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Assessable Income from Private Companies pre 01/01/2002

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Basis of assessment of income

The assessment of income received by a person from a company is based on the type and current rate of income, if any. Income currently maintained should cease to be assessed, if:

  • the person advises that they are no longer receiving any income, or
  • a company in which a person has an interest is placed in liquidation.

In this case the shareholders effectively no longer have access to the income.

Assessment of profit from a private company

The profit of a private company is not the profit of the individual shareholders. The shareholders have no entitlement to any profits until a distribution is made by the directors, in the form of dividends. These dividends are assessable income, as described in the following table.

If a person is....

Then the

a pensioner

  • cash dividends paid to them are held as income for 12 months from the date distributed, and     
  • franking credits ,also known as imputation credits, paid with the dividend are income for the purpose of the pension income test.
Summary table - assessable income for pensions

The following table summarises the assessable income of a pensioner involved in a private company.

Type of income

Treatment

Company profit

Not assessed under any circumstances. There is no need to check for allowable deductions, and the company profit and loss statement is not adjusted. Income, apart from deeming, is only assessed when the company pays it to the person in some way.

Dividends on shares (including franking credits)

Assessed as their income for 12 months from the date of distribution.

Wages, salaries, stipends, honoraria and director's fees

Use the current rate payable from the latest personal income tax return. Assess the current rate received. Discontinue the assessment if salary or wages cease. If received as a lump sum, the normal lump sum provisions apply.

Royalties

Assess them as ordinary income.

Fees, Commissions

Assess the current rate payable and received from the latest personal income tax return, unless a more recent figure is available. If regular payments are received as an employee, assess the current gross income received and do not maintain when the payment ceases. If the payment is received from self-employment, assess the current net profit and maintain it on an annual basis.

Salary packaging and fringe benefits

Assess them as income. They are valuable consideration and the same as income from salary and wages. The non -grossed up amount of the fringe benefit is assessed.     

More ?

Policy Library – Overview of Fringe Benefits

Section 5.8.1

More ? (go back)

Loans by the person to the company

Assess them as a financial investment of the person. Assess income under the deeming provisions. Disregard any actual interest income received from the company. No deduction is allowed from the deemed income for investment expenses.     

Loans by a company to the person

Care should be taken that payments characterised as loans are not disguised distributions. If the person can provide evidence that borrowings are bona fide loans do not assess them as income.

Example: Bona fide loans will have a loan contract. If evidence is not provided, assess the distribution as income.     

Drawing back on loans made to a company

Do not assess it as income.

Actual interest received on loans made to the company by the person

Disregard. Assess them as financial investments. They are subject to the assessment of income under deeming provisions.

Deemed income on deprived assets

Deeming applies to the value of deprived assets.     

More ?

Overview of Deprivation Provisions

Section 9.6.1

More ? (go back)

Rent paid to the person

Assess as rental income. Allowable deductions reduce the assessable amount.


Company has the same meaning as in the Income Tax Assessment Act 1997.

 

 

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.

 

 

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

Company has the same meaning as in the Income Tax Assessment Act 1997.

 

 

The ordinary income of a person for a period means, as described in section 46 of VEA, the gross ordinary income from all sources for that period without any reduction, other than a reduction of business income.

 

 

An employee is someone who is:

  •       under a contract OF service to an employer, and
  •       a salary or wage earner, and
  •       subject to PAYE tax deductions.

Valuable consideration is defined as receipts not in money form but capable of being valued in money terms.