4.7.2.10 Assessable Income from Private Companies pre-01/01/2002

Summary

This topic provides information on the following:

  • the basis of assessment of income,
  • assessment of profit (1.1.P.428) from a private company (1.1.C.220), and
  • summary of assessable income for income support recipients involved in a private company.

Note: For the income test treatment of general business items also see 4.7.1.20. The assessment of general business items applies to all business structures including sole traders, partnerships, private trusts and private companies.

Act reference: SSAct section 8(1)-'income'

Basis of assessment of income

The assessment of income received by an income support recipient from a company, is based on the type and current rate of income, if any.

Income currently maintained should cease to be assessed, if:

  • the income support recipient advises that they are no longer receiving any income, or
  • a company in which an income support recipient has an interest is placed in liquidation.

Explanation: In this case the shareholders effectively no longer have access to the income.

Assessment of profit from a private company

The profit of a private company is NOT the profit of the individual shareholders. The shareholders have NO entitlement to any profits until a distribution is made by the directors, in the form of dividends. These dividends are assessable income, as described in the following table.

If an income support recipient is… Then the…
a pensioner or allowee,
  • cash dividends paid to them are held as income for 12 months from the date distributed, under SSAct section 1073, and
  • franking credits paid with the dividend ARE income for the purposes of either the pensions or allowances income test.

Explanation: Franking credits are also known as imputation credits (1.1.I.25).

Act reference: SSAct section 1073 Certain amounts taken to be received over 12 months

Summary table - assessable income for pensions & allowances

The following table summaries the assessable income for pension and allowance recipients involved in a private company.

Type of income Treatment
Company profit

Not assessed under ANY circumstances.

There is no need to check for allowable deductions, and the company profit and loss statement is not adjusted. Income, apart from deeming, is only assessed when the company pays it to the income support recipient in some way.

Dividends on shares (including franking credits) Hold them as their income for 12 months from the date of distribution.
Wages, salaries, stipends, honoraria and director's fees Use the current rate payable from the latest personal income tax return. Assess the current rate received. Discontinue the assessment if salary or wages cease. If received as a lump sum, the normal lump sum provisions apply. If the work undertaken is seasonal (1.1.S.60) an SWPP may apply.
Royalties Assess them as ordinary income.
Fees, Commissions Assess the current rate payable and received from the latest personal income tax return, unless a more recent figure is available. If regular payments are received as an employee (1.1.E.87), assess the current gross income received and do NOT maintain when the payment ceases. If the payment is received from self-employment, assess the current net profit and maintain it on an annual basis. If the work undertaken is seasonal an SWPP may apply.
Salary packaging and fringe benefits

Assess them as income. They are valuable consideration (1.1.V.25) and the same as income from salary and wages. The non-grossed up amount of the fringe benefit is assessed (4.3.3.60).

Exception: Where a person is under age pension age, additional superannuation contributions made on their behalf by a private company are not assessed as income.

Loans by an income support recipient to the company Assess them as a financial investment of the recipient. Assess income under the deeming provisions. Disregard any actual interest income received from the company. NO deduction is allowed from the deemed income for investment expenses.
Loans by a company to the income support recipient

Care should be taken that payments characterised as loans are not disguised distributions. If income support recipients can provide evidence that borrowings are bona fide loans do NOT assess them as income.

Example: Bona fide loans will have a loan contract.

If evidence is NOT provided, assess the distribution as income under SSAct section 1073.

Drawing back on loans made to a company Do NOT assess it as income.
Actual interest received on loans made to the company by the income support recipient Disregard. Assess them as financial investments. They are subject to the assessment of income under deeming provisions.
Deemed income on deprived assets Deeming applies to the value of deprived assets (1.1.D.110).
Rent paid to the income support recipient Assess as rental income. Allowable deductions reduce the assessable amount.

Act reference: SSAct section 9(1)-'financial investment', section 23(1)-'waiting period', section 1073 Certain amounts taken to be received over 12 months, Part 3.10 Division 1B Income from financial assets…

Policy reference: SS Guide 3.1.7 Seasonal Work Preclusion Period, 4.3.3.60 Deferred Income, Salary Sacrifice, Valuable Consideration & Fringe Benefits, 4.3.9.60 Income from Private Companies & Trusts, 4.4 Deeming Provisions, 4.6 Assets

Last reviewed: 3 January 2017