We can all agree that when we're making applications for funding, whether it's for a bank loan or whether it's for, to get compensation, there's some stage of that process where we have to prove our income and our earning capacity.

And that itself can have problems from time to time, especially if we don't know what to include when we are trying to prove how much money we actually earn.

Today, we're joined by Karen Thompson of Mazars and Angus Lillicrap of MCW Legal to discuss the types of things to include when you're making a funding submission of any sort.  

What are some of the problems you see when people do this, Angus?

Angus, if we could just throw to you first and in your particular situation, a person may be making an accident compensation claim. To do this, they have to prove what their loss of earnings has been. What are some of the problems that you see when people do this?

Angus Lillicrap | Lawyer

One of the biggest problems that we see come up, is when a person owns a small business or that they're sole director of a business. They often fall victim to calculating their income by simply assessing their taxable income on their tax statements and leave it at that. 

When they're calculating their income, they sort of just go with the taxable income off their tax returns and leave it at that.

And Karen, as an accountant, what can be some of the issues when solely relying on taxable income?

Karen Thompson | Accountant

Well, your taxable income isn't necessarily a true reflection of the business' earnings. 

There can be other tax deductions that are accounted for in your tax return or your financial statements that might not necessarily be part of the inherent earnings of the business itself. With that, you would normally want to add those expenses back to get a more correct reflection of your income.

An example would be depreciation, particularly at the moment in the current environment, there are so many accelerated depreciation taxation deductions out there, which you are entitled to as a business owner. These may not necessarily reflect the day to day activity of your business.

Now with this, say you've purchased the asset for a relatively large amount of money. You depreciate that, it will show on your accounts that your income is actually reduced. Though, that's not inherently part of the business itself. Yes it's an asset that you use in your day to day business, but you would want to add that back to get a true reflection of your actual earnings.

So that's depreciation, how about amortization?

Karen Thompson | Accountant

Yes, so amortization is where you've spent money on an expense, which is not necessarily immediately deductible. 

It may be deductible over a number of years (up to five). Now with that, what happens is that's written off from a tax perspective each year. You would also want to add those expenses back.

Other expenses you would also want to add back, are things of a one-off nature - perhaps you had increased marketing expenses last year because you were really building the business and that has reduced. You'd want to take that into account.

Another example would be if last year you had more employees and you do this year because you're taking on more of the work yourself. You would want to look at those.

You would also want to look at if you had any expenses that were not necessarily inherently part of the business. Something of that nature may be, you have a luxury car lease where that is by choice, as opposed to it being required by the company.

Is that something you're allowed to consider in a compensation claim, Angus?

There's a lot of good stuff there.

Angus, just throwing back to you, what you're saying is that a small business owner (when they're considering compensation claims) should be very mindful that they take into account ebbs and flows of the business and events like bushfires, floods, and pandemics. Is that kind of what you're allowed to do?

Angus Lillicrap | Lawyer

Certainly. Your taxable income is a good starting place, but you certainly want to factor in things outside of your (and the business') control that could've impacted your earnings. 

You also want to factor in all the things that Karen just mentioned, that aren't reflected on your tax return, but certainly are able to be added back in and are a true reflection of the performance of the business over time.

And is there a checklist you'd recommend people use to consider all possible avenues of income?

Angus Lillicrap | Lawyer

Certainly. I would recommend noting things like:

In conclusion...

If you're in this situation, whether applying for external funding or applying for compensation in a small business arrangement, you are urged to consider more than just your taxable income. Start considering other factors that could affect your actual earnings, and start considering how to adjust that to reflect a true income.