"ACCOUNTANCY is not rocket science," I heard myself say.
"It's just a journal, a story told in figures."
The occasion was a request by an associate of my firm, a financial planner, who was trying to make sense of a Centrelink interpretation of what caused his octogenarian clients to lose their age pension.
The story was simple. These people had an old company that had considerable tax losses. The losses were the result of a combination of poor trading results and some crook investments that took a beating during the 2007-8 global financial crises. That would sound familiar to anybody who had investments in super, Storm Financial or the many mini-Storms that were around at the time.
The point is that if the company had losses, it owed money to its shareholders, who had propped it up. Centrelink apparently understood this tenet in accountancy and assessed the loans as assets, reducing these people's pension entitlements. Not that there seemed much chance of the company repaying them!
But along came a white knight whose trust had made a tidy profit. Our knight legitimately distributed money to the company enabling it to repay the loans. Naturally this generosity was feathered somewhat by the tax saving on offer, but what he gave the company was fair dinkum, hard cash.
So what did Centrelink do? They assessed the distribution as income in the hands of the couple. What had previously been assessed as a loan to the company had morphed into income, slashing their pension to nothing.
The bottom line is that, in accounting parlance, the existence of the debt was the key element. The distribution of cash was to the benefit of the company, not the shareholders. What happened was that the company was subsequently put in a position to repay the debt that had been in its accounts since 2008 and it did so. The asset had changed from debt to cash - simple. Its assessment should not have changed.
As I said earlier, accountancy is just a story in figures. It seems, however, too often people make life-changing decisions but just don't have the know-how to read the story properly - Centrelink officials, tax officials and bank johnnies come to mind!
Bob Lamont is director of Corporate Accountants at the Night Owl centre. He welcomes your questions to email@example.com