Unrecorded cash and personal expenses in a disputed valuation

The short answer, explained

Two allegations come up again and again when one party runs the business and the other does not: that cash takings are not all banked or recorded, and that the owner's private spending is paid by the business. Both would mean the recorded profit understates what the business earns, and therefore its value.

They are not the same kind of problem. Private expenses that went through the business are usually in its ledger, so they can be identified, documented and added back. Cash that never entered the records leaves no direct trace, so the analysis has to work indirectly. This page explains how a valuer approaches each, and why indirect evidence such as an industry ratio can raise a question but rarely settles it. For how a business is valued in a property settlement more generally, Family Law Valuations explains the whole process in how a business is valued in a family law property settlement.

What the disclosure rules require

In the Federal Circuit and Family Court of Australia, rule 6.01 of the Family Law Rules gives each party a duty to the court and to each other party to make full and frank disclosure of all relevant information, in a timely manner. For financial or property proceedings, rule 6.06(2) extends that to the party's earnings and to income earned by an entity the party fully or partly owns or controls, including income paid or assigned to someone else.

Unless the court orders otherwise, rule 6.06(7) requires a party who must file a Financial Statement to serve, before the first court date, documents including the party's three most recent tax returns and assessments and, for a partnership, trust or private company in which the party has an interest, its three most recent financial statements and last four business activity statements. These are the starting materials for any analysis of unrecorded income. If they are incomplete, the first step is usually for the lawyers to seek the missing records, not for the valuer to fill gaps with estimates.

Proceedings in the Family Court of Western Australia follow that court's own rules, which this page does not cover.

Personal expenses: the traceable allegation

Private spending that the business paid for can usually be found by reading the general ledger and the supporting invoices. Common examples are private travel, family vehicles, phones, school fees, home utilities and wages paid to family members who do little work. The ATO's record-keeping guidance expects businesses to keep clear documents showing the business portion of expenses that are partly business and partly personal, so the absence of those records is itself informative.

A valuer will usually:

• identify each item in the ledger and obtain the invoice or statement;
• ask what business purpose, if any, it served;
• add back only the private portion, and only where the business would not need to replace the spending; and
• treat the add-back the same way in every year, so the trend is not distorted.

Goods taken from stock follow a related rule. The ATO says stock taken for private use must be accounted for as if it had been sold, with its value included in assessable income, and it publishes annual estimates of those values that sole traders and partners can use (TD 2025/7 for 2025-26). If a food or retail business has not done this, its cost of sales will look high relative to sales. That matters for the next section, because the same symptom can come from unrecorded sales.

The earnings normalisation worksheet has lines for private expenses and the other common adjustments. Our guide for accountants on preparing financial information for a valuation shows how to document them.

Unrecorded cash: why the evidence is indirect

When cash sales are not recorded, there is no ledger entry to trace. The valuer, or a forensic accountant working alongside, has to look for patterns that do not fit. Typical tests include:

• Sales against banking. Comparing recorded sales with deposits across the year, and point-of-sale reports with the accounts.
• Margins against purchases. Purchases from suppliers usually leave invoices and bank records, which makes them easier to test, so the ratio of cost of sales to recorded sales can suggest whether sales are complete.
• Margins across periods. A sudden change in gross margin after separation, without a change in suppliers, prices or product mix, needs an explanation.
• Costs that only make sense with more sales. Staff hours, stock purchases or utilities that look too high for the recorded turnover.
• Personal spending against declared income. A comparison usually done by a forensic accountant, and only as good as the records of spending it relies on.

The ATO's record-keeping guidance also says records must not be changed, for example by electronic sales suppression tools. If a party alleges sales data has been altered, that is a matter for forensic examination of the point-of-sale system, which is outside an ordinary valuation.

Using ATO benchmarks: a cross-check, not proof

The ATO publishes small business benchmarks: ratios such as cost of sales to turnover, by industry and turnover range. They are useful in a dispute because they are independent and public. They are also easy to over-read, and the ATO's own material shows why.

A careful report uses the benchmark to frame questions, then tests the specific explanations against this business's own records.

Worked example: a hypothetical takeaway business

This example is hypothetical. The benchmark range and the earnings multiple are invented round numbers for illustration; they are not ATO figures or market evidence.

The business records sales of $800,000 and cost of sales of $360,000. Suppose the published range for its industry and turnover band were 36% to 40%.

Step 1: the ratio. $360,000 divided by $800,000 is 45%, above the assumed range.

Step 2: what sales would fit the range. If cost of sales is complete and correct, sales consistent with the range would be $360,000 / 0.40 = $900,000 to $360,000 / 0.36 = $1,000,000, a gap of $100,000 to $200,000 over recorded sales.

Check: $900,000 x 40% = $360,000 and $1,000,000 x 36% = $360,000.

Step 3: test the explanations. Before treating the gap as unrecorded sales, the valuer asks whether stock was taken for private use without being recorded, whether wastage is high, whether prices are below competitors, and whether banking matches recorded sales. In this example, assume banking and point-of-sale data are inconclusive, and the parties disagree.

Step 4: value each scenario on stated assumptions. Both scenarios add back $15,000 of evidenced private expenses. Scenario B also assumes $100,000 of unrecorded sales (the low end of the gap) and $30,000 of unrecorded cash wages paid from those takings. Because the recorded cost of sales is assumed to already include the stock for those sales, no further cost of sales is deducted.

Check: $150,000 + $15,000 = $165,000, and $165,000 x 3.0 = $495,000. $165,000 + $100,000 - $30,000 = $235,000, and $235,000 x 3.0 = $705,000. The difference is $210,000.

Holding the multiple constant isolates the earnings question. In practice a valuer would also consider whether earnings that cannot be shown in the records would carry the same multiple, since a buyer relying on the records may not pay for them, and whether any tax exposure on past unrecorded income needs to be considered. Those points can narrow the gap between the scenarios. Equally, a family law valuation is not a sale to a buyer relying on the records, and how a party's incomplete disclosure is treated is a matter for the court and the lawyers, not something the valuer should resolve by default in that party's favour. You can test how the value moves with different earnings and multiples in the capitalised earnings sensitivity tool.

What the valuer decides, and what the court decides

Under rule 7.18, an expert witness must consider all material facts, including those that detract from their opinion. Under rule 7.22, the report must set out the facts, matters and assumptions the opinions rely on and, where there is a range of opinion, summarise it.

That structure fits disputed income well. The valuer can say what the records show, what tests were run, and what the value is on each set of assumptions. Whether cash was in fact withheld is a contested fact for the court to decide on all the evidence. A report that simply adopts one party's allegation, or dismisses it without testing, is harder to rely on. If you are reviewing a report that does either, our guide to reviewing the other side's valuation report sets out how to approach it.

Limitations

• This page describes general valuation practice and the cited rules. It is not legal advice; questions about disclosure, subpoenas and evidence belong with your family lawyer.
• Ratio analysis can show that figures are unusual. It cannot by itself establish how much income, if any, was unrecorded.
• A forensic accounting investigation is a different engagement from a valuation, with different methods and costs. Some matters need both.
• Benchmarks are published for particular industries and years and change over time. Use the year and industry that match the business and the period in question.
• Tax consequences of unrecorded income are not covered here. They are a matter for tax advisers.

Next steps

• Ask your lawyer which of the documents in rule 6.06(7) have been served, and what is missing.
• List the specific private expenses you believe the business pays, with any evidence you hold (statements, invoices, vehicle or phone details).
• Look up the ATO benchmark for the business's industry and turnover band, and treat the result as a question to put, not a finding.
• If a single expert is being appointed, make sure the letter of instruction asks the expert to address the allegation and to value any disputed scenarios separately.

General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.