A Guide to Non-Current Liabilities in Australia

When you’re running a business, it can be tempting to put off non-current liabilities; after all, they are debts not due for at least another 12 months. However, these long-term obligations significantly impact your business’s financial health and future planning. 

In this guide, we will walk you through non-current liabilities, the types of non-current liabilities versus current ones, and how you should report these on your financial statements.

What’s the meaning of non-current liabilities?

In Australia, when a company has an outstanding obligation that isn’t due for least a year, we call it a “non-current liability.” This is important because it shows how much your business owes in the long run, not just right now. Some examples of these long-term debts are:

1. Loans that take years to pay off
2. Taxes that aren’t due yet – but that will result in a payable in at least 12 months time
3. Agreements to rent something, like an office, for more than a year

Knowing about these long-term obligations helps business owners and stakeholders understand how a company is doing financially and what it might owe in the future. Depending on the type, repayment schedule, and classification, these can also have important tax implications for businesses. 

Types of non-current liabilities

Your business may have one or several non-current liabilities. Here are some common types in Australia’s financial landscape. 

Long-term leases

Long-term leases are rental agreements that last more than a year. For example, your company might rent an office space for five years or lease expensive equipment like computers or machinery for several years. You agree to make regular payments over this extended period, and the part of this long-term commitment due after a year is considered a non-current liability.

Long-term loans

Long-term loans are IOUs (or an I owe you note— a document that acknowledges the existence of a debt) your business takes out to pay for major expenses. Imagine a business that wants to build a new factory or buy a fleet of trucks. They might not have all the money upfront, so they borrow it from a bank and agree to pay it back over several years. This borrowed money, which they’ll be paying off for a long time, is a non-current liability.

Lines of credit

A line of credit is similar to a credit card but of larger value. The bank agrees to lend your company up to a certain amount of money, and you can borrow from this pool whenever you need it. Compared to a loan, you only pay interest on what you use; however, the interest rate is typically higher. 

Often, lines of credit are called revolving credit. This is because you can re-borrow what you’ve already paid back. For example, if you have a line of credit worth $10,000, you can borrow $7,000, pay it back, and then borrow it again at a later date. 

Deferred tax liabilities

Deferred taxes are a bit tricky, but think of them as a “tax IOU.” Sometimes, the way a company calculates its profits for tax purposes is different from how it calculates profits for its financial reports. This can result in the company owing taxes in the future based on profits it’s reporting now. It’s money they know they’ll owe to the tax office later, so they record it as a liability.

Bonds payable

Imagine if a company could sell its own “IOU notes” to the public. That’s essentially what bonds are. Your business can get money now from people who buy these bonds, and in return, you promise to pay back that money plus interest after a certain number of years. It’s a way for companies to borrow money directly from investors instead of going through a bank.

Pension liabilities

If your business promises to pay employees a certain amount of money after they retire, that future obligation is recorded as a pension liability. It’s like a company saying, “We owe our employees this much money for their retirement, but we don’t have to pay it until later.” In this case, your company needs to set aside money over time to make sure it can fulfil this promise in the future.

Examples of non-current liabilities

Let’s take a look at what non-current liabilities might look like in practice in Australia. 

1. A Sydney-based retail company takes out a 5-year loan of $500,000 to expand its operations. This is an example of a long-term loan. 
2. A Melbourne construction firm enters a 10-year lease for heavy machinery, with annual payments of $100,000. In this case, this is a long-term lease. 
3. An Adelaide tech startup issues $1 million in convertible bonds with a 3-year maturity date. Here, we are talking about bonds payable. 
4. A Perth mining company records a deferred tax liability of $2 million due to differences in asset depreciation methods between tax and financial reporting.
5. A Brisbane hospitality group sets aside $300,000 as a provision for potential legal claims expected to be settled in 2-3 years.

Non-current liabilities vs current liabilities

On a company’s balance sheet, liabilities are divided into two main categories: current and non-current

• Non-current liabilities: These are long-term obligations that are not due within 12 months, such as deferred tax, long-term loans and leases, provisions, and credit lines.
• Current liabilities: In contrast, these are short-term obligations due within 12 months, including short-term loans, accrued expenses, taxes, and accounts payable.

While non-current liabilities provide insights into a company’s long-term financial commitments, current liabilities reflect immediate financial obligations. Both are crucial for assessing a company’s overall financial health and liquidity.

What can’t be claimed as non-current liabilities?

Many long-term financial obligations are classified as non-current liabilities. However, some items do not fall under this category. Understanding this is important for reporting, tax obligations, and comprehending your business’s financial health. 

Short-term portions of long-term debt

Any part of a long-term loan due within 12 months is classified as a current liability.

Example: A company has a $1 million loan with 5 years remaining. The annual repayment is $200,000. While the total loan is a non-current liability, the $200,000 due within the next 12 months would be classified as a current liability.

Contingent liabilities

These are potential obligations that depend on future events and are not recognized on the balance sheet unless they become probable and estimable.

Example: A manufacturing company is facing a lawsuit for alleged patent infringement. The potential damages are estimated at $5 million, but the outcome is uncertain. This would be disclosed in the financial statement notes but not recorded as a non-current liability unless it becomes probable and estimable.

Shareholder equity

Although shareholder equity represents a claim on the company’s assets, it’s not a liability.

Example: A company has 1 million shares outstanding, valued at $10 per share. The total shareholder equity of $10 million represents ownership in the company, not a liability to be repaid.

Revenue received in advance

If the revenue is expected to be earned within 12 months, it’s classified as a current liability.

Example: A software company receives $120,000 for a one-year subscription service starting January 1. This entire amount is initially a current liability as it will be earned within 12 months.

Certain pension obligations

While some pension liabilities are non-current, others may be classified differently based on specific circumstances.

Example: A company has a pension plan for its employees. While the long-term pension liability might be classified as non-current, any payments expected to be made within the next 12 months would be considered a current liability.

How to report non-current liabilities on financial statements

In Australia, you have to follow specific guidelines to report non-current liabilities on financial statements. Here are six important steps to follow. 

1. Classification: Make sure to properly classify your liabilities. Remember, they are non-current if your business has the right to defer settlement for at least 12 months after the reporting period. 
2. Presentation: On the balance sheet, you should list non-current liabilities in order of maturity (shortest to longest term) and group them by type.
3. Disclosure: For liabilities subject to covenants, you must provide information to help stakeholders understand the risk that those liabilities could become repayable within 12 months.
4. Calculation: Calculate the total by adding up all of your business’s non-current liability entries.
5. Compliance: Ensure adherence to Australian Accounting Standards, particularly AASB 101 Presentation of Financial Statements.

Accurately reporting your non-current liabilities is crucial. It affects your business’s financial ratios, credit assessments, and overall financial analysis. Misclassification can lead to misrepresentation of your company’s financial position and potential regulatory issues.

FAQ

What are non-current liabilities?

Non-current liabilities are long-term financial obligations that a business doesn’t expect to settle within 12 months. They include items like long-term loans, deferred tax liabilities, and lease obligations extending beyond a year.

Can non-current liabilities be written off?

Some non-current liabilities, like asset depreciation, can be claimed for tax purposes. However, not all non-current liabilities can be written off. It’s important to strictly follow Australian tax laws when it comes to claiming tax deductions for non-current liabilities. 

How do non-current liabilities affect business loans?

Non-current liabilities play a significant role in assessing a company’s creditworthiness. If you have a lot of non-current liabilities, it may be difficult for your business to secure additional loans, as lenders consider these long-term obligations when evaluating the company’s financial health and repayment capacity.

Final thoughts

As an Australian business, it’s crucial to understand the scope and implications of non-current liabilities. While these are not immediate financial obligations, they can impact your tax deductions and liabilities, provide insights into your business’s financial health, and help stakeholders make decisions about loans and investments for your business. 

If you are unsure how to classify non-current liabilities or how they impact your taxes, get in touch with us and ensure business tax compliance and navigate the complexities of Australia’s business taxation laws.