For Australian taxpayers, distinguishing between
revenue and capital transactions is crucial, as it
affects how income and expenses are taxed.
This fact sheet outlines the key differences between
revenue and capital accounts for tax purposes, based
on guidance from the Australian Taxation Office (ATO).
What Is a Revenue Account?
A revenue account pertains to the income and expenses arising from a business’s ordinary operations. This includes:
- Trading Income: Sales of goods or services.
- Interest and Dividends: Income from investments held as part of business operations.
- Short-term Asset Sales: Profits from assets held primarily for resale. (Australian Taxation Office)
Tax Treatment:
- Income: Included in assessable income and taxed at the applicable marginal or corporate tax rate.
- Expenses: Generally deductible under Section 8-1 of the Income Tax Assessment Act 1997. (Australian Taxation Office)
What Is a Capital Account?
A capital account relates to transactions involving long-term assets not part of day-to-day operations. Examples include:
- Sale of Capital Assets: Such as property, shares, or equipment not held as trading stock.
- Structural Improvements: Expenditures that enhance the value of an asset.
(Australian Taxation Office, Australian Taxation Office)
Tax Treatment:
- Gains: Subject to Capital Gains Tax (CGT).
- Losses: Can offset capital gains; unused losses may be carried forward.
- Expenses: Not immediately deductible; may be included in the asset’s cost base. (Australian Taxation Office)
Key Differences
| Aspect | Revenue Account | Capital Account |
| Nature | Day-to-day business operations | Long-term investments and assets |
| Income Taxed As | Ordinary income | Capital gain (subject to CGT) |
| Expense Treatment | Generally deductible in the year incurred | Added to the cost base; not immediately deductible |
| Asset Holding | Short-term, held for resale | Long-term, held for investment |
| Examples | Sales revenue, service income | Sale of property, shares held as investment |
.
Practical Examples
- Share Trading vs. Investing: A person actively buying and selling shares as a business is taxed on revenue account; profits are ordinary income. An investor holding shares for the long term is taxed on the capital account; profits are subject to capital gains tax (CGT). (Australian Taxation Office)
- Property Development: A developer building and selling properties operates on a revenue account. An individual selling a long-held investment property is dealing with a capital account transaction.
Importance of Classification
Correctly classifying transactions ensures compliance and optimal tax treatment. Misclassification can lead to:
- Incorrect Tax Payments: Overpaying or underpaying tax.
- Penalties: For non-compliance with tax laws.
- Audit Risks: Increased scrutiny from the ATO.
Further Information
For more detailed guidance, refer to the ATO’s resources:
Note:
This page provides general information and should not be considered tax advice.
For personalised assistance, seek professional advice.
Prepared by AAG Technical Knowledge Base
