Being involved with private companies
This page explains how your involvement with a private company may affect your rate of income support pension or payment under the income and assets tests.
If you are the controller of a private company, the income and assets of that entity may be assessable for pension and payment purposes.
On this page
- What is a private company?
- What is an excluded company?
- Involvement in a private company
- What is a direct benefit?
- What is an indirect benefit?
- What is attribution?
- Considerations determining attribution
- The control test
- The source test
- Attributable stakeholder
- Private company assets
- Private company income
- Distributions of income
- Distributions of capital
- Information about your private company
What is a private company?
For pension and payment purposes a designated private company is a company that meets at least two of the following three criteria in relation to the last financial year:
- consolidated gross operating revenue for the financial year of the company and its subsidiaries is less than $25 million;
- consolidated gross assets at the end of the financial year of the company and its subsidiaries are less than $12.5 million; or
- the company and its subsidiaries have fewer than 50 employees at the end of the financial year;
- came into existence since the end of the last financial year; and
- has not been declared by the Repatriation Commission to be an excluded company.
What is an excluded company?
An excluded company is a company that has the sole or dominant purpose of receiving, managing and distributing:
- property transferred directly to it, or to it through an interposed entity, by a government body for a community purpose; or
- income generated from the use of indigenous-held land.
The rules apply to all small private companies, whether created inside or outside Australia.
*Note: - Special rules apply to private companies that do not meet the above definition. For information regarding the assessment of non-designated private companies please contact DVA.Back to top
Involvement in a private company
A person is involved in a private company if they or their partner:
- are a shareholder, director or other office-holder of the company;
- are owed money by the company;
- have provided, for less than market value, property or services to the company since 9 May 2000;
- are able to benefit directly or indirectly from the company; or
- can expect the director(s) of a company to act in accordance with their wishes, or can expect the governing director or major shareholder to act in accordance with their wishes.
What is a direct benefit?
A person may enjoy a direct benefit from a private company by, for example, having the company pay all their personal living expenses or using the company assets as if they were their own personal assets.Back to top
What is an indirect benefit?
A person may enjoy an indirect benefit from a private company by, for example, having access to, and use of, company assets such as holiday homes.Back to top
What is attribution?
From 1 January 2002, the assets and income of a private company may be attributed to a person based on:
- the Control Test - ‘control’ includes control via an associate; and
- the Source Test - where a person transfers assets or services to a company after 7:30pm Australian Eastern Standard Time (AEST) on 9 May 2000.
Considerations determining attribution
Some of the considerations for deciding attribution of income and assets include:
- the strength of control available to be exercised in theory;
- the exercise of control in practice;
- whether any contributions have been made to the company and their size in relation to the value of the assets of the entity;
- the scope of controller(s) to benefit from distributions;
- the history of distributions of capital and income from the entity;
- the use and enjoyment of the assets or income of the entity;
- any pre-existing attributions as determined by Centrelink or the Department of Veterans’ Affairs; and
- any other fact or circumstance related to the activities or administration of the Company which, in the opinion of the Repatriation Commission (for service pension, veteran payment and income support supplement) or Secretary (for age pension) should be taken into account.
If a person is attributed with the assets and income of the company, those assets and income will be treated as if they are the person’s assets and income.Back to top
The control test
Formal control of a private company generally rests with a person(s) who holds majority voting powers or governing director type powers. This reflects the absolute power the person holds. For example, a person can retain profits within the company, or reduce or eliminate profits by paying themselves higher wages or director's fees, or they can issue more shares to themselves, thus diluting the value of minority share holdings. The person(s) also controls the assets of the structure and can prevent the company from being wound up.
A person(s) may also control a private company by being able to influence the major shareholder or director to act in their favour. In some cases the major shareholder or director could be expected to act in accordance with their wishes.Back to top
The source test
The source test can only apply where assets or services are transferred to a private company after 7:30pm (AEST) on 9 May 2000. Under the source test, a person may be regarded as a controller:
- if the person transfers, or has transferred, assets to the structure whether directly or indirectly, for inadequate consideration; or
- if the person provides, or has provided, services to the structure for inadequate remuneration.
The source test recognises that persons, who transfer assets or services to a private company and do not receive adequate consideration in return, generally retain some means of control.Back to top
If a person controls a private company he/she is the attributable stakeholder of the company.Back to top
Private company assets
An asset of a private company is any asset (excluding exempt assets), whether fixed or financial that the entity owns. The value of the assets (including shares and managed investments of a private company is determined by the current market value.
Special provisions apply where a person other than the attributable stakeholder has injected equity capital into a private company whose investment is regarded as being a “genuine” injection of funds.
Where the principal place of residence of the attributable stakeholder is included in the private company’s assets it will not be an assessable asset if the attributable stakeholder has reasonable security of tenure.Back to top
Private company income
The assessable income of a private company will be the company’s profit and loss figure with certain adjustments. Reasonable expenses associated with the running of the company will be excluded.
Non-allowable deductions from the income of a private company include but may not be limited to the following:
- prior year losses;
- offsetting losses from unrelated businesses;
- building depreciation;
- borrowing expenses;
- contributions to non-complying (as per the SIS Act 1993) superannuation;
- income equalisation deposits/farm management bonds;
- double wool clip;
- forced disposal of livestock;
- trading stock valuation adjustments;
- premiums for personal life insurance policies or funds;
- private health insurance premiums;
- industry concessions/incentives;
- amortisation of intangible assets;
- provisions to defer taxation;
- capital expenditure deductions;
- entertainment; and
- deductions for research and development.
Distributions of income
Distributions paid to an attributable stakeholder (the controller) of a private company will not be double counted. Distributions of income to a non-attributable stakeholder will generally be assessed as a gift by the controller of the private company. For the non-attributable stakeholder such a distribution is assessed as income for 12 months from the date of receipt if the person receives an income support payment from DVA or Centrelink.Back to top
Distributions of capital
Distributions of the capital of a private company to an attributable stakeholder will not be assessed as income unless it is in excess of the attributable stakeholder’s attribution percentage. Excess amounts will be assessed as income for 12 months. If a capital distribution is less than the attribution percentage deprivation may result.
Distributions of capital to a non-attributable stakeholder will be assessed as a gift by the attributable stakeholder and as income for 12 months from the date of receipt for the non-attributable stakeholder.Back to top
If you relinquish control of a private company on or after 1 January 2002 without adequate consideration, you will be considered to have gifted the assets held by the company. Gifts may be assessed for 5 years from the date of transfer and deemed income rules will apply to the gift.Back to top
Information about your private company
You should note that where an income support recipient is attributed with the income and assets of a private company, the company will be reviewed annually. DVA will require you to provide the latest trust related information and documentation. The primary sources of information are:
- tax return and assessment notice
- profit and loss statement
- balance sheet
- depreciation schedule.
In certain cases a valuation of business assets may be done by an independent valuer.Back to top
When you are granted an income support pension or payment and periodically after that, you will be notified of your obligations. You will be required to tell us within 14 days (28 days if you live overseas or receive remote area allowance) of changes to your circumstances that might affect the rate of income support pension or payment you receive or your eligibility to receive that pension or payment. These obligations apply equally to income support recipients involved in private companies.
In relation to your private company, the sorts of things you would need to tell us about within 14 days (28 days if you live overseas or receive remote area allowance) are as follows:
- you start up a private company;
- you wind up or resign from a private company;
- you become a shareholder or director of a private company; or
- there is any significant change to the private company.
Usually an overpayment of pension or payment will not occur when you have met your obligations. However, sometimes even if you have met your obligations, an overpayment can occur because we have not been able to process the change before the next payday. We do our best to prevent this occurring, but it is not always possible. To provide you with your exact entitlement we are obliged to recover overpayments of pension or payment where they do occur.Back to top