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Summary of Assessable Assets of Sole Traders and Partnerships

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Last amended 
25 June 2015

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This topic provides a summary of assessable assets for pensions that relate to sole traders and partnerships.

Summary table - assessable assets for pensions

The following table summarises the assessable assets, and their treatment, from a sole trader's or a partnership's business for pensioners.    

 

Asset

Treatment

Principal home.

Remove it from the balance sheet along with any associated liability, after apportioning where necessary.

Portion of home used exclusively for business purposes.

Include it as part of the assessable asset value of the business.

Note: If the business is associated with satisfying the criteria for the effective land use test, then the part of the home used to run that business will not be assessed.

Petty cash and financial investments used as part of the ongoing operations of the business listed as business assets.

Treat them as the assets of the business and include them when calculating the overall value of the business.

Financial investments not used as part of the operations of the business.

Assess them as personal financial assets of the pensioner. Take them out of the business financial statements.

Goodwill.

Include it when valuing a business. In most cases  the value shown in the balance sheet can be used. Reassess this value if the pensioner provides evidence of a different value, or on the sale or transfer of the business where an updated market valuation should be obtained.

Advice from the fomer Australian Valuation Office regarding the valuation of goodwill is - .

“Goodwill” on the balance sheet usually refers to the goodwill purchased when the business is acquired, and is the difference between this historic purchase price and the value of the business' identifiable assets.

Balance sheets of small businesses are usually prepared on a historical cost basis, so the net assets or equity value may not correlate with the current market value.

The market value of a business' goodwill is the residual amount after deducting the market value of the identifiable assets from the market value of the business.

The market value of the business (e.g. in the absence of an open sale, such as on transfer to a family member) can be determined by examining the likely future cash flow. Future cash flow can be estimated by examining the business' recent performance (preferably over the last three years) as summarised in the profit and loss statement and balance sheets. Income and expenditure needs to be normalised by removing one-off or abnormal revenue and costs. Further amendment may be necessary when valuing owner-operated businesses as these often do not include appropriate wages for themselves or family members.

For a small business, the market value (including goodwill) is usually determined by applying an appropriate multiple to the normalised earnings. The market value of the goodwill can then be determined by deducting the market value of the identifiable assets from the market value of the business.

 

Where a small business is sold on the open market involving a transaction between a willing but not anxious seller and buyer, at arms length to each other, the transaction value can be accepted as the current market value.  Where a small business is transferred or gifted to a family member or another person, advice of the current market value (including goodwill) based on the above approach should be sought from a professional business valuer.

The cost of full business valuations involving a detailed examination of financial statements, will generally exceed the usual cost of desktop valuations done by a property valuer. Accordingly, appropriate management approval should be obtained before seeking a business valuation.

Amortisation

Amortisation is a balance sheet entry which acts to reduce the book value of an intangible asset (such as a patent, copyright or goodwill) in the same way that depreciation reduces the book value of a real asset such as plant or property over time.

Amortisation is not accepted as a reduction against the business income.     

 

However, an amortisation entry can be accepted as reducing asset value, where there is corresponding evidence which satisfies the delegate that the value of the intangible asset has declined.

As an example, a goodwill amount which historically reflects the component of the market value of the business, over and above the net asset value of the business, may be reduced by an amortisation entry where the owner or accountant believes that the market value of the business has declined.

Where there is supportive evidence that the market value has declined, such as a reduction in trade or profitability, the amortisation amount can be accepted.  Where there is no supportive evidence, a valuation from a professional business valuer may be needed.

As with goodwill valuations (above), the verification of the reasonableness of amortisation of intangible asset value may require a detailed analysis of the business' financial statements, trading performance and profitability over time.  The cost of obtaining a business valuation will generally exceed the usual cost of desktop valuations done by a property valuer.  Accordingly, appropriate management approval should be obtained before seeking a business valuation.



Date of effect

The date of effect policy for sole trader and partnership asset value, where annual reviews are undertaken following the receipt of an income tax return or completed financial statements.     

 

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.



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.

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.

 

 

Making effective use of land means that if the land has a potential commercial use (e.g. as a farm), the person must be making use of the land in order to generate an income.

According to section 5J of the VEA, a financial investment means:

     but does not include an investment in an FHSA (within the meaning of the First Home Saver Accounts Act 2008) or a designated NDIS amount.