LEX: 34952
Calculating financial capacity for business owners 277-
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Home > Separated parents > Collection (CS) > Calculating financial capacity for business owners (CS)
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This procedure may not be printed, broadcast or released external y. For contact details and
more information, s
ee Information Publication Scheme.
This page outlines the process for calculating the financial capacity of a customer who is a
business owner
On this Page:
Calculating financial capacity for a customer who is linked to or associated with a business
owner
Business tax information
Business structure analysis
Financial statement analysis
Attributing profit to a customer
Funds received from a business
Depreciation
Calculating financial capacity for a customer who is linked to or
associated with a business owner
Calculation of financial capacity
Table 1: This table details the process for calculating the financial capacity of a customer who
is linked to or associated with a business.
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Step
Action
1
Calculate financial capacity - Read more [1]
A customer’s income and financial resources may not be accurately reflected in
the Child Support assessment if they are linked to or associated with a business.
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LEX: 34952
The financial resources may provide the customer with a greater capacity to
financial y contribute to the support of the child(ren). See the
Child Support
Guide 2.6.14: Reason 8 - a parent's income property, financial resources, or
earning capacity
A customer 'linked to' a business is involved in the ownership of the business. A
customer 'associated with' a business is involved beyond that of an ordinary
employee but is not legally involved in the ownership of the business.
Determining a customer’s income and financial resources may include:
• determining how they generate an income
• investigating any businesses they are linked to or associated with,
including:
o
reviewing the financial statements of the businesses
o
determining any personal benefits or financial resources the
customer may receive from the businesses
Note: the length and detail of the investigation depends on the individual
circumstances of the customer and will vary from case to case. Consider making
a decision rather than extending the investigation if a reasonable income for the
customer, which is reflective of the financial resources available to them, can be
determined.
2
Investigate financial circumstances - Read more [2]
Conduct an analysis of the customer’s financial circumstances including any
businesses they are linked to or associated with. Analysis may include:
• reviewing tax information of the customer and businesses, see
Business
tax information
• reviewing the business structures to determine if they are providing a
personal or financial benefit to the customer, see
Business structure
analysis
• reviewing the financial statements to determine if any business income,
expenses or assets provide the customer with a financial resource, see
Financial statement analysis. Note: requesting at least three
consecutive years of financial statements will assist in determining a
more reliable representation of the financial resources available to the
customer
• determining the profit to be attributed to the customer. see
Attributing
profit to a customer
• determining if the customer has received any funds from a businesses,
s
ee Funds received from a business
• determining if any depreciation expenses represent a financial resource
for the customer, see
Depreciation
3
Determine if profit or funds received should be considered - Read more [3]
When the financial analysis is completed, determine if profit attributed to the
customer or funds received by the customer from a business should be
considered as the customer’s financial resource.
• if the customer has received funds significantly more than the profit
attributed to them, consider using the funds received as the financial
resource for the customer:
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LEX: 34952
o
depreciation expense or other non-cash expenses should not also
be considered as a financial resource
o
if the funds received were from retained earnings or undrawn profits
from prior years, consider if the assessment has been subject to a
COA, court varied assessment or an agreement, in which these
funds have already been considered. If the funds have already been
considered it may not be appropriate to consider the funds received
as a financial resource.
• if the customer has received funds less than or similar to the profit
attributed to them, consider using the profit
The income and financial resources to be attributed depends on the
circumstances of the customer and will vary from case to case. A decision can
vary from the above steps if the circumstances of the case support this.
• Only the profit attributed to the customer or funds received should be
considered as a financial resource of the customer. Including a
combination of both may result in double counting the financial
resources of the customer.
4
Determine any other financial resources - Read more [4]
Determine if the customer receives any other financial resources from businesses
they are linked to or associated with. These include but are not limited to:
• depreciation expenses which are available to be taken by the customer.
Note: if the funds received are to be considered as a financial resource
of the customer, depreciation expense or other non-cash expenses
should not also be considered as a financial resource
• business expenses which provide the customer with a financial resource
or personal benefit, s
ee Step 4 in Financial statement analysis
• any use of business assets that provide the customer with a personal
benefit
5
Calculate the income and financial resource - Read more [5]
After analysis and consideration of all income and financial resources available to
the customer from businesses they are linked to or associated with, the financial
resources of the customer is either:
• the profit attributed to the customer plus any other financial resources
available to the customer, including financial resources available
through non-cash expenses, or
• the funds received by the customer plus any other financial resources
available to the customer, excluding financial resources available
through non-cash expenses.
Business tax information
Analysing business tax information
Table 2: This table provides details to assist with analysing business tax information to
determine a customer's financial resources.
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LEX: 34952
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Step
Action
1
Business tax information - Read more [6]
Reviewing information from the Australian Taxation Office (ATO) may assist in
determining the financial resources available to a customer.
Tax information which should be considered includes:
• tax returns,
go to Step 2
• Special Taxation rules,
go to Step 3
• Business Activity Statements,
go to Step 4
2
Tax returns - Read more [7]
A business tax return may provide information also found in the financial
statements for a business, such as:
• income and expenses
• depreciation expenses
• total assets and liabilities
• statement of distributions for partnerships and trusts
See th
e ATO website for more information.
This information can be used along with the financial statements or other
information obtained during the investigation to determine the financial resources
of a customer.
S
ee Business tax returns in Resources for details of information located in a
business tax return.
3
Special Taxation Rules - Read more [8]
The ATO may introduce special rules, for certain periods of time, to support
government initiatives, such as:
• Accelerated depreciation for certain assets purchased in specific periods
• Small Business tax offsets
• Entrepreneur’s tax offset (applied to income years up to 2011-12)
The rules may reduce the customer's income however not the financial resources
available to them. If any special taxation rules are identified see the
ATO website
for more information. Consider any Special Taxation rules when determining the
financial resources of a customer.
4
Business Activity Statements - Read more [9]
Businesses registered for Goods and Services Tax (GST) must lodge Business
Activity Statements (BAS) with the ATO either monthly, quarterly or annually.
See th
e ATO website for more information.
The BAS is used to advise the ATO of activities such as:
• GST payments,
go to Step 5
• Pay as You Go (PAYG) income tax instalments,
go to Step 6
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• PAYG tax withheld,
go to Step 6
5
Goods and Services Tax (GST) - Read more [10]
GST is a tax paid on most goods and services purchased which is collected by the
business that provides the goods or services. Certain goods and services are GST
free, for example most basic food, some education courses, some medical, health
and care services. GST paid by a registered business in the purchase of goods
and services is claimable and offsets any GST payment from GST collected.
A business must register for GST if:
• the business turnover exceeds the GST turnover limit
• it provides taxi travel as part of the business, regardless of the GST
turnover
See th
e ATO website for more information
A GST registered business will report their:
• total sales
• export sales
• GST–free sales
• capital purchases
• non-capital purchases for the BAS period
• total salary, wages and other payments
6
PAYG income tax instalments or PAYG tax withheld - Read more [11]
The BAS includes:
• PAYG income tax instalments, which are instalments the business pays
towards their own income tax obligations
• PAYG tax withheld, which are tax payments withheld from payments
made by the business to others. The PAYG tax withheld reported in the
BAS may include total salary, wages and other payments and the
amounts withheld from the payments. The section includes amounts
withheld from payments to other individuals or entities where no ABN is
quoted. See th
e ATO website for more information
7
Using the BAS - Read more [12]
The BAS can be used to:
• compare annual turnover in past income tax returns and/or financial
statements of the business with turnover of a more current period
reported in the BAS
• check the financial performance of a business if tax returns have not been
lodged
• determine wages paid to employees
• obtain up to date information on the performance of the business
The BAS may not include:
• all business income such as interest received, dividends received, trust or
partnership distributions and other income that does not attract GST
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LEX: 34952
• all overseas transactions
• all business expenses as they do not all contain GST such as
superannuation expense, interest expense and depreciation expense
Note: a business may use the cash based accounting method for BAS and the
accruals based method for its financial statements. This can result in a difference
between the information reported in the BAS and the financial statements for the
same period. Consider which accounting method is used to ensure income and or
expenses are not omitted or double counted when calculating the financial
resources of the customer.
To use the BAS to assist in calculating or verifying the financial resources of a
customer:
• determine the performance of the business from the information in the
BAS using the BAS analyser in the
Capacity To Pay (CTP) tool suite
macro.
Note: sales may be reported in the BAS with GST excluded
• compare the information with information from the business tax returns
or financial statements such as:
o
most recent turnover or sales with past turnover or sales
o
most recent expenditure with past expenditure.
Note: the BAS may
not include al of the business expenses
• if there are significant variances between the information, investigate the
reason for the variance to determine which source of information
should be used in calculating the financial resources of the customer
BAS information should only be used as the sole source of information if no other
reliable information such as up to date tax returns or financial statements are
available.
Business structure analysis
Analysing business structures
Table 3: This table provides details to assist with analysing business structures to determine
a customer's financial resources.
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Step
Action
1
Business structure analysis - Read more [13]
Business structures can provide an avenue for customers to minimise their
taxable income. Examples of how income financial resources may be understated
for a customer are dependent on the type of business structure:
• Sole trader,
go to Step 2
• Partnership,
go to Step 3
• Companies,
go to Step 4
• Trusts,
go to Step 5
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LEX: 34952
For information about the types of business structures see
Business Structures
and Financial Statements for Child Support debt recovery.
2
Sole Trader - Read more [14]
A sole trader’s income and financial resources can be understated if payments
are made to or on behalf of a related person, for example a spouse or entity,
such as:
• wages
• sub-contractor amounts
• consulting fees
• private expenses paid via the business for a related person
• an amount recorded as a loan from the business to a related party
An individual operating as a sole trader is entitled to the profit of the business.
The profit or loss made by the sole trader business must be reported in the
individual’s income tax return.
A customer trading as a sole trader may have greater income and financial
resources than that reflected in their taxable income due to:
• private use of a business asset such as a motor vehicle
• business paying for private or living expenses
• making payments to other persons disproportionate to their contribution
to the business including paying more than the compulsory
superannuation contribution. See
Step 5 in Attributing profit to a
customer
• drawings taken from the business, see
Funds received from a business
• reporting a profitable business as a hobby
• reporting a loss making hobby as a business
• if they are an employee earning a salary or wage, using a loss making
business to minimise their taxable income
3
Partnership - Read more [15]
A customer linked or associated with a partnership can understate their income
and financial resources if payments are made to or on behalf of a related person,
for example a spouse or entity, such as:
• a partnership distribution
• wages
• sub-contractor amounts
• consulting fees
• private expenses paid via the business for a related person
• an amount recorded as a loan from the business to a related party
The partners are entitled to receive the profit of the partnership with the amount
dependent on the ‘Partnership Agreement’. Each partner is required to report
their own partnership distribution in their individual income tax return.
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LEX: 34952
A customer with links to a business operated through a partnership may have
greater income and financial resources than that reflected in their taxable income
where:
• the distribution of the partnership’s net profit does not fairly represent
each partners contribution of capital, assets, expertise and/or skills to
the business, s
ee Step 5 in Attributing profit to a customer
• drawings are taken from the business, s
ee Funds received from a
business
• the business lists spouses or other associated persons as employees but
they do not make any actual contribution to the business or receive
payments that do not reflect their contribution to the business see
Step
5 in Attributing profit to a customer
• they have private use of partnership’s assets
• the partnership may be paying for the customer’s private expenses
4
Company Income - Read more [16]
A customer linked or associated with a company can understate their income and
financial resources if payments are made to or on behalf of a related person, for
example a spouse or entity, such as:
• dividends
• wages
• sub-contractor amounts
• consulting fees
• private expenses paid via the business for a related person
• an amount recorded as a loan from the business to the related party
The shareholders of the company are entitled to receive the profit of a company
which is paid as a dividend. The level of profit distributed to each shareholder will
depend on the class of share and the individual’s ratio of the overal
shareholding, for example if a shareholder holds one of three ordinary class
shares in the company they would ordinarily be entitled to receive a third of the
total dividend payments. Each shareholder is required to report the dividend they
receive in their individual income tax return.
A customer with links to a business operated through a company may have
greater income and financial resources than that reflected in their taxable income
due to:
• retaining profits in the company rather than distributing it in the form of
salary and wages, dividends and/or director’s fees, see
Attributing
profit to a customer
• distributing profits by loaning money to shareholders or directors, see
Funds received from a business
• the al ocation or ownership of shares so some shareholders receive a
greater distribution of profits disproportionate with the labour and
assets they contribute to the business, see
Step 5 in Attributing profit
to a customer
• selling or transferring shares to another person for less than their
commercial value for example, shares being transferred to new spouse
at a nominal price that presents the spouse as the sole or major
shareholder
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LEX: 34952
• the business paying for the personal expenses of the customer,
shareholders, directors or related parties for example, providing a
motor vehicle to their spouse or paying the customer's rent
• paying salary or wages to associated persons disproportionate with the
labour or assets they contribute to the business, see
Step 5 in
Attributing profit to a customer
• paying more than the required compulsory superannuation amount for an
employee or related party
5
Trust Income - Read more [17]
A customer linked or associated with a trust can understate their income and
financial resources if payments are made to or on behalf of a related person, for
example a spouse or entity, such as:
• distributions
• wages
• sub-contractor amounts
• consulting fees
• private expenses paid via the business for a related person
• an amount recorded as a loan from the business to the related party
The beneficiaries of a trust are entitled to receive the profit of the trust. The
Trustee must distribute profits in accordance with the trust deed to the
beneficiaries. A beneficiary of a trust is required to report the trust distribution in
their income tax return.
A customer with links to a trust may have greater income and financial resources
than that reflected in their taxable income due to:
• lending money to beneficiaries or related parties, s
ee Funds received from
a business
• distributing profits to beneficiaries in a manner disproportionate to the
true value of their real connection or involvement in the business for
example, children, spouse, step children or other entities made
beneficiaries, s
ee Step 5 in Attributing profit to a customer
• the business paying for the personal expenses of the customer or related
parties for example, providing a motor vehicle to their spouse or paying
the customer's rent
• paying salary or wages to associated persons disproportionate with the
labour or assets they contribute to the business,see
Step 5 in
Attributing profit to a customer
• paying more than the required compulsory superannuation amount for an
employee or related party
Financial statement analysis
Analysing financial statements
Table 4: This table provides details to assist with analysing business financial statements to
determine a customer's financial resources.
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LEX: 34952
Step
Action
1
Financial statement analysis - Read more [18]
Financial statement analysis involves reviewing the financial statements of a
business to determine the income, property or financial resources of a customer.
For information on the:
• Profit and loss statement,
go to Step 2
• Balance sheet,
go to Step 6
2
Profit and Loss analysis - Read more [19]
A Profit and Loss (P&L) is a summary of income and expenditure over a period of
time. The P&L may have three components:
• the income,
go to Step 3 • the expenses,
go to Step 4
• the net profit or loss,
go to Step 5
• S
ee Business Structures and Financial Statements for Child Support debt
recovery.
3
Income component - Read more [20]
The income component may include the following:
•
Sales and general business income – usually comprises of the primary
income of the business
•
Gross Income & Cost of Goods Sold (COGS) – the direct costs
incurred to purchase or produce the items sold by a business (COGS)
may be deducted from the business’ total sales when calculating the
business’ Gross Income. The details of the costs of sales may be
included in a separate trading statement. Note: not all businesses wil
incur COGS. Generally businesses that manufacture or buy and resel a
product will incur COGS
•
Interest and dividend income – indicates if the business has or had an
investment such as term deposit, bank account, shares etc. that
produced income during the period reported on.
•
Gains on sales of assets – indicates if the business has made a profit
on the sale of a business asset.
•
Employee contributions to offset FBT– indicates if one or more
employees of the business received a non-monetary benefit from the
business. The amount they contribute is effectively a reimbursement to
the business for providing this benefit.
•
Grants, rebates and other benefits and subsidies – indicates if the
business has conducted activities or incurred expenditure that entitles
them to a grant, rebate or other form of benefit. An example is the
Diesel Fuel Rebate which indicates that the business operates motor
vehicles or machinery that used diesel fuel in connection with primary
production or other eligible business activities.
•
Other income – other income of the business that does not come under
one of the specific headings listed above.
Note: there is no requirement for a business to use these exact headings.
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LEX: 34952
Analysing the income component
The income component should correspond, but may not exactly match with
information in the:
• Business Activity Statement
• business tax return
• business bank statements of the business
The gross sales can provide an indication of the gross profit or turnover trend of
the business. The turnover trend can be an indicator if the business is growing or
contracting.
When reviewing the business income, consider:
• what has caused any significant income change (increase or decrease)
since the previous year
• if the costs of sales is a reasonable proportion of the gross turnover of the
business.
Note: the Australian Taxation Office (ATO) prepares
benchmarks for certain industries. See
ATO benchmarks
• the reasons why any increase/decrease in purchases of COGS does not
match increase/decrease in business activity. COGS, stock or materials
that do not indicate a reasonable proportion of the gross turnover or
increase/decrease in purchases that do not match increase/decrease in
business activity may indicate:
o
the customer is not declaring the whole business income or is
drawing a cash income
o
the business stock is being used by the customer for personal use
4
Expenses component - Read more [21]
Expenses have the effect of decreasing profit. Consideration must be given to
whether the expenses are reasonable and necessary in producing income.
Expenses vary from business to business and may include:
• accounting fees
• advertising
• bank charges
• bad debts
• depreciation
• employee amenities
• insurance
• interest
• motor vehicle
• stationery
• salary /wages
• subscriptions/seminars/travel
• superannuation
• telephone/internet
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• workcover
Note: there is no requirement for a business to use these exact expenses.
S 47E(d), S 37(2)(b)
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LEX: 34952
S 37(2)(b), S 47E(d)
5
Net Profit or Loss - Read more [22]
Net profit equals gross profits less expenses. How the net profit of a business is
distributed depends on the structure of the business:
• a sole trader business earns its net profits for its owner/operator. The net
profit or loss is attributable to the owner and will be included in their
tax return. A sole trader may offset a business loss against other
sources of income such as a salary or wage from an unrelated party
• a partnership distributes all its net profits and losses to its partners. It
does not pay tax itself; its partners do by including their share of the
partnership net profit as their income. Partnerships may distribute the
loss to each partner and the loss reported may reduce the taxable
income the partner receives from any other source of income
• a company pays company tax of 30% on its net profits. A company
cannot distribute a loss but may distribute profit as dividends or retain
the earnings. A company’s loss may offset past or future taxable
income
• a trust usually seeks to distribute al its net profits to beneficiaries. A trust
cannot distribute losses. A trust loss can only be carried forward to
offset against the trust’s income in future years
S
ee Attributing profit to a customer, for further information on how to attribute
net profits or losses.
6
Balance Sheet analysis - Read more [23]
The Balance Sheet provides a summary of the value of:
• assets,
go to Step 7 • liabilities,
go to Step 8
• owner’s equity,
go to Step 9
• at a particular point in time and is usually prepared on 30 June of each
year. The Balance Sheet represents the accumulated value of assets
and liabilities of the business since its inception.
7
Assets component - Read more [24]
The assets component should report all the assets owned by the business. The
fair value of these assets can indicate potential income, property or financial
resource of the customer.
The assets component may include:
• current assets
• non-current assets
Current Assets
Any asset expected to be used within one year is considered a current asset and
includes:
•
Cash at Bank – indicates how much cash the business has on the day
the Balance Sheet is generated. The bank statements of the business
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LEX: 34952
over a period of time may provide a better indication of the amount of
cash available to the business
•
Trade Debtors (Accounts Receivable) - money owed to the business
from past sales, that is made on credit
•
Other Debtors – money owed to the business from past non-trading
operations
•
Closing Stock on hand – indicates the value of stock, inventory or
products held by the business to be sold or made into saleable items
Non-Current Assets
Any asset expected to last for more than one year is considered a non-current
asset and includes:
•
Motor vehicles – indicates the motor vehicles owned or used in the
business. It is useful to establish how the vehicle is used in helping
produce business income
•
Office Equipment – office equipment can vary from new desks,
networked computers and equipment
•
Tools, Plant and Machinery and other assets – the nature and
condition of plant and machinery can vary widely. Verify the nature,
type, link to income production, cost and value of all plant and
equipment if there is any doubt about its relevance and fair value or
personal use
•
Property – property (homes, buildings and business premises) is usually
reported at cost price. Buildings may include any improvements and
revaluations or improvements and revaluation may be reported
separately. Buildings and improvements may be depreciated
•
Land - land may be reported in a separate account at its cost price or re-
valued amount. Land cannot be depreciated
•
Loan to Director/s or others - indicates a loan provided to a director,
associated party or unrelated entity
• Other assets – may include details of shares in other companies,
intangible assets such as goodwill, trademarks
When analysing the assets component consider:
• if the customer has derived a personal benefit from the assets, for
example:
o
has the business made a loan to the customer or an associated
person or entity, see
Funds received from a business
o
has the asset been used to provide the customer with a benefit, for
example the business owns a motor vehicle or real estate which is
available to the customer for private use. Note: the value of the
assets is not the value of benefit attributed to the customer. To
determine the value of the benefit quantify what the benefit would
cost the customer if it was not paid for by the business
• the level of cash reserves held by the business. If the cash reserves are in
excess of what could reasonably meet ongoing business needs, then it
is reasonable to assume the cash reserves may be available as an
additional financial resource for the owners of the business. An increase
in assets other than cash reserves may impact negatively on cash
available to the business which may impact on the ability of the owner
to distribute profits
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LEX: 34952
• accumulated depreciation, see
Depreciation
8
Liabilities component - Read more [25]
Liabilities are claims against the business’ assets and can include money the
business owes to others.
The liabilities component may include:
• current liabilities
• non-current liabilities
Current Liabilities
Any liability expected to be paid within one year is considered a current liability
and includes:
•
Trade Creditors (Accounts Payable) - money owed to suppliers for
materials or other items used in the production of the products sold by
the business
•
Other Creditors – money owed for goods and services purchased or
used by the business. An example might be electricity that is payable
quarterly, rates or telephone bills
•
Payroll Liabilities - may include other liabilities owed or accrued by the
business such as Superannuation Payable
•
GST and or Income Tax Liability – the net amount owed to the ATO
after calculating the net GST payable (may be an amount the ATO owes
the business if this item appears in parentheses), PAYG Payable and
other tax liabilities
Non-current Liabilities
Any liability expected to be paid over one or more years is considered a non-
current liability and includes:
•
Loans – may include loans that have a contract or other form of
agreement whereby repayment occurs over 12 months or longer. For
example, loans from financial institutions, loans from the owners,
directors, related or other unrelated parties to the business.
Note: the
amount may be owed to the business if this item appears in
parentheses
When analysing liabilities consider:
• if the customer derives any financial benefit such as loan repayments and
interest income from the business liabilities. If the business has made a
loan to the customer or the customer has made a loan to the business,
s
ee Funds received from a business
• if there has been any significant changes in the value of the liabilities that
would affect the ability of the business to distribute profits.
Note:
reductions (payments) in liabilities wil reduce cash reserves but not
the profitability of the business
9
Owner’s Equity - Read more [26]
Owners’ Equity reflects the financial value of the business for the owners and
shows:
• the contribution to a business by the owner, for example capital
introduced
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LEX: 34952
• profits paid to/or money drawn by owners of the business
• profits retained within the business, see
Attributing profit to a customer
• the equity held in the company by the owners
Owner’s Equity may include:
•
Opening balance - reports on the balance of owner’s equity at the start
of the period of the Balance Sheet
•
Current Year/Net profit – equals the net profit amount reported in the
P&L for the business (assuming it ends on the same day that is used for
the Balance sheet)
•
Drawings – drawings from the owner’s investment in a business reduce
an owner’s equity. Drawings is any benefit (such as funds or goods)
obtained from the business for the owners own personal use. Drawings
only apply to sole traders and partnerships. A sole trader or partnership
cannot employ themselves and therefore cannot pay wages. Drawings
are their way to obtain a benefit for the effort they apply to their
business
•
Retained Profits/Earnings – retained profits are the total of the net
profit made over the time the company has been in existence which
have not been distributed to the shareholders of the business through
the payment of dividends.
Note: retained profits most commonly
relates to businesses conducted in a company structure however it is
possible for businesses operated via a trust to also retain profits
•
Total Equity, Shareholder’s Equity or Closing Owner’s Equity – the
balance of Owner’s Equity as at the date referred to on the Balance
Sheet. The equity of a partnership and trust may be referred to as the
Partnership’s funds or Proprietors’ funds in the business tax return. The
equity of a company is referred to as the Shareholders’ funds in a
company tax return.
When analysing Owner’s Equity consider:
• if profits are being retained within the business
• payments to the owners of the business. The term used for payments to
the owner depends on the business structure:
o
Sole Trader – Drawings
o
Partnership – Drawings
o
Company – Dividend
o
Trust – Distribution
Attributing profit to a customer
Attribute business profit
Table 5: This table details the process for attributing profit to a customer.
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Action
1
Attributing Profit to a customer - Read more [27]
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LEX: 34952
A business may have net or retained profits which can provide a customer with
an income or financial resource.
To determine the profit that can be attributed to the customer as a financial
resource from a business they are linked to or associated with, determine:
• the net profit of the business,
go to Step 2
• the net or retained profit available to be drawn by the customer,
go to
Step 4
• if any net profit has been alienated,
go to Step 5
The profit that can be attributed to the customer is any net or retained profit that
is available to be drawn plus any profit that has been alienated.
To determine the net or retained profit, review the businesses:
• profit and loss statements, see
Financial statement analysis
• balance sheets
2
Determine net profit - Read more [28]
Determine the businesses the customer is linked to or associated with and if
these businesses have derived a net profit or have retained profits.
S 47E(d), S 37(2)(b)
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LEX: 34952
S 37(2)(b), S 47E(d)
3
Business losses - Read more [29]
If a business has reported a loss, consider:
• if the current taxable income of the customer or business has been
reduced by a loss from a previous year being carried forward
• multiple businesses or business activities in the same entity where a loss
from one business has reduced the net profit of another business
• if the loss has been generated due to a non-cash expense such as
S 37(2)(b), S 47E(d)
4
S 47E(d), S 37(2)(b)
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LEX: 34952
S 47E(d), S 37(2)(b)
5
S 37(2)(b), S 47E(d)
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LEX: 34952
S 47E(d), S 37(2)(b)
6
Customer involved in multiple businesses - Read more [32]
If a customer has links to more than one business apply the steps above 1 to 5 to
each business.
If the customer is associated to or linked with businesses that are interrelated
determine which business derives the initial or primary income. The business that
derives the initial or primary income should be the business considered first when
determining if any net or retained profit can be attributed to the customer. Then
consider the other businesses in an order which follows the flow of profit between
the entities. To determine the income to be attributed to the customer for each
business entity, do not consider any wages, income or distribution of profit paid
to the interrelated business to be alienation of income. Any income, wages or
distribution of profit paid to other entities or persons should be considered when
determining alienation of income.
Examples of businesses that may be considered inter-related include:
• transactions between related entities, for example Company A pays rent
to a Company B and the customer has a business relationship with both
companies
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LEX: 34952
• Company A may hold shares in Company B (identified on the Balance
Sheet or MASCOT search)
• an earthmoving company splits into two businesses, where one business
operates the machinery and hires equipment and the other business
undertakes the contract work
• a parent franchise company that is the sole shareholder in three
companies. The first company interacts with the franchisees, the
second company holds the property that the business operates from
and the third company operates its own franchise
S 37(2)(b), S 47E(d)
Funds received from a business
Determine if funds received from a business are providing a financial
resource
Table 6: This table provides details for determining if funds received from a business are
providing a financial resource to a customer.
Collapse table
Step
Action
1
Funds received from a business - Read more [33]
A customer may receive funds from a business they are linked or associated with,
these funds may include:
• drawings,
go to Step 2
• dividends,
go to Step 4
• loans,
go to Step 5
• trust distributions, go to Step 6
S 47E(d), S 37(2)(b)
2
Identify business drawings - Read more [34]
Only businesses operated as a partnership or sole trader can derive drawings
from a business. See
Business structure analysis.
To determine if a customer has received drawings and the amounts review the
business Balance Sheet. See Financial statement analysis.
S 37(2)(b), S 47E(d)
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LEX: 34952
S 37(2)(b), S 47E(d)
3
Grossing up drawings - Read more [35]
Drawings should be ‘grossed up’ if the funds withdrawn from the business provide
the customer with a taxation advantage.
For a customer to receive a taxation benefit through drawings, the value of the
drawings they receive must exceed the net profit attributed to the customer from
their business. See Attributing profit to a customer.
S 37(2)(b), S 47E(d)
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LEX: 34952
S 47E(d), S 37(2)(b)
4
Calculate dividends - Read more [36]
To determine if a customer has received a dividend:
• search the ATO systems, see the
External Searches Guide
• review the customers tax return
• review financial statements of any businesses the customer is linked to or
associated with
A dividend is a payment of a share of a company’s profits to its shareholders or
members. Unfranked dividends have had no Australian company tax paid on the
profits from which they are paid. Franked dividends are paid out of profits on
which the company has already paid tax and includes a franking credit. A
franking credit is a credit to a person owning shares for the tax that has already
been paid by the issuing company on their dividends.
A dividend may be paid to a customer because they:
• are investors who have shares in publicly listed companies such as BHP,
Telstra, Woolworths etc. If a customer has shares in a public company
no further action is required as any dividends will be reported in the
customer’s tax return
• have shares in a company where their relationship goes beyond that of
financial investment, that is they are involved in the operation and
management of the business. The dividend is reported in the
customer's tax return. If the dividend does not reflect the labour and
assets the customer contributed the business, see
Step 5 in Attributing
profit to a customer.
Note: if the dividend has been paid from profits
from a previous financial year, consider if the dividend has been
included in a previous decision
The value of the dividend is:
• if the dividend is unfranked, the total value of the dividends
• if the dividend is franked, the franked dividend plus the franking credit
Do not include dividend payments in the calculation of the customer's financial
resources if the net profit of the business is going to be included in the
calculation.
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LEX: 34952
5
Assess loans - Read more [37]
A customer may make a loan to a business. Repayments of the loan by the
business to a customer may represent a financial resource. If the business is
claiming an interest expense that relates to the loan the interest received by the
customer may be considered as a financial resource.
A business may lend money or assets to a customer. To determine if a customer
has received a loan from a business:
• review the financial statements of the business. A loan may be reported
on:
o
the Balance Sheet as an non-current asset showing the customer
owes an amount to the business
o
on the Profit and Loss Statement (P&L). The income component of
the P&L may show the business is receiving interest payments
which could indicate there is a loan between the business and the
customer or another party
• review the business bank statements. Money paid between the business
and the customer may indicate a loan arrangement
• verbal evidence from the customer or third party, such as their
accountant or the other party, may provide information which suggests
that there could be a loan arrangement in place
Note: loans refer to loans made by a business that the customer is linked to or
associated with, not a loan from a financial institution.
To determine if a loan is a financial resource of the customer consider:
• the purpose of the loan. For example if the business provided the
customer money for a specific purpose such as to purchase a home or
go on a holiday this may indicate there is a formal loan arrangement in
place. If money is drawn by the customer over a period of time this
may indicate the loan is being used by the customer to draw a wage
from the business
• the terms and repayments schedule, if can they can be obtained. A
written loan agreement specifying the interest rate and term of the
loan is more likely to be treated in the same manner as a loan from a
traditional lender which is not a financial resource
Note: under Division 7A of Part III of the Income Tax Assessment Act 1936
(Division 7A) loans to shareholders or their associates are, unless they come
within specified exclusions, treated as dividends. This may result in a customer
reporting the payment of a dividend on their tax return which may not be
reflected in the distribution of the net profits of the business for the same period.
Only the loan or dividend should be included in the calculation of the customer's
financial resources and consideration given to the period the dividend or loan
relates too. For further information about Division 7A see the ATO website.
If a loan is considered a financial resource, to determine the value of the
resource consider:
• the increase of the loan from the last financial year on the balance sheet,
or
• the amount of funds transferred from the business bank account to the
customer's bank account
6
Identify trust distributions - Read more [38]
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LEX: 34952
To determine if a customer is receiving trust distributions:
• review the financial statements of the business
• review the tax return of the business and customer
The value of the trust distributions is the amount reported on the customer tax
return or financial statements of the business.
Note: profit alienation may occur in the profit distribution of a trust, see
Step 5
in Attributing profit to a customer.
Depreciation
Determine if a business depreciation expense is providing a financial
resource
Table 7: This table provides details for determining if a business depreciation expense is
providing a financial resource to a customer.
Collapse table
Step
Action
1
Depreciation - Read more [39]
Depreciation is the process of a business expensing an asset that has a life span
of more than 12 months. The depreciation expense is a ‘paper based’ or ‘non-
cash’ expense. It has the effect of reducing the recorded value of an asset and
increasing the expenses of the business. As depreciation is a non-cash expense,
some businesses may use part of or all of the amount to reduce debt, purchase
assets or put aside part or all of the cash amount into a bank account to
purchase a replacement of the asset. See
Child Support Guide 2.6.14: Reason 8 -
a parent's income, property, financial resources, or earning capacity for more
information.
Consider if there are any current special taxation rules for depreciation, see
Step
3 in Business tax information.
2
Methods of calculating depreciation - Read more [40]
There are several methods for a business to calculate the depreciation expense:
• Straight line or Prime Cost method - the depreciation expense is the
acquisition cost spread equal y over the useful life of the asset
• Diminishing Balance or Diminishing Value method - this method assumes
that the decline in value each year is a fixed percentage of the
remaining value and produces a progressively smaller decline over time
• Simplified depreciation – smal businesses can immediately expense
assets costing less than $6,500. Assets costing more than $6,500 are
depreciated at the annual rate of 30% except in the first financial year
where they are depreciated at a rate of 15%, regardless of the date of
acquisition.
3
Considerations for determining if a depreciation expense is a financial
resource - Read more [41]
To determine if a depreciation expense is a financial resource:
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LEX: 34952
• Consider if the depreciation amount is being applied to other business
purposes. If so, it is not considered a financial resource of the
customer:
o
any amount of the depreciation expense al ocated to a capital
replacement fund or a depreciation fund or provisioned for asset
replacement purposes is not considered a financial resource of the
customer. This can be determined if:
the business’ Balance Sheet shows an ‘Asset’ account indicating
money has been put aside for the replacement of the business
assets or has resulted in a corresponding increase of the cash
assets
if the business has a separate business bank account where
they have put money aside to replace assets in the future
o
any amount of the depreciation expense applied to the reduction of
business debt may not be considered a financial resource. This can
be determined if the business’ Balance Sheet shows a reduction in
one or more of the liability balances
o
any amount of the depreciation expense used to purchase new
assets for the business is not considered a financial resource. This
can be determined if the business’ Balance Sheet shows an increase
in either the asset balances other than cash and bank assets or
receivables (Debtors). Compare any new assets to any new
liabilities reported on the balance sheet to determine if the assets
have been purchased through a loan.
• Determine if the depreciation is a reasonable representation of the actual
depreciation of the asset by considering:
o
if the asset is being depreciated over a reasonable period of time.
Use the Australian Taxation Office effective life table, from th
e ATO
website to test reasonableness. If the asset is not being depreciated
over a reasonable period of time, the excessive depreciation
expense can be considered a financial resource
o
if the depreciating asset is being used for private purposes. If so a
portion of depreciation expense that reflects the private use can be
considered a financial resource
o
if the depreciating asset was purchased by the business from the
customer or an associated person or entity, consider if the original
value of the asset is reasonable. An exaggerated purchase value
could lead to an increased depreciation claim. The excessive
depreciation expense can be considered a financial resource
4
Determine if a depreciation expense is a financial resource - Read more [42]
The depreciation amount can be considered a financial resource if:
• the depreciation amount is not being applied to other business purposes
or a depreciation fund,
go to Step 3 for more information
• the depreciation is not a reasonable representation of the actual
depreciation of the asset for business purposes,
go to Step 3 for more
information
S 37(2)(b), S 47E(d)
If the depreciation represents a financial resource and the business is operated:
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LEX: 34952
• as a sole trader, then all the depreciation wil be the financial resource of
the customer
• as a partnership, company or trust, then the depreciation should be split
at the same rate that any profit attributed to the customer from the
same business has been. If no profit has been attributed to the
customer then the financial resource should be split in accordance with
the customer's entitlement to receive the business net profit
27
Document Outline
