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Assessment of Assets for Sole Traders
Last updated:17 March 2011
This topic provides information on the following:
- assessable assets of sole traders,
- verification of asset value, and
- summary of assessable assets for pensions.
Assessable assets for all businesses
The value of the net assets of a business run by a sole trader are assessable if the owner or their partner is a pensioner. The amount to be taken into account for assets test purposes is the current market value of the assets, less the 'business' liabilities listed on the financial statements. If the pensioner is involved in primary production activities, section 52CA of the VEA rules apply. This section allows for primary producers to offset total debts against the total assets of the business.
Verification of asset value
Each item on the balance sheet must be individually examined and a judgement made about whether the asset value recorded is reasonable. In most cases, the asset value recorded on the balance sheet is accepted, particularly for assets such as:
- bank accounts,
- petty cash,
- pre-paid expenses,
- debts owing, and
- plant and equipment.
However, if necessary, the balance sheet must be adjusted and the value of assets owned by the business reassessed to reflect current market value. Using conventional accounting methods, fixed assets are recorded at historical cost, usually the purchase price less depreciation.
Valuation of real estate belonging to sole traders
The following table describes the requirements for valuation of real estate belonging to a sole trader.
If the real estate...
is recorded on the balance sheet,
an Australian Valuation Office (AVO) valuation of the property may be necessary.
is a farm,
an AVO valuation of livestock, plant and equipment, as well as the property itself, excluding the principal home and any exempt land, may be necessary.
the assessable value of the real estate is the value of the portion of the principal home and land that is used for commercial purposes. Any land in excess of the two hectares of adjacent land is assessable. An AVO valuation may be necessary.
an AVO valuation may be necessary if the property includes titles other than the principal home title.
An asset means any property, including property outside Australia.
For the purposes of income and assets assessment, a sole trader is a business owned by one person.
- is not a separate legal entity from the owner,
- is not a separate accounting entity, which means that sole traders need ONLY lodge a personal tax return,
- may be run in the owner's name OR under a registered business name, and
- may or may not have employees.
The owner is:
- liable for all the debts of the business, and
- entitled to all the profits of the business.
The market value of an asset is the point at which a willing purchaser and a willing, but not anxious vendor, would reach agreement.
The market value of an asset is only decreased by the value of an encumbrance secured against it. The market value of an asset is not reduced by any costs which may be incurred if the asset was to be sold.
The Australian Valuation Office is a business line within the Australian Taxation Office. It provides Commonwealth Government departments, including DVA, with property valuations for assets test assessment purposes. Some of the types of property commonly valued include:
- real estate;
- commercial leaseholds; and
- taxi plates and licences.
The principal home has the meaning given by subsection 5LA(1) of the VEA and subsection 5LA(2) of the VEA. The principal home of a person is generally the place in which they reside. In certain circumstances, however, the principal home of a person can be the place in which they formerly resided. The following property is regarded as part of the principal home.
- the residence itself (e.g. house, flat, caravan),
- permanent fixtures (e.g. stoves, built-in heaters, dish-washers, light fittings and affixed carpets),
- [glossary:curtilage:DEF/Curtilage] (i.e. two hectares or less of private land around the home where the private land use test has been satisfied, or all land held on the same title as the person's principal home where the extended land use test has been satisfied), or
- any garage, shed, tennis court or swimming pool used primarily for private purposes provided it is on the same title as the principal home.
Private land is land of [glossary:two hectares:DEF/Two Hectares] or less, which is:
- adjacent to the [glossary:principal home:DEF/Principal home], and
- meets the [glossary:private land use test:DEF/Private land use test] as described in [glossary:subsection 5LA(3):] of the VEA.