Business revenue 043-03100010

Section 8 of the Social Security Act 1991 defines income (in relation to a person) as:

• an income amount earned, derived or received by the person for the person's own use or benefit
• a periodical payment by way of gift or allowance
• a periodical benefit by way of gift or allowance

This section further defines an income amount as an amount earned, derived or received by a person, whether of a capital nature or not, in the form of:

• valuable consideration
• personal earnings
• moneys
• profits

Accordingly, money or profits received by a customer from a business fall within the section 8 definition of income amount and therefore also income. Money includes salary, wages, commissions, fees, honoraria, or interest received by a customer from a business. Profits are a customer's share of the net profit of a business.

For sole traders and partnerships, it is the customer's share of the net profit earned by the business which is assessable as income.

For private trusts and private companies, profit includes:

• dividends or distributions of profit made to shareholders and beneficiaries
• income from rent or lease of an asset, and
• income amounts attributed to a customer who is an attributable stakeholder

The assessable business income attributable to the customer will depend on the attribution assessment of who controls the entity. Although distributions are made to shareholders or beneficiaries (from current and sometimes prior year profits) they are assessed separately from the business income of the entity.

The owners of sole trader and partnership businesses have a legal entitlement to the profits generated by their business. This is in contrast to profits made by a private company or private trust, which belong to the private company or private trust until distributed.

Sections 1075 and 1208B of the Social Security Act 1991 provide an exception to the general rule of assessing gross income. These relate to assessment of income where a person or entity carries on a business. Under these sections, ordinary income from the business is to be reduced by some losses and outgoings (expenses) which relate to the business and which are allowable deductions under specific sections of the Income Tax Assessment Act (ITAA) 1936 and the Income Tax Assessment Act (ITAA) 1997.

The phrase 'carries on a business', used in these sections, has the same meaning as the term 'carrying on a business' in section 51 of the ITAA 1936 and section 8-1 of the ITAA 1997 (two of the specific sections of the ITAA referred to in sections 1075 and 1208B of the Social Act 1991).

A business is defined in section 6(1) of the ITAA 1936 as including 'any profession, trade, employment, vocation or calling', but specifically excludes 'occupation as an employee', The same definition also applies to the term used in section 1075 of the Social Security Act 1991, and accordingly a person working as an employee cannot be regarded as person who 'carries on a business'.

Consequently, section 1075 cannot apply to a person who is an employee, and therefore only apply to income arising from business activities. Generally, a person is regarded as carrying on a business for the purposes of section 1075 of the Social Security Act 1991 when they are the owner of a sole trader or partnership business enterprise.

Businesses can receive revenue from many different sources, but the more common are:

• trading - provision of goods or services
• investments - interest, dividends and distributions
• sale of business assets - apart from stock, which would be included in the normal trading figures
• grants or other assistance - from government and other organisations

Generally Centrelink uses the business entity accounting convention. Assets and investments not considered to be related to the principal function of the business are removed and assessed separately.

Business profit for accounting purposes, taxation purposes and social security purposes are not the same thing. Accounting profit is calculated in accordance with various accounting standards. However, profit for taxation and social security purposes is calculated in accordance with various legislative provisions. Small businesses with an annual turnover less than $2 million may be able to access a range of tax concessions under the small business entity concessions.

The primary source of verification of income should be the latest available Income Tax Return and associated financial statements, such as the profit and loss statement. It is important that the Notice of Assessment is also sighted, when available, to confirm the authenticity of the return if doubt exists about the taxation return and financial statements.

Tax return(s) should be sighted and all pages copied to determine which deductions are not allowable for social security purposes. If the accountant has used electronic transfer, a full copy of the electronic return should be sighted and copied to verify all income and its source. If the customer has completed their own return using a Tax Pack, it will be necessary to also copy each page in the Tax Pack corresponding with information provided in response to a question in the Tax Pack, as well as any accompanying schedules (for example, Tax Pack Supplement or the Business and Professional Items Schedule).

A person who obtains income from rent, letting or leasing an asset will generally not be regarded as operating a business, but will be regarded as deriving income from a profit making transaction.

Income from rental is assessed under the general definitions of income and income amount in section 8 of the Social Security Act 1991, that is, the net profit earned from rental is assessable as income.

Accordingly, a deduction from gross rental income is allowed in respect of expenses necessarily incurred in earning the rental income.