4.7.1.20 Assessment of income for sole traders & partnerships
Summary
This topic provides information on the following items which are common to BOTH sole traders (1.1.S.225) and partnerships (1.1.P.95):
- assessment of business income
- assessment of income from new businesses
- treatment of business items for income test purposes
- value of trading stock on hand, and
- assessable income for partnerships when couples separate.
Act reference: SSAct section 8(1) Income test definitions, section 1074 Ordinary income from a business-treatment of trading stock, section 1075 Permissible reductions of business income
Policy reference: SS Guide 4.7.1.30 Assessment of business deductions & losses for sole traders & partnerships
Assessment of business income
Income from a sole trader or partnership business is the net amount:
- AFTER allowable expenses for the cost of running the business, AND
- BEFORE income tax and other personal deductions.
For assessment purposes the current annual rate of income is used, generally based on the most recent income tax return. To calculate the effect of income on fortnightly payments, the annual rate should be divided into 26 equal instalments and then treated as ordinary income in each fortnight.
When your most recent income tax return is not representative of current income
If the income tax return does not represent a reasonable indication of current income, an estimate may be made on available evidence, such as the business profit and loss statement. Estimates made in this manner should generally be maintained for a period of 3 months and then reassessed.
Note: As a Business Activity Statement (BAS) does not contain any actual reconciliation of expenses, it CANNOT replace the annual income tax return for sole traders and partnerships. However, it could be used as an indicator of a significant change in the business circumstances.
When the income of a business changes or is anticipated to change, the recipient should notify Centrelink. Their need for income support will be reassessed and a new annual rate set. In most circumstances, this rate should then be reassessed every 3 months until an income tax return is available which is representative of the recipient's current financial circumstances.
Example: A self-employed courier driver enters into a new contract that will significantly alter their ongoing profit. A new annual rate based on this change in circumstances should be maintained from the date of the change in circumstances.
Example: A person owns a café and due to health restrictions because of COVID-19, the café is only allowed to serve take-away drinks and food. During this period, their income drops which significantly reduces their ongoing profit. A new annual rate based on this change in circumstances should be maintained from the date of the change in circumstances.
Act reference: SSAct section 1075 Permissible reductions of business income
Policy reference: SS Guide 4.7.1.30 Assessment of business deductions & losses for sole traders & partnerships, 4.7.5.30 Business Requirements & Fringe Benefits
Assessment of income from new businesses
When a recipient commences working as a sole trader or in a partnership, they must provide an interim profit and loss statement for the first 3 months of their business operation. Bills and receipts of payment used to develop the profit and loss statements may be required to support the statement. A BAS cannot be used instead of a profit and loss statement as it does not contain information on expenses.
Every 3 months after the initial profit and loss statement has been provided, the recipient must supply a new interim profit and loss statement which covers the full period from the start date of self-employment. Profit and loss statements should continue to be used for assessments until the recipient has lodged an income tax return which covers self-employment income for a period of 12 months.
Assessment of business income for the work bonus
The work bonus is calculated based on instalment periods whereas business income, including self-employment income from gainful work, is assessed and recorded on an annual rate of income basis. It is necessary to convert the annual rate of assessed self-employment income from gainful work to an amount of income for each instalment period.
A person's self-employment income from gainful work for an instalment period is the sum of the annual rate of assessed income from self-employment from gainful work divided by 364, for each day of the instalment period.
Also, where a person is eligible for the work bonus, the amount of self-employment income from gainful work that is assessed for an instalment period is spread evenly across the entire instalment period.
Example: 14 day instalment period
A person operates a business as a plumber and has an assessed annual rate of self-employment income from gainful work of $18,200. The person's self-employment income from gainful work for the instalment period is $700 ($18,200/364 multiplied by 14 days). The $700 that is assessed for the instalment period is spread evenly across the entire instalment period, i.e. $50 is assessed for each day of the instalment period ($700/14 days).
Example: 13 day instalment period
A person operates a business as a plumber and has an assessed annual rate of self-employment income from gainful work of $18,200. Based on a 13 day instalment period, the person's self-employment income from gainful work for the instalment period is $650 ($18,200/364 multiplied by 13 days). The $650 that is assessed for the instalment period is spread evenly across the entire instalment period, i.e. $50 is assessed for each day of the instalment period ($650/13 days).
Example: Annual assessed rate of income changes during an instalment period
A person operates a business as a plumber and has an assessed annual rate of self-employment income from gainful work of $18,200 for the first 5 days of a 14 day instalment period. The person's annual rate of self-employment income from gainful work is re-assessed as $9,100 with a date of effect of the 6th day of the instalment period. The person's self-employment income from gainful work for the instalment period is $475. ($18,200/364 multiplied by 5 days ($250) plus $9,100/364 multiplied by 9 days ($225)). The $475 that is assessed for the instalment period is spread evenly across the entire instalment period, i.e. $33.93 is assessed for each day of the instalment period ($475/14 days).
Act reference: SSAct section 1073AA(4BB) to section 1073AA(5A) Work bonus
Treatment of business items for income test purposes
The following table summarises the treatment of certain business items encountered in assessing BOTH sole traders and partnerships.
| Item | Treatment |
|---|---|
|
Goods: 1) taken from business stock for personal use, and NOT paid for, or 2) received in return for services. |
1) The value of the goods is added to gross sales to determine the income. 2) The value of the goods is income. |
|
Salary/wage is paid to a recipient who is a sole trader or a partner from a business. (This will show as an expense on the profit/loss statement and amounts paid will reduce the business profit.) Note 1: The profit/loss statement MUST be checked to ensure the payments are a salary/wage. If these amounts are on the balance sheet rather than the profit/loss statement they are in fact drawings, not wages. Note 2: Care must be taken to ensure the salary/wage is counted once only (as part of the business income), and that they are NOT counted again as 'earnings'. |
Example: If the recipient's salary is $6,000 and their share of the partnership loss is $3,500, then their assessable income is $2,500. |
|
Drawings (1.1.D.255) made from a sole trader owned or partnership business. Note: Drawings are:
|
Drawings are NOT income.
Explanation: The income is the profit (1.1.P.428) of the business. Drawings are deductions from the capital investment in the business. |
| Rent paid by a business to a recipient who is the sole trader or a partner in a partnership. | Add it to assessable net profit and assess as income on an annual basis. It can be offset against the recipient's share of the business loss, and a rental loss can be offset against the recipient's share of the business profit. |
|
Capital gain or loss: 1) on disposal of depreciated assets (1.1.A.290) distributed via the business structure's profit and loss statement. 2) on disposal of assets not depreciated and distributed via the business structure's profit and loss statement (not including managed investments and shares) from business assets. |
1) Do NOT include when calculating the current rate of assessable income for the business unless it is part of the normal activity of the business. 2) Do NOT include when calculating the current rate of assessable income for the business unless it is part of the normal activity of the business. Example: Property developers make their income from capital gain, so would have capital gains included in their assessment. |
|
Loan interest: 1) paid by the business to the recipient who is a sole trader or a partner in a partnership. 2) paid by the business to a third party who is not the owner or a partner. |
1) If it is listed as an expense on the profit/loss statement it is allowed as a deduction against business income. No deeming applies. The amount received by the recipient is added to the recipient's share of the business profit. It can be offset against the recipient's share of a business loss. 2) Allowed as a deduction if it is listed as an expense on the profit/loss statement. Note: If the payments are made to a third party who is a recipient who does not own the business, the amount received is disregarded as income, and deeming is applied to the investment as with any financial investment. |
| Financial investments used as part of the on-going operations of the business. | Actual income is included as part of the business profit and no deeming applies. Deductions for investment expenses claimed on the profit/loss statement are allowed. |
| Financial investments not used as part of the operations of the business. | Take them out of the business financial statements and assess them as the financial investments of the investment owners. Deeming applies. Disregard the actual income earned. No deduction is allowed for investment expenses. |
| Farm Management Deposits (this scheme, launched on 2/03/1999, replaces the Income Equalisation Deposits and Farm Management Bonds schemes). | Take them out of the business financial statements and assess them as the financial investment of the investment owners. Deeming applies. Disregard the actual income earned. No deduction is allowed for investment expenses. |
| Recipients share of a net profit. | Hold it as assessable income on an annual basis after making adjustments for non-allowable expenses. |
| Recipients share of a net loss. |
A business loss can be offset against any amount described as salary, rent, interest or other amounts that have been paid by the business to the sole trader or the partner in a partnership. Note: The loss cannot be offset against income from unrelated sources. |
Act reference: SSAct section 8(1) Income test definitions, section 1075(1) Permissible reductions of business income
Value of trading stock on hand
The following table describes the treatment of the value of trading stock on hand for income assessment purposes.
| If the value of all trading stock on hand at the end of the year … | then the excess is … |
|---|---|
| is MORE than stock on hand at the start of the year | ADDED to the recipient's business profit for that year. |
| is LESS than stock on hand at the start of the year | DEDUCTED from the recipient's business profit for that year. |
Generally, these adjustments will have already been made to the profit and loss statement.
Act reference: SSAct section 1074 Ordinary income from a business-treatment of trading stock
Assessable income for partnerships when couples separate
In some situations, members of a couple (1.1.M.120) may run a business together as a partnership. If they separate a delegate will need to ascertain, based on the available evidence, whether both members of a couple still have access to the proceeds of the business.
Where a salary continues to be paid, it is maintained as income and may be added to profits (see below).
Where one member does not have access to the proceeds of the business, their legal entitlement to a share of the proceeds may not be known until after the end of the financial year. In some cases the Family Court may make an order for payment or profit sharing. Payments made under such an order should be maintained as income, based on the information in the order, less any deductions that the recipient is allowed under the SSAct.
Act reference: SSAct section 1075 Permissible reductions of business income