Business Structures and Financial Statements for Child Support debt recovery 277-04050000

A sole trader is the simplest form of business structure.

A sole trader is a person who trades alone without the use of a company structure or partners. A sole trader may trade under his or her own name or under a registered business name.

A sole trader business is not a separate legal entity from the owner.

A person operating a business as a sole trader:

• controls and manages the business
• is liable for all the debts of the business
• is entitled to all the profits of the business
• owns the assets of the business
• uses their individual tax file number (TFN) when lodging tax returns for the business
• a separate tax return for the business of a sole trader is not required
• declares all income derived through the business in their own personal individual tax return
• is solely responsible for any tax payable on business income as the income of the business is the owner’s individual income
• may have an Australian Business Number (ABN) for their business dealings
• may be registered for Goods and Services Tax (GST)

Services Australia may identify a customer is operating as a sole trader if:

• a customer or third party advises the agency
• the customer’s bank accounts are held in the names of the business. For example, Mick Jones trading as (or t/a) Mick’s Mechanics
• Australian Taxation Office (ATO) searches, including TSF and ICP may identify:
• sole trader income in the tax return lodged under the customer’s TFN (ICP for tax returns lodged after February 2010 and STAC prior to February 2010)
• a business ‘trading as’ name
• the customer is registered for GST
• the customer has an ABN
• STAC/ICP – identifies income earned from a business
• an Australian Business Number (ABN) search identifies the customer as the business owner and provides dates when the business commenced or was cancelled

Note: from 1 August 2014 staff can no longer access Single View of Client (SVOC). This information is available in other ATO systems including ICP and AIS. For more information see the ATO Applications Manual.

• ATO information (including income tax and business tax) may identify income sources and assets for building a financial profile. For example, asset depreciation, income due from trade debtors, motor vehicle expenses, bank accounts
• the customer or their financial accountant could provide Financial Statements which may identify income sources and assets. For example, assets, trade debtors and creditors, assets, bank accounts. Issue a section 120 if necessary
• funds or assets may represent capacity to make payments and where the agency is unable to establish a payment arrangement or administrative enforcement, litigation action may be appropriate. See Customer referral guidelines for Child Support staff

• the agency can issue a section 72A notice to:
• a financial institution where accounts are held in the payer’s name or their business’ trading name
• individuals or businesses making payments to the customer or their business
• funds or assets held in the business’ trading name belong to the customer as an individual and are subject to administrative enforcement powers

Note: Child Support cannot issue a section 72A notice to the payer as a sole trader because the sole trader is the customer/payer and not a third party

For more information on how to issue a section 120 or section 72A notice, see the External Searches Guide (CS).

A partnership is the relationship that exists between two or more people who are carrying on a business in common with a view to profit.

In this situation, two or more people ‘together’ are the business. A partnership is not a legal entity.

Essentially, all partners are jointly in direct control of the business and the money the business makes belongs to all partners jointly, although this can be modified through the use of a partnership agreement.

The rights and interests of members of a partnership are defined in a partnership agreement between the persons in the partnership, but there is no requirement for a written agreement. Partnership agreements can be written, oral, or inferred from the conduct of the parties. Partners can be individuals or artificial legal entities, such as companies.

A partnership can be recognised by the following characteristics:

• it is not recognised as a separate legal entity but as a relationship between individuals carrying on a business
• more than one person may be involved in running the business
• the business may be run in the owners’ names or under a registered business name
• each partner owns a share of the business assets and receives a share of the profits, and profits and losses are shared equally unless agreed otherwise
• the individual income, profits or losses, that a partner makes will need to be included in the personal tax return of each partner
• it is not a separate legal entity and is not required to pay income tax or Pay as you go (PAYG) instalments, aside from PAYG for any employees
• still required to lodge a partnership tax return using its own tax file number (TFN) to reconcile the income and expenses of the partnership, as well as show how the taxable income or loss of the partnership has been distributed

Services may identify a customer is operating a business partnership if:

• a customer, business partner, or third party advises the agency
• Australian Taxation Office (ATO) searches identify:
• a partnership distribution in the customer’s individual tax return (ICP for tax returns lodged after February 2010 and STAC prior to February 2010)
• a partnership tax return showing distributions to the customer
• links between the customer’s TFN and the partnership TFN
• TSF search may provide income details
• External Information window in Cuba may provide partnership income details
• STAC/ICP – identifies income earned from a partnership/trust/business
• External Information window in Cuba may provide partnership income details
• bank account statements for either the customer or partnership indicate the relationship
• an ABN search may identify the customer’s financial interest in a trading partnership

Note: from 1 August 2014 staff can no longer access Single View of Client (SVOC). This information is available in other ATO systems including ICP and AIS. For more information see the ATO Applications Manual.

• ATO information (including tax returns) may identify the customer’s income from a business partnership
• the partnership tax return will show the partners’ share of earnings from the partnership
• the customer or their financial accountant, or another business partner or the partnership’s financial accountant, could provide Financial Statements, a copy of the partnership agreement and other information about the business. Issue a section 120 if necessary
• a section 120 notice to the partnership’s financial institution may identify payments made to the customer

Note: a failure or refusal to comply with a section 120 notice may, in some limited circumstances, be appropriate to refer for prosecution. See Fraud.

• a section 72A notice can be issued to the customer’s individual financial institution
• a section 72A notice can be issued to the other partner/s for any partnership business payments made to the customer
• a section 72A notice cannot be issued against an account held in the name of the partnership or to the debtors of the partnership because the money is owed to the partnership and not to the customer

Note: funds or assets may represent capacity to make payments. Where the agency is unable to establish a payment arrangement or administrative enforcement, litigation action may be appropriate. See Customer referral guidelines for Child Support staff.

For more information on how to issue a section 120 or section 72A notice see the External Searches Guide (CS).

Companies are a separate legal entity where the directors of the company manage and administer the assets of the company on behalf of the company’s owners who are called shareholders.

To become a company, an entity must be incorporated under the Corporations Act 2001 and be registered with Australian Securities and Investments Commission (ASIC).

It is not uncommon for a company to be formed by an individual who takes on the roles of director and secretary and who is the sole shareholder of the company.

A company may be private or publicly listed:

• public companies are publicly listed and this enables the company to raise funds by selling shares to the general public, for example Telstra
• private companies are not publicly listed and funding is raised by private means (usually by taking out loans) or borrowing from individuals associated with the company. For example, a director provides $30,000 of his own money to buy initial plant and equipment and this may be repaid by the company to the individual and is not considered salary and wages
• a public company is a company of not less than five members, with no restriction on the right to transfer shares and with the capacity to invite the public to subscribe for shares or debentures
• a private company is owned by between 1 and 50 non-employee shareholders and where shares are available only under strict conditions set out in the Memorandum of Association. Ownership is by way of a shareholding which gives certain entitlements and responsibilities which are set out in the Memorandum of Association. Private companies can be identified by the letters Pty Ltd or the words Propriety Limited after the company name

A company can be identified by the following characteristics:

• income and assets of a company cannot be attributed to the owners of the company as it is a separate legal entity
• a director or directors govern a company on behalf of the shareholders who elect them
• ownership is determined by the shareholdings
• a company is required to use an Australian Business Number (ABN) and register with the ASIC
• a company is required to lodge a tax return and pay tax under its own tax file number (TFN)
• profits of a company are available to be distributed to the shareholders in the form of dividends
• ability to split income between family members through paying wages and salaries
• earnings of the company can be retained within the entity thereby deferring payments of tax or distribution of dividends to shareholders
• directors and shareholders are still required to lodge their own individual tax returns
• using its own name, a company can:
• hold property
• lend and borrow money
• issue securities
• operate bank accounts
• enter into contracts

Income received by a customer may be identified as non-salary income or financial benefit from a company if:

• a customer or third party advises the agency
• tax returns lodged by or on behalf of the company may determine:
• the total income of the company
• expenses declared by the company
• actual income being derived by the paying parent through his or her interest in the company
• a MASCOT ASIC search may identify if the customer is a company director, shareholder or public officer
• ICP identifies income earned from a partnership/trust/company where tax returns were lodged after February 2010 and can provide information on income earned and company expenditure, and may also identify if the customer is paying himself or herself a salary and the financial institution used by the company
• STAC – identifies income earned from a partnership/trust/company prior to February 2010
• External Information window in Cuba
• Mascot (ASIC) - provides information about a company’s status, the customer’s role and/or shares in a company, and contact details for a company’s accountant

Note: from 1 August 2014 staff can no longer access Single View of Client (SVOC). This information is available in other Australian Taxation Office (ATO) systems including ICP and AIS. For more information see the ATO Applications Manual.

• the customer’s tax return may identify:
• dividends and/or director fees paid to the customer
• salary and wage type income from the company
• the company tax return may help identify:
• company ownership
• the income and financial standing of the business
• company assets
• a section 120 notice to the customer’s financial institution may identify a regular income stream from the company
• a section 120 notice to the financial institution used by the company may identify a regular payments to the customer
• a section 120 notice to the company may identify distributions or payments made to the customer including salary and wages, director’s fees and dividend distributions
• a section 120 notice to the company’s accountant may provide a breakdown of business expenses for private expenditure
• a Mascot (ASIC) report may help to identify:
• company status, for example, private, current
• customer’s role and/or shares held in a company
• contact details for a company’s accountant
• an ABN search may identify companies with a relationship to the customer
• property search results for both the customer and the company may identify financial information about the customer
• public company share portfolios (ownership) are often managed by share registries. For more information, use Menu selection on the Process page of Banks and organisations

Note: a failure or refusal to comply with a section 120 notice may, in some limited circumstances, be appropriate to refer for prosecution. See Fraud.

• if a customer receives a wage from the company, employee withholding (EW) can be established
• a section 72A cannot be used to garnishee funds from financial institution accounts in the company name, or to company debtors, because the company is a separate legal entity to the customer
• a section 72A notice can be issued to the company for distributions or payments made to the customer, including:
• salary and wages, and
• director’s fees and dividend distributions

Note: funds or assets may represent capacity to make payments, and where the agency is unable to establish a payment arrangement or administrative enforcement, litigation action may be appropriate. See Customer referral guidelines for Child Support staff.

What is a share?

Issued shares are legal instruments which demonstrate and detail the extent of ownership of a company. Many Australians, including customers, own shares in public and private companies.

Shareholder information

Many Australian public companies use share registries to manage their share portfolio. For more information see the Process page in Banks and organisations. The information below could be used to make a decision to garnishee dividend payments.

What is a dividend?

A dividend is a share of the company’s profits. Dividends can be paid in different ways, for example, money, property, or shares. The amount of a dividend can vary and a low dividend may not necessarily mean a low number of shares held.

Not all companies pay a dividend for a range of reasons including:

• the company did not make a profit
• the customer may own a particular type of share which affects their entitlement to a dividend
• part of the company’s constitution may direct that the profits be distributed back into the company

Investigation tips

• investors are given a reference number often referred to as a Holder Identification Number (HIN) or Share Registry Number (SRN)
• the HRN/SRN is an account number similar to bank and superannuation account numbers
• the HRN/SRN is used as the primary identifier by share registries to identify and confirm a customer’s assets
• the Annual Investment Income Report (AIIR) identifies customers who received a dividend payment in the previous financial year
• the data from the AIIR is uploaded into the External Information window in Cuba
• the HIN/SRN number can be sourced from the AIIR in the External Information window in Cuba

Collection tips

• when issuing a section 120 notice to a share registry include the HIN/SRN
• if a section 120 share registry response confirms a payer has assets, issue a section 72A notice and include the HIN/SRN on the notice

For more information on how to issue a section 120 or section 72A notice see the External Searches Guide (CS).

A trust is basically a structure which owns and holds assets, such as investments, that are controlled and managed by a person or a company (trustee) for the benefit of other persons (beneficiaries). The trustee has the legal control over the assets of the trust, which means that they can buy and sell assets, however is not entitled to the income generated from the trust. The beneficiaries are those entitled to the assets and profits of the trust.

The trustee may be a natural person or a company, and the beneficiaries may be natural persons and/or other trusts or companies.

Discretionary/Family Trust

The primary feature of this trust is that the trustee has discretion to determine which beneficiaries receive income/assets, and when and how. Therefore, there is no fixed entitlement for each and every beneficiary.

Generally, the immediate family members of the trustee are the beneficiaries of a discretionary trust. The trustee will ordinarily consider which of the beneficiaries will receive the most benefit from the income, and is usually undertaken with a view to minimising the tax implication of the family members.

Fixed Trust

The trustee must distribute assets / income to the beneficiaries strictly in accordance with the terms of the trust deed. The trustee has no discretion to alter the distribution of the assets and or income.

Unit Trust

Beneficiaries hold units in a trust. All units have a pre-determined value, so those beneficiaries who hold more units are entitled to a greater share of the assets and income.

A trust can be identified by the following characteristics:

• the trustee has the legal control of the property but the beneficial interest rests with the beneficiary/ies
• the trustee can be an individual or a company
• a trust deed sets out the powers and duties of the trustee including:
• purpose of the trust
• the beneficiaries of the trust
• the powers of the trustee
• a trust must lodge a tax return under its own tax file number (TFN)
• Australian Taxation Office (ATO) searches may identify that the trust has an Australian  Business  Number  (ABN)

Income or financial benefits received by a customer may be identified as being for a trust if:

• a customer or third party advises the agency
• ATO tax return (in ICP or STAC) information may disclose the amount and regularity of distributions of income to the beneficiaries
• a TSF search may provide income details
• ATO records (STAC or ICP) indicate the customer is linked to a TFN that belongs to a trust or a company that operates as a trustee
• the External Information window in Cuba may provide partnership income details, for example, a trust can be involved in a partnership
• TSF will provide income details
• STAC and ICP may identify income earned from a partnership/trust/company
• bank account information may include accounts in the trustee’s name, for example, Mick Jones as trustee for Michelle Jones or Mick’s Mechanics Pty Ltd as trustee for the Jones Family Trust
• a property search may identify a customer is a trustee to the trust which owns the property

If a customer with a child support debt is the beneficiary of a trust:

• issue a section 120 notice to the trust to identify payments made and amounts due to the customer
• issue a section 120 notice to the customer’s and/or trustee’s accountant to obtain information about the customer’s financial interest in the trust to determine if the customer is the sole beneficiary

Note: a failure or refusal to comply with a section 120 notice may, in some limited circumstances, be appropriate to refer for prosecution. See Fraud.

If a customer with a child support debt is the beneficiary of a trust:

• monies held in trust for a customer are not collectable using section 72A, however a section 72A notice can be effective when monies are distributed from the trust to the payer
• section 72A action cannot be issued on an account where the customer holds the money as trustee for certain beneficiaries because the money is not the property of the customer
• if the customer is:
• trustee and sole beneficiary of a trust that owns a property, or
• trustee and sole beneficiary of monies earned from a trust
• where the agency is unable to establish administrative enforcement or a payment arrangement, litigation may be appropriate. See Customer referral guidelines for Child Support staff

For more information on how to issue a section 120 or section 72A notice see the External Searches Guide (CS).

A Trading Statement sets out the amount of sales less the costs involved in making those sales to establish the gross profit of the business. At times the trading statement will be included at the top of the Statement of Financial Performance.

See the Resources page for an example of a Trading Statement (see annotations a - f).

This gross profit is then transferred to the business’ Statement of Financial Performance (Profit and Loss Statement) where other expenses are deducted.

A business’ Statement of Financial Performance is a summary of income and expenditure over a period of time, usually 12 months. This statement is also known as the Profit and Loss Statement. It details sources of income and expenditure incurred in producing that income to establish the business’ net profit or loss. If expenses are more than income the business result is a loss.

See the Resources page for an example of a Statement of Financial Performance/Profit and Loss (see annotations g – n).

The Statement of Financial Position was previously known as the Balance Sheet. It is a record of the financial standing of a business and it lists the assets, liabilities and proprietorship of a business at a particular date (often the end of the financial year). It reflects a business’ financial health.

A Statement of Financial Position enables one to:

• quickly see the financial strengths and capabilities of the business
• review the level of assets, debt and working capital of the business
• compare the increase or decrease in value of the business over time
• see the relative liquidity of the business, and
• analyse the business’ ability to pay all short-term and long-term debts as they come due

A Statement of Financial Position has 3 key sections:

• Assets
• Liabilities, and
• Owner’s Equity

Assets

Assets are sub-divided into:

• current (short-term) assets; current assets are business resources that can be easily turned into cash and are readily available to pay the liabilities of the business. For example, cash at bank, inventory or stock and accounts receivable
• non-current (long-term) assets; non-current assets are business resources that are not so easy to convert into cash. For example, machinery, motor vehicles, land and buildings

Liabilities

Liabilities are also sub-divided into current and non-current:

• current liabilities are business debts that are due and payable in the short term. For example, accounts payable, accrued liabilities
• non-current liabilities are business debts that are not expected to be paid in full in the short term. For example, mortgages, unsecured loans from business owner’s shareholders, partner's advances or loans

Owner's Equity

The Statement of Financial Position is a major source of information to determine the owners’ assets within the business. It is the amount the owners of the business would receive if they sold all the business assets and repaid all the business liabilities.

Retained earnings, dividends paid, distributions, and owners’ drawings are recorded in this statement. The information may be useful in developing any challenges to a customer’s actual financial position.

Note: if a customer has any involvement with a business structure, the most recent Statement of Financial Position will help determine the customer’s assessable assets within the business.

Retained earnings, dividends paid, distributions, and owners’ drawings are recorded in this statement. The information may be useful in developing any challenges to a customer’s actual financial position.

See the Resources page for a sample statement of financial position.

You may see ‘Personal services attributed income’ on a customer’s personal tax return.

Personal services income is income which is mainly a reward for a person’s efforts or skills, but paid to a personal services entity (a company, partnership or trust).

This type of income is included in the customer’s personal assessable income for tax purposes, and may be included in their salary and wage payments from the business. In these cases, when calculating the business income available for a customer to make child support payments, do not double count this type of income.