Income and expenses of a business 043-03100000

If a customer advises their activities are only a hobby (for example, hobby farm) the first decision to be made is whether the customer has undertaken activities for the purposes of making income - even in a small way. If the intention is to make income, then the net income and assets should be assessed as a business. If an activity is the main source of a customer’s income then it indicates that this activity is more than a hobby.

The possible choices a delegate can make when determining whether a customer has hobby income:

• The customer is actually running a business and the income should be assessed as part of their business income. Generally previous years financial statements are used to make the income assessment and it is coded on the Business Detail (BUS) screen
• No business exists and the amounts received are ordinary income. No expenses can be deducted from the income because the customer is not carrying on a business. These would be assessed as non-remunerative lump sums for a period of 52 weeks on the Other Income (OIN) screen
• No business exists and the amounts received are not ordinary income. This would be the case when the thing being sold is already assessed as part of the customer's assets, for example, when a customer owns a small number of cattle on land surrounding the family home and the value of the cattle are already included in the customer's assets. If the customer occasionally sells one or more cattle, the money received for the sale is not considered to be income. An adjustment to the customer’s assets may be required due to the sale

The Australian Taxation Office (ATO) use the term Personal Services Income (PSI) to describe income produced mainly from personal skills or efforts as an individual. A person can receive PSI even if they are not a sole trader. If a person is producing PSI via a partnership, trust or company structure and the PSI rules apply the income is treated as their individual income for ATO purposes’.

Services Australia's treatment of PSI is different to the ATO and PSI can either be employment income or form part of a person's business income.

Determine if the person is self-employed or an employee, see Self-employed or employee?

If the person is determined to be:

• an employee, the assessable income is the gross salary or wages, which would include PSI
• carrying on a business, the assessable income is the net profit of the business, after allowing expenses incurred in earning that income. PSI would be added back to the net profit

Property developers can operate under different business structures including sole traders, partnerships, private trusts and private companies.

There are 2 usual ways they may account for their business. There must be consistency in the treatment for social security purposes.

• Method 1 - the business will account for the real estate and development assets like any other trading business and have profit assessed using the formula:
• Gross income less cost of goods sold less expenses
• The cost of goods sold = opening stock plus purchases less closing stock
• The stock value for a property developer will be the value of land and buildings as a work in progress. This method will assess the net profit every year just like any other business. When the business ceases trading there is no further income to be maintained
• Method 2 - the business will be assessed on the net income of each development at the end of the development when sold:
• In this case the net profit (sale price less expenses associated with the particular development) will be assessed as a lump sum for 12 months. There will be no further discounting of the net profit (for example, a 50% discount or discount for inflation) as is allowed under the Tax Act

When there is more than one sale associated with the overall development then the net profit on each sale will be assessed separately for 12 months.