Summary of Assessable Assets of Sole Traders and Partnerships

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.