Principal source of income
For a self-employed Reservist to be eligible for ESP, your business or company must provide your principal source of income and have done so for a continuous period of at least the previous six months.
Income means the amount earned, derived or received by the person for the person's own use or benefit, including personal earnings, moneys or profits. Income means income from all sources, including Reserve salary, except that any pension received by the member is excluded. The principal source of income relates to the Reservist's income from the business, not to the business' income, profit, loss or turnover. Potential or projected income cannot be used to satisfy the principal source of income requirement.
Income received from the business must relate to the activities of the business and, when income is derived from the sale of stocks or assets, the stocks or assets must have been owned by the business.
For sole traders, their income from the business is the net income/loss from the business that would be required to be shown in the member's personal tax return.
For partnerships, a partner's income is their share of the partnership net income, whether profit or loss and whether distributed or not, as would be required to be shown in the partner's personal tax return.
For members employed by a company in which the member has a controlling interest, their income from the business is the member's income from the company including any fees, emoluments and dividends but excluding repayment of loans.
Consideration of Payments of ESP
Payments of ESP cannot be used to meet the principal source of income requirements. Principal source of income documentation must relate to a specified period of at least six months in length. If payments of ESP have been made to the member's business or company over the assessment period, then the amount of the payments is subtracted from the member's income from the business.
Consideration of Payments of ESP
Payments of ESP cannot be used to meet the principal source of income requirements. Principal source of income documentation must relate to a specified period of at least six months in length. If payments of ESP have been made to the member's business or company over the assessment period, then the amount of the payments is subtracted from the member's income from the business.
Example
A self-employed member is a sole trader who provides principal source of income documentation for a financial year. His normal business income is $45k pa with business expenses of $15k pa (net profit of $30k pa). He receives $10k in employer support payments and uses these payments towards his normal expenses (thus increasing his net annual profit to $40k). The employer support payments are subtracted from his income for principal source of income purposes and his income from the business is assessed as $30k over the 12 month period.
Reduction of the member's income from the business by the amount of the payments of ESP may be varied or eliminated by DESPS or a delegate if:
A self-employed member is a sole trader who provides principal source of income documentation for a financial year. His normal business income is $45k pa with business expenses of $15k pa (net profit of $30k pa). He receives $10k in employer support payments and uses these payments towards his normal expenses (thus increasing his net annual profit to $40k). The employer support payments are subtracted from his income for principal source of income purposes and his income from the business is assessed as $30k over the 12 month period.
- the payments of ESP, in whole or part, were provided to other persons who shared ownership or control of the business; or
- the payments of ESP were used to address extra costs to the business that related directly to the member's absence on defence service; or
- DESPS is satisfied that it would be reasonable to include the payments, having regard to the aims of the scheme and provisions of the Defence Determination.
Examples
A self-employed member is one of four partners in a legal practice. The practice receives $10k in employer support payments and divides this equally, with each partner receiving $2.5k. On production of evidence, verified by the partnership's accountant, $7.5k of the employer support payments would not be subtracted from the member's income for principal source of income purposes.
A self-employed member operates a rural property. He receives $10k in employer support payments and uses these payments to pay for a replacement farm manager while he is absent on Defence service. These employer support payments are not subtracted from his income for principal source of income purposes as they were used to meet extra costs to the business that would not have arisen except for the member's absence on Defence service.
Relying on PSI Documentation
If a claimed period of Defence service is within six months of a previous period of continuous Defence service (for which an ESP payment was received or which was counted towards the annual qualifying period) - a self-employed Reservist can rely for up to three years on the supporting documents that were previously provided.
A self-employed member is one of four partners in a legal practice. The practice receives $10k in employer support payments and divides this equally, with each partner receiving $2.5k. On production of evidence, verified by the partnership's accountant, $7.5k of the employer support payments would not be subtracted from the member's income for principal source of income purposes.
A self-employed member operates a rural property. He receives $10k in employer support payments and uses these payments to pay for a replacement farm manager while he is absent on Defence service. These employer support payments are not subtracted from his income for principal source of income purposes as they were used to meet extra costs to the business that would not have arisen except for the member's absence on Defence service.
Relying on PSI Documentation
If a claimed period of Defence service is within six months of a previous period of continuous Defence service (for which an ESP payment was received or which was counted towards the annual qualifying period) - a self-employed Reservist can rely for up to three years on the supporting documents that were previously provided.
If relying on previously provided supporting documents, there is no requirement to re-submit these supporting documents, unless requested to do so by the approving ESP delegate.
However, each period of Defence service is considered discretely. So, an approving ESP delegate is entitled to re-assess evidence accepted by a different ESP delegate for an earlier claim and may make a different decision relating to acceptance of the evidence and approval of the current claim.
Re-Establishing PSI
A self-employed Reservist may choose to provide new supporting documents with any claim, even if within the three year period detailed above. If the new evidence is accepted by the approving ESP delegate, a new three year period would apply.
Re-Establishing PSI
A self-employed Reservist may choose to provide new supporting documents with any claim, even if within the three year period detailed above. If the new evidence is accepted by the approving ESP delegate, a new three year period would apply.
If there has been a gap of six months or longer between periods of continuous Defence service (ie periods that are at least 5 consecutive days in duration) - new supporting documents must be provided with the subsequent claim for Defence service in order to re-establish PSI.
If a self-employed Reservist has relied on previously provided supporting documents, the Reservist must submit new supporting documents to re-establish eligibility after three years. The three year period for the use of documentation runs from the end of the specified assessment period that the information covers.
The new documents must relate to a new period immediately prior to the Defence service now being claimed. They must cover the same requirements as previously:
- Evidence that the business or company is bona fide.
- Evidence that the business or company is trading or operating.
- Evidence that the business or company provides the Reservist's principal source of income and has done so for a continuous period of at least the previous six months.
- If self-employed on a part-time basis - evidence of normal work hours (this should, whenever possible, cover a two month period).
Standard advice on evidence from Financial Advisors/Accountants
A statement from a financial adviser or accountant should specify the amounts of income earned, derived or received from all sources over a specified period of at least six months prior to the member’s Reserve service (a statement that a Reservist receives his or her principal source of income from the business, without income details, is insufficient).
An extract of paragraphs 64 – 80 of Defence Instruction (General) PERS 05-42 should be provided to the financial adviser or accountant to ensure the figures are calculated in accordance with the requirements of the Defence Determination.
An example of a statement from a financial adviser or accountant is available for download here
This contains the minimum information that would be required by a delegate. When necessary, statements from financial advisers or accountants should contain additional details to substantiate a claimant’s eligibility for ESP.
