Salary Paid to Owner(s) from Sole Trader and Partnerships

Salary paid to the owner(s) from sole trader and partnerships

Sole traders

• Although not usual in the case of a business conducted as a sole trader, the financial statements may indicate that a salary has been paid to the owner. A salary paid to the veteran, partner or war widow/widower by their own business is not a true salary (as the customer is not a separate legal entity to the business). Where paid to the business owner, the salary will be included as an expense in the business profit/loss statement.
• This is an allowable business deduction for [glossary::288] purposes, however the salary is treated as personal income of the veteran, partner or war widow/widower and should be added to the assessable business profit. If the business operated at a loss, the loss can be offset against the salary.
• For example if the business made a loss after all deductions of $3500, yet paid the customer $6000 in salary, then the assessable income from the business is $2500.

Salary paid to the owner(s) from sole trader and partnerships

Partnerships

• It is not unusual for members of a partnership to receive a salary from the business in addition to any other income they may receive from the partnership. If one partner takes a more active role in operating a business, the partners may agree for that member to receive a salary in recognition of their greater contribution to the overall profit of the business.
• A partner's salary is paid against the net profits of the business. The sum of the business profit and salary received by the veteran, partner or war widow/widower will be shown in the partnership Statement of Distribution.
• Some accountants may show the partner's salary as an expense in the business profit/loss statement.
• Regardless of how the salaries are characterised in the business financial statements, a partnership salary is an allowable deduction for [glossary::288] purposes.
• Partnership profits are not always shared equally as the partnership agreement may allow for profits to be apportioned unequally. Assessors can accept and assess the apportionment when the partnership agreement indicates this may occur.
• The financial year's tax returns are used to determine the profit or loss. If there is a change in the business from the last tax return the customer will need to supply details for an amendment.
• Add any salary received by a partner to that partner's share of the assessable net profit and assess as income on an annual basis. Salary can be offset against customer's share of partnership loss.
• Note: Care must be taken to ensure the salary/wage is counted once only (as part of the business income), and that it is not also counted as [glossary::135].