Transitional Rules - Trades

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The year ending 5/4/97 was the year of transition from the Prior Year Basis (PYB) to the Current Year Basis (CYB). These rules cover Schedule D case I and II income (There are different rules for the transition of Schedule D III, IV and V.)

When will the transitional rules apply?

If the trade commenced business on or after 6/4/94 none of these rules apply. The trade is taxed under CYB rules.

All trades that commenced trading prior to 6/4/94 will be taxed on a transitional basis for the y/e 5/4/97, except in the following cases:

Trades that cease in y/e 5/4/97 will be taxed on a strict actual basis;
Trades that cease in y/e 5/4/98 or 5/4/99 may be revised to strict actual basis if the Revenue make a s63 election;
Trades that commenced in the y/e 5/4/94 and the individual made a s62 election will be taxed on a strict actual basis for y/e 5/4/97.

What are the transitional rules?

The basic transitional rule is to tax half the profits from the two account periods ending in the current and prior year. IRIS computes the amount on a daily basis by adding together the profits of the basis period and the relevant period and multiplying the result by 365/n (n is the number of days from the start of the relevant period to the end of the basis period).

basis period + relevant period x 365/n

The basis period is a twelve month period ending in the fiscal year ending 5/4/97; and
the relevant period is the gap between the end of the period taxed in y/e 5/4/96 and the start of the basis period (usually twelve months unless there has been a change of accounting date, see below).

In most cases, with two twelve month periods, the formula is 'combined profits' multiplied by 365/731. (The extra day in the 1996 leap year results in slightly under half the combined profits being taxed.)

To accurately compute these periods, all accounting periods from 6/4/93 onwards must be entered. It is not necessary to enter accounting information but the dates must be registered. Accounting information will be required for any period that falls wholly or partly within the basis period or relevant period.

The transitional rules apply to the y/e 5/4/97. In y/e 5/4/98 transitional overlap profit will be computed for trades that have gone through transition.

Losses

Where there is a loss in the basis period or relevant period the profits are still averaged, as outlined above but the loss period is deemed to be nil income for averaging purposes. If both periods are in loss, the transitional profit will be Nil.

The loss may be claimed under s380 to set it against other income. IRIS assumes that losses will be carried forward (s385) to set against future profits unless an alternative claim is made. The loss in the relevant period may be set against income from 1995-96 or 1996-97. Any loss in the basis period may also be set against the income from 1995-96 or 1996-97.

Changes in Accounting Date

Where there is a change of accounting date, in either the relevant period or the basis period, the formula above still applies. The only difference is that n (in the formula above) will not be 731. This applies to account periods that are longer or shorter than twelve months. However, if the account period is longer than twelve months and completely spans the y/e 5/4/97, the basis period becomes a strict actual basis (see example 9 below).

The following examples illustrate all the possible combinations:

1) Two twelve month periods

Account periods 31/12/93, 31/12/94, 31/12/95 profit 10,000 and 31/12/96 profit 11,000
The relevant period is 365 days to 31/12/95
The basis period is 366 days to 31/12/96
The transitional profit will be (10,000 + 11,000) x 365/731 = 10,485

2) Long accounting period ending in the relevant period

Accounting periods 30/6/93, 30/6/94, 31/3/96 profit 10,000 and 31/3/97 profit 11,000
The relevant period is 640 days from 1/7/94 to 31/3/96
The basis period is 365 days to 31/3/97
The transitional profit will be (10,000 + 11,000) x 365/1005 = 7,626
3) Long accounting period ending in the basis period
Accounting periods 30/6/93, 30/6/94, 30/6/95 profit 10,000 and 31/3/97 profit 11,000
The relevant period is 365 days to 30/6/95
The basis period is 640 days to 31/3/97
The transitional profit will be (10,000 + 11,000) x 365/1005 = 7,626

4) Short accounting period ending in the relevant period

Accounting periods 31/1/94, 31/1/95, 30/9/95 profit 10,000, 30/9/96 profit 11,000
The relevant period is 242 days from 1/2/95 to 30/9/95
The basis period is 366 days to 30/9/96
The transitional profit will be (10,000 + 11,000) x 365/608 = 12,606

5) Short accounting period ending in the basis period

Accounting periods 31/1/94, 31/1/95, 31/1/96 profit 10,000, 30/9/96 profit 11,000
The relevant period is 365 days to 31/1/96
The basis period is 243 days to 30/9/96
The transitional profit will be (10,000 + 11,000) x 365/608 = 12,606

7) Short accounting period falling entirely within one of the fiscal years

Accounting periods 30/9/93, 30/9/94, 30/9/95 profit 10,000, 30/9/96 profit 11,000, 31/3/97 profit 6,000
The relevant period is 365 days to 30/9/95
The basis period is 366 days to 30/9/96 plus 182 days to 31/3/97
The transitional profit will be (10,000 + 11,000 + 6,000) x 365/913 = 10,794
This example works in the same way regardless of whether the short period falls in the relevant period or the basis period

8) Long accounting period spanning the relevant period

Accounting periods 31/1/94, 31/1/95, 31/5/96 profit 10,000
The relevant period is 0 days (p/e 31/1/95 taxed in the 95/96 year)
The basis period is 486 days from 1/2/95 to 31/5/96
The transitional profit will be 10,000 x 365/486 = 7,510

9) Long accounting period spanning the basis period

Accounting periods 31/1/94, 31/1/95, 31/1/96 profit 10,000, 31/5/97 profit 11,000.
The relevant period is 430 days from 1/2/95 to 5/4/96
The basis period is 365 days to 5/4/97 (strict actual basis because no a/p ending in the year)
The transitional profit will be (10,000 + 66/486 x 11,000 + 365/486 x 11,000) x 365/795 = 9,069