Tax Assessment Act 1936 (ITAA 1936), where the company accounts on a cash basis?

Yes. The debtors of a private company, as recorded in invoices, cashbooks and accounting software, are included in the company's assets (according to the company's accounting records) under subsection 109Y(2) of the ITAA 1936, where the company accounts on a cash basis.

The taxpayer is a private company which carries on a business.

Whenever a sale is made, the taxpayer issues an invoice.

When an invoice is paid, the taxpayer records the payment in its cashbook.

The taxpayer uses the cash basis of accounting which means that it does not record debtors in its journal until cash is received.

The taxpayer can manually work out its debtors by comparing its invoices to its cashbook.

The taxpayer can also use accounting software to work out its debtors.

A private company's distributable surplus for a year of income is worked out using the formula in subsection 109Y(2) of the ITAA 1936: Net assets - Non-commercial loans - Paid-up share value - Repayments of non-commercial loans

'Net assets' means the amount by which the private company's assets (according to the company's accounting records) exceed the sum of its present legal obligations to persons other than the company and various provisions (according to the company's accounting records - subsection 109Y(2) of the ITAA 1936).

'Accounting records' are not defined for the purposes of Division 7A of the ITAA 1936 (section 109ZD of the ITAA 1936) or generally for the purposes of the ITAA 1936 (subsection 6(1)) or the Income Tax Assessment Act 1997 (ITAA 1997) (section 995-1 of the ITAA 1997). However section 160ZZV of the ITAA 1936 defines accounting records for the purposes of Part IIIB of the ITAA 1936 as including 'invoices, receipts, vouchers and other documents of prime entry'.

In Van Reesema v. Flavel (1992) 57 SASR 590 the Court found that the ordinary meaning of accounting records includes various books of prime entry such as the cashbook, journal and ledgers. In Caratti v. The Queen (2000) 22 WAR 527; (2000) 45 ATR 305 'farm books', which contained monthly wages and fuel analyses of a company, were found to be accounting records within any ordinary meaning of the term.

A cash receipts journal and debtors' ledger are accounting records ( McKay and Tax Agents Board (Tas), Re (1994) 28 ATR 1186; 94 ATC 2057. Records of debtors and creditors are included in books of account (In Re Crimmins (1956) 18 ABC 53).

Accordingly, the debtors of the taxpayer, which are recorded in invoices, cashbooks and accounting software, would be included in the taxpayer's assets (according to the taxpayer's accounting records) for the purposes of working out the taxpayer's distributable surplus under section 109Y of the ITAA 1936.