6.3.33 Self-employment

Last amended: 24 February 2011

Establishing the level of Normal Earnings (NE) or Actual Earnings (AE) in suitable employment for a self-employed client presents particular difficulties.

The method of assessing a person's AE derived from self-employment may vary depending on the individual circumstances of each case.

There is a considerable body of case law (discussed below) which demonstrates that in assessing a self-employed applicant's AE, it may be necessary for the decision maker to look beyond the net income that a person has allocated themselves as a salary from the business.  While in some cases a person's net income might accurately reflect their AE, it has been established that AE should not necessarily be equated with the profit or loss of a business.

In certain situations, it may be appropriate to consider the gross earnings of the business as a guide, as the figure provided to reflect a person's net income may conceal expenditure which might not otherwise be regarded as business expenditure.  When examining the gross earnings of a business 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 related to the normal operation of the business should be excluded when examining the gross earnings of the business.

Delegates may also refer to the Compensation and Support Policy library (which were developed for the purpose of assessing income for service pension eligibility) for further guidance when assessing earnings from self-employment. References 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 to guide decision making. It is also important to note that this advice is highlighted as guidance, it is not binding.    

In other cases 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 Australia website at http://www.fwa.gov.au/

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.

Summary

To summarise, in cases of self-employment delegates should consider each case on an individual basis including:

• examining net and gross earnings from business and taxation records; and/or
• ascertaining the cost of employing a person to undertake similar work by reference to award rates of pay.

Scenario 1

Corporal “X” has an accepted claim for compensation for a condition which he sustained whilst serving in Iraq in 2008.  In 2009 he was discharged as a result of his condition and his normal earnings are $1,652.65 per week.

Whilst he is not currently employed, Corporal “X” has been approached to write a book about his experiences in Iraq and signed a 12 month contract in which to produce it.  Shortly after signing the contract, he was paid a lump sum advance of $30,000 against future sales of the book.  As the lump sum constitutes earnings, it must be considered when calculating his ongoing incapacity entitlements.  His treating General Practitioner has provided medical clearance for him to work up to 22 hours per week.  For the duration of his contract he must provide a work diary of the number of hours he works in each week, as his entitlement to maximum rate weeks has ended.

It is important to note that after the first 45 weeks of incapacity (and subsequent reduction in compensation to 75% of NE) the number of hours that Corporal “X” works affects the calculation of his incapacity payments.  In this particular example he is able to work for 22 hours per week, meaning his NE could be increased to 90% in accordance with subsection 131 of the MRCA (being greater than 50% of normal weekly hours but not more than 75%) as the basis for calculating his entitlements.

The lump sum advance must be converted to a weekly amount as per the formula below:

NE - AE, where

NE   =   Adjustment percentage x $1,652.65

AE   =   $30,000   x   6   ÷   313   =   $575.08 per week

If Corporal “X” works 22 hours in a week his entitlement would therefore be:

90% of $1,652.65 less $575.08 = $912.31 per week.  At the end of the contract he should have a proven ability to earn.

It should also be noted that any subsequent “royalties” that are received from sales of the book will also need to be considered as AE and subtracted from Corporal “X's” incapacity payments.

Scenario 2

Able Seaman (AB) “Y” was medically discharged from the Royal Australian Navy (RAN) in 2005.  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 NE as an ex-member of the RAN are $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.

Scenario 3

Sergeant (SGT) “Z” is a former member of the Royal Australian Air Force (RAAF) who sustained an injury to his left shoulder on 15 July 2005 whilst playing rugby at RAAF Base Tindal.  Despite undergoing a comprehensive course of treatment, he was discharged as medically unfit for service on 23 August 2007.  His claim for compensation was accepted under the MRCA on 10 June 2008 and incapacity payments were commenced.

SGT “Z” left the Northern Territory in early 2009 and moved to Queensland to start 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 left shoulder condition.

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.