Speaking to Accountants Daily, former ATO technical director Vincent Licciardi said he has seen a widespread misunderstanding across the accounting industry about what accounting entries actually are and how they are used.
“The misunderstanding is that a lot of accountants simply think they can do some accounting entries and that means those transactions that are represented by the entries are fact; legally, that’s not the case,” Mr Licciardi said.
“Accounting entries simply record transactions that have already occurred.
“Accounting entries are not a substitute for transactions that have not occurred, they are not a substitute for papering over the cracks, they are not a substitute for fixing any gaps, and they are not a substitute for doing things just for convenience.”
In a case example provided by Mr Licciardi, Mr A borrowed $2 million from a related company XYZ Pty Ltd. XYZ Pty Ltd was owned by the XYZ Trust. During the year, XYZ Pty Ltd declared a dividend to the XYZ Trust and the trust distributed the dividend to Mr A’s dad, Mr B (a non-resident for tax purposes). Mr B wanted to help his son and he repaid the loan owing to XYZ Pty Ltd. No money changed hands, and instead each of the steps were journalised in the various accounts.
The ATO audited Mr A and found that Mr B did not really know about the dividends he was owed by the XYZ Trust.
“The widespread misunderstanding is just because you do some accounting entries, that the transaction has actually occurred and the ATO will often pick up on this issue,” Mr Licciardi said.
Mr Licciardi, now a senior associate with HWL Ebsworth Lawyers, said that while there hasn’t been a noticeable increase in ATO activity around this issue, it has been an ongoing focus area for the agency.
To avoid a potentially hairy situation when faced with an ATO dispute, he suggests either moving the money or properly documenting the transaction.
“I don’t think there’s been an increased activity, but I think a lot of accountants just think that accounting entries and journalising are just a remedy for every problem, and all that does is get their client into strife,” he said.
“Bear in mind, the journal entry is only a record of the transaction that has already occurred, it is not the transaction itself — that’s the key issue.”
Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.