Assessing sole trader income 043-03110050

For payments made under the Social Security Act 1991, the income assessed from a sole trader business is the net income amount. This is the gross income earned by the business less any allowable expenses incurred in running the business.

When assessing income from a sole trader business, there are some general points to note:

• Salary paid to the sole trader is not assessed as employment income. The amount must be added back to the net profit of the business
• Drawings are not assessable income. They are withdrawals of capital previously advanced to the business
• Previous year's losses cannot be offset against the current year's profit
• If the customer runs more than one business within the sole trader structure, the losses of one business cannot be used to offset the profit of another unless the customer can show that the businesses are necessarily related, then offsetting is allowable. That is, the income generated from one business could not have occurred without incurring a loss from the other business
• Not all deductions are allowable under social security law. Any non-allowable deductions should be added back onto the net profit of the business
• Profit from a sole trader business is ordinary income not employment income. The customer is unable to deplete their Working Credit balance to offset this sole trader income
  Note: if the customer is receiving a wage from their sole trader business, treat this as other ordinary income because salary/wage is added back to the net profit to obtain total assessable income. A sole trader cannot have an employer-employee relationship with themselves, as the sole trader business is not a legally separate entity from the owner
• Some customers use their sole trader business as a structure to buy and sell shares and other investments. Not all of these sole traders will be considered to be carrying on a business, as this determination is based on the frequency and objective of the share trading
• Financial assets on the business balance sheet, except for the principal business bank account, are considered a customer's personal assets and should be recorded separately, with income from them assessed under the deeming provisions
• The Australian Taxation Office requires a person to lodge an income tax return if they carried on a business, even if their income is below the threshold or their business is running at a loss. However, a customer may be assessed as being self-employed for Centrelink purposes, but not for taxation purposes. See Self-employed or employee? for more information

When a customer becomes a sole trader, they must provide a projected profit and loss statement for the first 13 weeks of their business operation and then provide an interim profit and loss statement for that period. Bills and receipts of payment used to develop the profit and loss statements may be required as supporting evidence of the statement.

Note: a Business Activity Statement (BAS) cannot be used instead of a profit and loss statement as it does not have information on expenses.

The net income from the profit and loss statement for this initial period is to be used for the following period and not to amend the period to which it relates.

A customer without a profit and loss statement should be issued with a Profit and Loss Statement (SU580) in which the customer can advise past or estimated future net profits over an appropriate period such as 3 months (13 weeks).

At 6 months, and again at 9 months and 12 months, the customer needs to supply a new interim profit and loss statement that covers the full period from the initial start date of the self-employment. See Steps to assess an interim profit and loss statement. At each contact, check if the customer needs to revise their current family assistance income estimate and advise choices available to help reduce the chance of an overpayment during the reconciliation process. Profit and loss statements are to be used for assessments until the customer has lodged an Income Tax Return that covers a full 12 months of the self-employment income.

However, a previous year's return may not give an accurate indication of current circumstances. If a customer advises of a significant increase or decline in business income, a reassessment can be made at any time, based on available business records. In this case, interim profit and loss statements are to be obtained.

Particular care needs to be taken when Disability Support Pension (DSP) or Carer Payment (CP) customers advise of starting self-employment as this change in circumstance may require a review of the customer's qualification for payment.

If a customer claims their activities are only a hobby, first consider whether the customer has undertaken activities to make money, 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 this activity is more than a hobby.

If a customer undertakes activities only as a hobby, the gross income is assessable. No expenses can be deducted from the income because the customer is not carrying on a business.

If the income is not assessed as a business, the income received is to be assessed as a lump sum for up to 52 weeks. The income should be coded on the Other Income (OIN) screen.

Some activities will not be assessed as income because the customer is not carrying on a business and is merely converting an asset 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.

Generally, artist grants paid directly to third party organisations to allow an artist to make use of facilities such as studio space or to attend functions are not assessed as income.

For such grants not to be considered income the artist must have no discretion or control as to how the funds are spent. Non-discretionary artist grants are not considered as income because artists cannot use these funds to directly contribute to their current needs.

Discretionary artist grants, including those paid direct to an artist, such as cash payments, are assessable under the social security income test. This is consistent with targeting assistance on the basis of a person's current needs.

When the artist has undertaken the activities for the purpose of making a profit, the customer is actually running a business and the grant is included in the assessment of business income. The expenses necessarily incurred in earning the business income will be allowed as a deduction against the business income.

Service Officers and Complex Assessment Officers (CAO's) must use the correct date of event (DOV) for assessment of business income and assets.

If a customer has reported income as employment income that is later determined to be self-employment, a Business Details (MOD F) must be completed by the customer (or (MOD PT) or (MOD PC) depending on the structure of the business).

Staff must take care to only remove the employment income in the same activity as the self-employment income is recorded.

This will stop incorrect overpayments or arrears from generating.