Assessing attribution income 043-04050010

Attribution occurs if the controllers of the trust or company exercise control over the assets and income of the entity. This control is expressed as a percentage and can only be determined by a CAO.

Note: different rules apply to an approved Special Disability Trusts (SDT). This procedure does not cover SDTs.

Attribution income is the assessment of the entity's assessable income as the customer's income. The amount is determined by the person's attribution income percentage multiplied by the trust or company's assessable income. This determination could involve attribution of income from multiple trusts and companies.

There are two exceptions to this general rule:

• Reasonable distributions paid to a genuine investor by a trust or company are not attributed to the controller(s)
• If a partnered couple are involved, there is an exception when a controller makes a distribution or pays a dividend to their partner
• If the total combined actual income distributions received by a partnered couple is equal to, or less than the combined attribution income, the amount of any distribution income belonging to a person is to be deducted from their partner's attribution income amount
• If the total combined actual income distributions received by a partnered couple is greater than the combined attribution income, any amount by which attribution income exceeds actual distributions for a customer, can be deducted from that customer's attribution income

If a trust or company balance sheet includes equity in a related trust or company, the income is only recorded against the trust or company that owns the primary asset.

The income attribution amount for the trust or company is assessed after examining the net taxable profit which will include any capital gains and imputation credits or foreign income credits etc. that may not be included in accounting profit. The profit and loss statement should be examined to determine if the entity is using the accruals or cash basis for accounting. Either method is acceptable but there must be a consistent usage from year to year. The taxable income and profit and loss statement can be used to identify any non-allowable expenses.

Attributable income is therefore based on:

• net taxable profit less
• non-assessable income plus
• income attribution amount for inter related entities plus
• non-allowable expenses

The income and assets of an entity are generally assessed from the private trust or private company’s most recent tax return and financial statements.

Discretion to determine the relevant attribution period sits with the Complex Assessment Officer (CAO) as the delegate. When deciding for which period of time to attribute the assets and income of a trust or company to an individual, the assessor first needs to establish the derivation period, and the attribution period to which the derivation period relates.

An attribution period is the period for which ordinary income is to be attributed to an attributable stakeholder. An attribution period must relate to a derivation period, which may or may not overlap.

An attribution period can be shorter or longer than the derivation period to which it relates. An attribution period would generally be a period of 12 months and start at the earliest possible time after the tax return in regard to the most current tax year is available. However, in some situations an attribution period could be determined by the delegate to be a period less than 12 months, for example, where an income support recipient requests a reassessment of his/her circumstances. In some cases, the decision maker may determine that the attribution period should be the same as the derivation period.

The Resources page contains examples of how to determine an attribution period.

The 'annualised' income attribution amount needs to be determined for a trust or company. If a profit and loss statement provided only represents a 6 month period. To annualise it:

• remove non allowable deductions
• divide the resulting net income by the number of days the profit and loss represents
• multiply by 365

Sometimes it is not appropriate to apply such a simple calculation. For example, a business may be seasonal and derive most of its income in the 3 months over the winter period and the 3 month profit and loss statement provided represents only the winter months. Alternatively, a business may derive income from property development where income is derived only when property is sold.

If an entity ceases trading, the current attribution income is set to zero. In addition, for the controller and their partner, the previous distribution income will be set to zero. However, for non-controllers the previous distributions are still assessed for 12 months under section 1073 of the Social Security Act 1991.

When determining the amount of the entity's income to attribute to stakeholders, the net taxable profit is the starting point. Financial investments held within an entity are not subject to deeming provisions, instead actual income applies. Some expenses allowed for the purposes of calculating the tax payable, may not be allowed when determining entitlement to an income support payment.

Adjust the profit and loss statement to calculate the income attribution amount for the entity. Adjust the net taxable income by subtracting items such as dividends and distributions from designated private trusts and companies and adding on items such as non-allowable deduction amounts.

Business deductions (adjustments on a profit and loss statement or allowable deductions) are covered in a separate procedure.

Prior to 16 March 2017, excess superannuation contributions above the Superannuation Guarantee (SG) amount were not an allowable deduction for the entity. CAOs were required to calculate the amount of excess super contributions and record these as a non-allowable expense claimed by the entity.

Effective from 16 March 2017, the amount of excess superannuation above the SG levy paid on behalf of controllers (including part controllers), is an allowable deduction for the entity.

If the controller is an income support payment customer, the amount above the levy is employment income, to be assessed as explained in Assessing salary sacrificing/salary packaging arrangements for employment income.

If the SG levy amount is not clear, such as when a controller salary sacrifices additional employment income from a trust or company to superannuation, CAOs must check other documentation such as super statements and personal tax returns. Super statements will generally include the Superannuation Guarantee amount. Any additional amounts voluntarily sacrificed to super will show on the super fund statement as Employer Contributions. Personal tax returns will show amounts salary sacrificed to super as Reportable Super Contributions.

See Resources for further information and examples.

For remunerative lump sums, such as wages or directors fees the assessment start date is the entitlement period start date (EPSD) of the period in which the lump sum is paid. Amounts are apportioned over the period the lump sum represents, for a period of up to 52 weeks from this date. Any period where an income support payment is not paid is included in this period.

The period of up to 52 weeks will apply to all affected remunerative lump sum amounts received by the person or their partner after claiming.

When a remunerative lump sum is received by the person or their partner prior to claiming, the attribution income is not adjusted to include the remunerative lump sum. That is, the remunerative lump sum is not to be recorded as a non-allowable deduction for the entity.

This is because section 1073A of the Social Security Act 1991 only allows a remunerative lump sum to be assessed as income where the customer and/or their partner are in receipt of an Income Support payment at the time the lump sum is paid.

It is also important to note that because of the application of section 1073A, any remunerative lump sums paid to a customer or partner in receipt of payment will continue to be assessed as income for the appropriate period (up to 52 weeks) even where the trust or company has ceased or has had a reduction in trade.

Under trusts and companies legislation some expenses claimed by private trusts and private companies are not allowed and the profit and loss statements have to be adjusted. See list in the Guide to Social Security Law, 4.12.7.20, Allowable & Non-allowable deductions. See References for a link.

Note: effective from 16 March 2017 salary sacrificing must be accepted as an eligible business deduction when assessing attribution income.

Each business conducted within the trust or company needs to be assessed separately. Centrelink cannot accept a consolidated profit and loss statement of the trust or company. The guidelines are the same as those for sole traders and partnerships. Businesses are not allowed to offset the losses in one against the profit of another business within the structure unless the activities of the businesses are necessarily related.

For trusts and companies, some further non-allowable deduction provisions may apply, such as:

• excessive wages or salaries
• excessive interest on loans

Working Credit and employment income nil rate provisions cannot be used for attribution income as it is not employment income.

From 1 July 2019, Work Bonus may be applied to attribution and distribution income received by a customer who is:

• of Age Pension age and
• in receipt of an income support payment other than PPS

Work Bonus will be applied only where the customer's role in the trust or company involves personal exertion, (that is the customer's direct involvement helps generate the income for the entity). This could include such activities such as truck driving, book keeping or sales.

Work Bonus can be applied to distribution income prior to 1 July 2019 only if the distributions are considered to be paid in lieu of wages and coded as employment income.

Section 1208 allows Centrelink to assess all capital gains as income when determining an entity's income. The capital gain or loss assessed is the total amount of the gain or loss, less any expenses relating to that gain, without any discounting for inflation or any other amount that is allowed under the Income Tax Assessment Act. For example 50% discounting or prior year losses.

For controllers or part controllers, only the capital gain from normal trading should be assessed. Examples of normal trading are the sale of shares, managed investments and depreciable assets on a regular basis. If the entity was in the business of buying and selling real estate, the capital gains or losses would be assessed.

What should not be assessed as income for controllers or part controllers, is the capital gain from an asset sale which is not part of normal trading, for example capital gain from selling a shop or land on which a business was conducted, or an entity motor vehicle that has been depreciated over its working life.

A capital distribution, being the direct transfer of entity assets to a person who is a controller, is not assessed as income.

Note: for controllers or part controllers only (and their spouses/partners), Centrelink no longer assesses capital gains once they cease involvement with an entity, the entity ceases trading permanently or winds up.

These capital gains are assessed under section 1073 of Social Security Act 1991 (SSA) along with income distributions. Centrelink assesses all of the capital gain without any discounting or any other amount allowed by the Income Tax Assessment Act.

For non-controllers, Centrelink must assess the capital gain from normal trading. Examples of normal trading are capital gains from the sale of shares, managed investments and depreciable assets on a regular basis. If the entity was in the business of buying and selling real estate, the capital gains would be assessed.

In addition, what should also be assessed as income for non-controllers is the capital gain from the sale of an asset that is not part of normal trading. Examples of this would include capital gain from the sale of a shop or land on which a business was conducted or an entity motor vehicle that has been depreciated over its working life. Therefore, for non-controllers all gross capital gains are assessed irrespective if the gain is from a one off event.

A capital distribution, being the direct transfer of entity assets to a person who is not a controller however, is not assessed as income under section 1073 of the SSA.

Note: all these capital gains for non-controllers continue to be assessed for 12 months, even if the entity ceases trading, winds up or the non-controller is no longer involved with the entity.

If an entity invests in a long term bond where there is no income credited until the end of the period of the bond (usually 10 years), Centrelink assesses no income until the income is credited. There is no income assessed during the period of the bond.