Assessing sole trader income 043-03110050

Has the customer notified their activities are only a hobby?

• Yes, go to Step 2
• No, go to Step 4

Has the customer undertaken activities to make money?

• Yes, go to Step 4
• No, go to Step 3

Is the customer converting assets to cash?

For example, if a customer owns a small number of cattle on land surrounding the family home and the value of the cattle is included in the customer's assets, money received from occasionally selling one or more cattle is not considered income.

• Yes, no income is assessable.
• Update customer asset details as needed
• Procedure ends here
• No, assess the income received as a lump sum for up to 52 weeks
• Code the income is on the Other Income (OIN) screen. See Treatment of lump sums
• Procedure ends here

• Issue Business Details (MOD F) form
• Issue Real Estate (MOD R) form if real estate is involved
• Record details on a DOC or Note

See Requesting information (CLK) when requesting information from the customer. Steps 5 and 6 outline what additional documentation is required.

If the customer receives:

• JobSeeker Payment (JSP) or Youth Allowance (YA) check that they are still considered to be unemployed upon commencing self-employment
• Disability Support Pension (DSP) check that they continue to be eligible for DSP upon commencing self-employment
• Carer Payment (CP) check that they continue to be eligible for CP upon commencing or returning to work

If this is the customer's first advice of self-employment, go to Step 5

If the customer has previously advised of their self-employment, go to Step 6

Note: if this self-employment income has been incorrectly recorded as employment income:

• the earnings update should only be completed when the self-employment income is coded
• this will make sure the incorrect arrears or overpayment are not created by removing employment income before it can be coded as self-employment

Discuss the method of assessment with the customer. Request a profit and loss statement and suggest completion of a 3 month estimated profit and loss.

If a customer is unable to supply their own profit and loss statement, issue a Profit and Loss Statement (SU580).

• If the businesses is in the early stages (first 3 months) and has started:
• from scratch, it is unlikely that a profit will be made in the first 13 weeks and an estimate of nil can be accepted
• because work has become available, the customer should have an idea how much net profit will be made from the work
• If the business has been operating for more than 3 months the customer should be able to provide a profit and loss statement from the start date of business. A SU580 can be issued for the customer to complete. Every 3 months after the initial profit and loss statement has been provided, the customer must supply a new interim profit and loss statement that 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. See Steps to assess an interim profit and loss statement
• If this is a new customer with an existing business that has traded for a full financial year, the latest tax return should be supplied. If this is not indicative of the current state of the business it would be advisable for the customer to provide an interim 3 monthly profit and loss statement

Check that no assets (capital expenses) are included in the interim profit and loss statement as expenses. For more information, see Steps to assess an interim profit and loss statement.

Go to Step 8.

If the business has been operating for:

• Less than 12 months - request the customer supply a profit and loss statement. For example, they can complete SU580 for the period since self-employment began. Every 3 months after the initial profit and loss statement has been provided, the customer must supply a new interim profit and loss statement that covers the full period from the start date of self-employment. Profit and loss statements must continue to be lodged until an Income Tax Return covering a full 12 month period has been provided. When the profit and loss has been returned, go to Step 8
• 12 months or more, but the customer has not yet lodged income tax returns showing full details of the profit and loss for a full 12 months - request an interim profit and loss statement for the 12 month period. For example, via a completed SU580. When the profit and loss has been returned, go to Step 8
• More than 12 months and the customer does not lodge a tax return for the business. For example, the customer is considered to be self-employed by Centrelink, but not by the ATO. Or, the customer is behind in lodging tax returns. For example, has not lodged a tax return for a number of years. The customer must provide a profit and loss statement each financial year. When the profit and loss has been returned, go to Step 8
• More than 12 months and the customer has lodged an income tax return with the Australian Taxation Office that covers a full 12 month period of self-employment, go to Step 7

Check that income tax return and financial statements reflect the customer's current rate of income received from self-employment. Reasons for a change in income may include:

• loss of a contract
• seasonal downturn in business or
• other change in business circumstances

See:

• Unexpected downturn of a business
• Business has ceased or has been sold
• Seasonal downturn in business
• Steps to assess an interim profit and loss statement

Does the income tax return reflect current income?

• Yes
• Request the customer supply a copy of the income tax return and financial statements.
• When the documents have been returned, see Assessing and coding the Business details for sole traders and partnerships MOD F
• No,
• Request the customer supply a profit and loss statement for the period from the date the income changed (for example, SU580)
• When the profit and loss has been returned, go to Step 8

Adjust for non-allowable deductions and non-assessable income such as one-off capital gains that are not part of the normal trading activity of the business by removing them from the profit and loss statement. (Customers may mistakenly include some setting up asset costs as expenses.) Take out investment income for financial assets that have been removed from the balance sheet (as these are to be coded on SVS, SIS or MIS and deemed). See Assessing sole trader assets. Removing these amounts will give you an adjusted net profit/loss for the business.

If customer receives a wage or salary from the business, this must be added back to the net profit to get adjusted net profit or loss.

For more information, see Steps to assess an interim profit and loss statement.

Note: Cash Flow Boost payments paid by the Australian Taxation Office to eligible small and medium sized businesses as part of the Australian Government COVID-19 stimulus response are exempt from assessment under section 8(8)(zt) of the Social Security Act 1991, and should not be included when assessing business income for a customer or their partner. Payments will be made for the March to June 2020 and June to September 2020 quarters. As these payments are not assessable income, they will also need to be removed from the profit and loss statement to determine the adjusted net profit/loss for the business.

Code sole trader income, see Assessing and coding the Business details for sole traders and partnerships MOD F.

Go to Step 9.

If the customer or their partner receives Family Tax Benefit (FTB) or Child Care Subsidy (CCS), check if they need to revise their current annual income estimate and advise choices available to help reduce the chance of an overpayment during the reconciliation process. See Updating income estimates for the current income year.

Record details on a Note or DOC. Include all information used for assessment including the source documents for example, 2020 Income Tax Returns, Profit and loss 1 July 2020 to 30 September 2020.