You are here

Assessment of Income for Sole Traders and Partnerships

Document

Last amended: 4 February 2010

This topic provides information on the following items that are common to both sole traders and partnerships.

  •       issues which affect income, and
  •       value of trading stock on hand.
Items which are income for assessment purposes

    

The following table describes items which are, and are not, income for assessment of both sole traders and partnerships.

If...

then...

goods are taken from business stock for personal use, and not paid for

the value of the goods is added to gross sales to determine the income.

goods are received in return for services

the value of the goods is income.

wages, salary or dividends are paid to a sole trader/partner from a business

they are income.

drawings are made from a sole trader owned or partnership business

they are not income.

The income is the profit of the business, regardless of the level of any capital drawings from it.    

Value of trading stock on hand

    

The following table describes the treatment of the value of trading stock on hand for income assessment purposes.

If the value of all trading stock on hand at the end of the year...

then the excess is...

is more than stock on hand at the start of the year

added to the pensioner's business profit for that year.

is less than stock on hand at the start of the year

deducted from the pensioner's business profit for that year.

Generally, these adjustments will have already been made to the profit and loss statement.

Annual Reviews and Date of Effect

Income from sole traders and partnerships is usually assessed annually, when income tax returns or completed financial statements are provided to the Department, with the date of effect of a pension reassessment based on the date this evidence of earnings is received.     

Notification obligations still apply where income is assessed annually

The notification obligations still apply to pensioners who are subject to an annual review.  If a discernable change to the pensioner's rate of income or asset value occurs during the review year, that change is a notifiable event and the date of effect of the pension reassessment will be based on that event, and whether it was notified within the allowed notification period.  For example, the acquisition of a property asset by a pensioner's trust during the review year will be known to the pensioner, and is a notifiable event.

Date of the event or change in circumstances

Where there is no discernable change to the entity's income or asset value during the year, there is no “specified event” on which a date of effect decision can be based.  For this reason, the date on which the income tax return or financial statements are finalised and provided to the Department at the end of the review year may be regarded as the notifiable event, for date of effect purposes.  For example, a small variation in income received by the entity over the course of the year may not be known until the entity is eventually audited, and may not be able to be attributed to a specified event during the course of the year.


For the purposes of income and assets assessment, a sole trader is a business owned by one person.



The business:

  • 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.

For the purposes of income and assets assessment, a partnership is the relationship which exists between people carrying on business in common, with a view to making a profit. A partnership agreement may be oral OR written. The business may be run:

  •       in the owners' name(s), or
  •       under a registered business name.

The business is not a separate legal entity, which means that although the partnership lodges a tax return, the profit or income is assessable in the hands of the individual partners.

Each partner:

  •       owns an agreed portion of the business assets,
  •       receives an agreed portion of the profits, and
  •       is 'jointly and severally' liable for all business debts.

According to section 5H of the VEA income is:

  • an amount earned, derived or received by a person for the person's own use or benefit;
  • a periodical payment by way of gift or allowance; or
  • a periodical benefit by way of gift or allowance.

 

 

Drawings are the withdrawals of funds from a business by the proprietor during the financial year, and represent either a withdrawal of capital previously advanced to the business, or an advance on profits to be earned by the business.

Profit, for a business, is the amount of earnings in excess of its expenses over 12 months.