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8.6 Self-employment

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Last amended 
15 August 2017

The method to calculate earnings from self-employment is used for both calculations of Normal Weekly Earnings/Normal Earnings and AE (actual earnings/able to earn). There are multiple methods to calculate earnings from self-employment and discretion should be used to pick the method that best represents the person’s earnings.  The same method should be used to calculate both the person’s NE/NWE (see chapter 3) and the person’s AE.

The method used to assess a person's AE derived from self-employment will vary depending on the individual circumstances of each case. It is important to look beyond equating the net profit of a business with a person’s AE. Similarly, the income that a person has allocated themselves as a salary from their business may not be a reflection of what they are actually earning (or able to earn).

There are 2 established methods to calculate AE from self-employment:

  1. examining the net and gross earnings from business and taxation records; and/or
  2. establishing the cost of employing a person to undertake similar work using award rates of pay (i.e. establishing the cost of replacement labour).

If a person’s taxation or accounting records are too complex to establish an AE without forensic examination, or the established AE does not represent a reasonable wage for that employment, delegates should utilise the AE calculation method based on the cost of replacement labour.

Self-employment does not encompass hobby activities yielding a small income. The distinction between self-employment and hobby activities is drawn on the facts of the case.

8.6.1 AE based on an examination of business earnings

In some situations, the gross earnings of the person’s business can be used to establish their AE. When examining the gross earnings it is necessary to exclude expenses that are clearly related to the running of the business, such as the purchase of stock, staff wages or rent on premises used exclusively for the purpose of running a business.  As a general rule, only expenses directly relating to the normal operation of the business should be excluded when considering the gross earnings of the business.

Delegates may also refer to the Compensation and Support Policy library and specifically sections 10.3.2 General provisions for sole traders and partnerships and; 10.3.2 Assessment of income for sole traders and partnerships for further guidance when assessing earnings from self-employment. References in these sections describing allowable deductions from sole traders and partnerships are written specifically for income support delegates assessing business income under the Veterans' Entitlements Act 1986 and should not be used. It is also important to note that this policy is for guidance only, and is not binding under the SRCA or MRCA.

The examination of business earnings may be more appropriate to a small business with a small number of staff and few expenses.

8.6.2 Cost of replacement labour

It may be appropriate to consider the likely cost of employing another person to provide the same services as an indication of what the person would reasonably have derived as personal income from the business.  Delegates should refer to the appropriate award rate of pay for a person doing similar work where the earnings from self-employment are less than the award rate of pay.  Information about award rates of pay can be obtained from the relevant State of Territory Department of Industrial Relations website or on the Fair Work Commission website.

8.6.3 Case Law

The principle that AE should not be equated with net profit was reflected in the High Court decision in J & H Timbers Pty Ltd v Nelson [1972] and the more recent Federal court decision in Comcare v Davies [2008].

In Comcare v Davies the applicant ran her own business in which expenditure exceeded total income such that there was a net loss.  The Federal Court held that AE should not be confused with the ability to run a profitable business.

In the AAT cases of Hooper v Comcare [2001], Robinson v Military Rehabilitation and Compensation Commission [2008] and Warnock v Comcare [2008], the Tribunal observed that in cases of self-employment, actual net profit or wages drawn by the owner of a business may not be good indicators of AE.  This is because expenses debited to the accounts may be inconsistently applied, not in accordance with good accounting practice or because actual net profit may conceal expenditure which might not otherwise be regarded as business expenditure.

The High Court decision in Cage Developments Pty Ltd v Schubert [1983] demonstrated that in some circumstances actual net earnings might reflect AE.  In that case the High Court also considered that one way to determine AE would be to consider the wages one may have to pay another person to provide the same services.

8.6.3.1 Examples

Example 1 – Calculating AE using gross earnings and business costs

Able Seaman (AB) “Y” was medically discharged and since that time he established a business performing gardening and general household maintenance.

He has accepted claims for his left and right knees under the SRCA and continues to receive incapacity payments.  He works full-time hours.  His NWE as an ex-member of the RAN is $1,100.50 per week.

Financial statements from AB “Y” show that his business averages gross earnings of approximately $2,850.00 per week.  From this amount, he draws $600.00 as a personal income and claims expenses relating to tools, parts and equipment of $1,500.00 per week and motor vehicle expenses of $750.00 per week.

Due to the high amount of expenditure claimed, it would be appropriate for the delegate to look beyond the net earnings and consider the gross earnings of the business.  In doing so, it would be appropriate for the delegate to contact the person to request written documentation (by way of receipts, copies of relevant Business Activity Statements, etc) to support the amount claimed as expenditure.  It would then be open to the delegate to determine the appropriate rate of the person's actual earnings by reference to the gross earnings of the business and any direct business costs.

Example 2 – Calculating AE based on award rates of pay

Sergeant (SGT) “Z” is a former member who sustained an injury and is now receiving incapacity payments.

SGT “Z” started his own plumbing business.  He also employed a trade qualified plumber to assist him on a casual basis.

Advice has been received from SGT “Z” that the gross earnings of his business is $2,450.00 per week.   From this figure, an amount of $1,600.00 is listed as expenditure relating to the purchase of equipment and tools and an average of $350.00 is paid for his casual assistant (15 hours per week at the industry rate of $23.00 per hour).  SGT “Z” only lists his personal net income as $500.00 per week.  However, the evidence points to this figure being linked to the financial profitability of the business and not determined by any medical restriction imposed on him by his injury.

For the purpose of determining an appropriate AE figure when calculating SGT “Z's” incapacity entitlements, it may be necessary for the delegate to investigate what the base industry rate of pay would be for someone performing a similar type of work and multiply the rate by 38 hours.  In this particular case, the standard hourly rate for a full-time trade qualified plumber is $19.36.  His AE would therefore be 38 multiplied by $19.36 which equals $735.68 per week.  This approach is consistent with the AAT, Federal Court and High Court decisions outlined above.