This section contains information on the assessment of income and assets from private companies prior to 1 January 2002.
The assessment of income received by a person from a company [3] is based on the type and current rate of income [3], if any. Income currently maintained should cease to be assessed, if:
In this case the shareholders effectively no longer have access to the income.
The profit [3] of a private company [3] 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 |
|
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 [3]. |
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 [3], 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 [3] and the same as income from salary and wages. The non -grossed up amount of the fringe benefit is assessed. More ? [5] |
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. VEA ? [6] |
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. VEA ? [7] |
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 ? [8] |
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 [17] income is:
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 [18], 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:
Valuable consideration is defined as receipts not in money form but capable of being valued in money terms.
While the new rules for trusts and companies have largely replaced methods of valuing shares, an acceptable method is still required where:
A share in a private company or unlisted public company [3] is an assessable asset and needs to be valued for assets test purposes. The assets owned by the company, however, are not the property of the shareholder and therefore are not assessed as an asset of the person.
More ? [20]
There are three accepted methods of valuing shares in private companies or unlisted public companies:
A market exists where there is:
Generally, it will be rare for an effective market to exist for private companies or large unlisted public companies. However, such markets have operated:
The person should provide the necessary evidence that a market exists for a particular company's shares.
Where no market exists private company and unlisted public company shares are valued by calculating the 'net asset backing' per share if they carry rights to participation in capital distributions, as shown in the company's Articles of Association or Company Constitution. The net asset backing method [3] of valuation of shares in a private company is used because it provides a consistent basis for assessment of the value of all private companies. It is also less complex than other methods to administer. The company's Articles of Association outline the special rights or restrictions attached to a particular class of shares issued by the company.
Exception: If the shares do not carry rights to participate in capital distribution, or in certain other cases, other methods of valuing the shares are used (see additional instructions below).
The net asset backing method of valuation of shares in private companies and unlisted public companies calculates the:
This calculation is based on information contained in the company balance sheet and depreciation schedule. Because the balance sheet of a company records the value of fixed assets at their historical cost, adjustments may be needed to reflect the current market value of these assets.
When the adjusted net asset position of a company has been determined:
This calculation is based on information contained in the company balance sheet and depreciation schedule.
Alternative methods include (but are not limited to):
The method should be based on the circumstances of each case.
Deprivation provisions apply if the person influenced a private company's action to:
A person's influence should be assumed as a matter of course if the person, and/or their partner:
If a company is in receivership, the assessable asset value of the shares owned, or loans owed, should continue to be assessed as though the company were still managed by the directors.
If a company is in liquidation, assets to be maintained should be assessed on the basis of the projected payout to be provided by the liquidator. If a person advises that they have forgone repayment of a loan, or voluntarily agreed to receive a repayment of a lesser proportion of their loan than other unsecured creditors, deprivation provisions may apply. However, consideration should also be given to the circumstances in which a loan no longer exists for income support purposes.
Company has the same meaning as in the Income Tax Assessment Act 1997.
The net asset backing method provides the least complex and consistent basis for assessing the value of private companies. The method values the shares in a private company by calculating the:
The calculation is based upon information in the company balance sheet and depreciation schedule taking into consideration the current market value rather than the historical value as may appear in the balance sheet.
The market value of an asset [3] is the point at which a willing purchaser and a willing, but not anxious vendor, would reach agreement.
The market value of an asset is only decreased by the value of an encumbrance secured against it. The market value of an asset is not reduced by any costs which may be incurred if the asset was to be sold.
Company has the same meaning as in the Income Tax Assessment Act 1997.
Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.
The following table describes the treatment of assessable assets and provides references to further information, if appropriate.
More ? [24]
Assessable Asset |
Treatment/Further Information |
|
Shares in a private or unlisted public company, which carry rights to participate in capital distributions |
Assess using the market value if a market exists. If no market exists, generally the net asset backing method [3] is used. |
|
Shares in a private or unlisted public company, which do not carry rights to participate in capital distributions |
Assess using the market value if a market exists. If no market exists use the amount paid for the shares or some other valuation. |
|
Assets, excluding the principal residence, which are transferred or sold to the company by the person and/or partner VEA ? [25] |
Deprivation of assets may apply if the person did not receive adequate financial consideration [3]. |
|
|
Deprivation of assets may apply unless valuable consideration [3] is received, even though the value of a person's interest in their principal residence is exempt from the assessment of the assets test. |
|
Partly paid shares |
If partly paid shares are NOT asset backed, the assessable value is:
If the shares are asset backed, ALL shares (both fully paid up and partly paid up) may be valued using the net asset backing method. The assessable value is;
|
|
Loans to a private company |
Shareholder loans are the assets of the individual shareholder and must be maintained for assets test purposes. Deeming rules apply to outstanding loan balances. This recognises that a company is a separate legal entity [3]. Shareholders' loans should not be removed from the balance sheet of the company. These loans represent a liability of the company which, if not repaid earlier, will be repaid when the company is wound up. |
|
Failed loans |
Loans that No Longer Exist. More ? [28] |
|
Governing director's shares |
If the Articles of Association... |
THEN the asset value is... |
EXPLICITLY state that the person has the right to participate in capital distribution, |
market value OR if no market exists, the net asset backing method is used. More ? [29] |
|
EXPLICITLY state that the person has NO right to participate in capital distribution, |
market value OR if no market exists, the amount paid for the shares or some other valuation. More ? [30] |
|
do not give ANY shareholder the right to participate in capital distribution AND do not state how the assets of the company are to be distributed, |
market value OR if no market exists, the net asset backing method if appropriate. More ? [31] |
|
Distribution of capital when a company is wound-up |
If a company has been, or is being, wound-up, any distribution of assets is not income. VEA ? [32] |
|
The net asset backing method provides the least complex and consistent basis for assessing the value of private companies. The method values the shares in a private company by calculating the:
The calculation is based upon information in the company balance sheet and depreciation schedule taking into consideration the current market value rather than the historical value as may appear in the balance sheet.
For adequate financial consideration to be received when disposing of an asset [3], a person must receive value in the form of money or assets. Adequate financial consideration can be accepted when the amounts received reasonably equate to the market value of the asset. It may be necessary to obtain a valuation from a property valuation service provider.
When disposing of income [3], in order for adequate financial consideration to be received, the person must receive money, goods or services which approximate in value to the rate of disposed income. If a person disposes of an income producing asset and receives adequate financial consideration in money or money's worth for the asset, then it can be accepted that they have received adequate financial consideration for the disposal of both the income and the asset.
Valuable consideration is defined as receipts not in money form but capable of being valued in money terms.
An entity means any of the following:
an individual,
a company,
a trust,
a business partnership,
a corporation sole,
a body politic.
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[3] https://clik.dva.gov.au/%23
[4] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn382
[5] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn383
[6] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn384
[7] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn385
[8] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn386
[9] https://clik.dva.gov.au/service-eligibility-assistant-updates/all-determinations-order-date-signed-oldest-most-recent/determinations-under-vea
[10] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn382
[11] https://clik.dva.gov.au/compensation-and-support-policy-library/part-5-income-support-allowances-and-benefits/58-fringe-benefits/581-overview-fringe-benefits
[12] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn383
[13] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn384
[14] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn385
[15] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/96-deprivation-income-and-assets/961-overview-deprivation-provisions
[16] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn386
[17] http://clik/health-procedure-library/health-information-and-management-notes-himn/vhc/072014-vhc-veterans-home-care
[18] http://www.comlaw.gov.au/Series/C2004A03268
[19] https://clik.dva.gov.au/user/login?destination=node/16391%23comment-form
[20] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn387
[21] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/91-income-and-assets-test-principles/913-income-and-assets-tests
[22] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn387
[23] https://clik.dva.gov.au/user/login?destination=node/16340%23comment-form
[24] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn388
[25] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn389
[26] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn390
[27] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn391
[28] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn392
[29] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn393
[30] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn394
[31] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn395
[32] https://clik.dva.gov.au/book/export/html/16328#tgt-cspol_part10_ftn396
[33] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/102-assets
[34] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn388
[35] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn389
[36] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn390
[37] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/1033-assessing-income-assets-private-companies-pre-01012002
[38] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn391
[39] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/102-assets/1024-assessing-personal-assets-and-investments/assessing-loans-and-guarantor-arrangements
[40] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn392
[41] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn393
[42] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn394
[43] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn395
[44] https://clik.dva.gov.au/book/export/html/16328#ref-cspol_part10_ftn396