Edited version of private ruling

Authorisation Number: 1011472777440

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Ruling

Subject: Small Business Concessions - Amounts included in the calculation of turnover

Question 1

Are payments received by a project manager/builder that relate to payments to be made to subcontractors included in the project manger/builder's turnover for the purposes of the small business concessions under division 328 and small business tax break under section 41-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Financial year ended 30 June 2008

Financial year ended 30 June 2009

The scheme commences on:

1 July 2007

Relevant facts and circumstances

The fact sheet has more information about relying on your private ruling.

The taxpayer manages the contracts for and the construction of commercial building projects in the following manner:

· undertakes a contract with a developer to manage the construction for a project

· remuneration to the taxpayer is calculated at a certain percentage of the contracts and expenses managed

· the taxpayer contracts with the subcontractors for the works, pays the subcontractors and then on bills the expense of the subcontractor with an additional percentage added

· from this the taxpayer then pays for his operating expenses

Part of the duties of the taxpayer are to act on behalf of their client, the developer of the property, in arranging subcontractors, co-ordinating the building schedules and the progress of the construction.

The taxpayer issues a tax invoice to the developer for progress payments due on the project and the subcontractors furnish the taxpayer with tax invoices for their services.

The taxpayer receives a certain percentage fee which is included in the invoice to the developer.

The invoice for a project itemises each good or service used on a project, the items are subtotalled and then the additional percentage is added onto the total.

The taxpayer contracts with a number of developers, usually coordinating between three to four developments at any one stage.

There is not always a contract between the taxpayer and the developer.

On the occasions that a contract is in place the standard contract states:

1. for the money stated below the Builder will, according to the terms and conditions of this Contract, carry out and finish the building work the subject of this Contract…

5.1 the Builder may sub-contract any part of the Work

5.2 if the Builder sub-contracts any part of the Work, he will still be responsible for doing everything he said he would in this Contract

5.1 neither the Owner not the Builder may assign the Contract without the consent of the other. Consent must not be withheld unreasonable

There are no written contracts between the subcontractors and the taxpayer. It is expected that the subcontractors work in line with the building specifications provided to them by the taxpayer on behalf of the developer.

The taxpayer has an obligation to the developer to instruct the sub-contractors to ensure that their work is in compliance with the building specifications laid out by the developer.

Payments to the subcontractors are made by the taxpayer following the subcontractor furnishing the taxpayer with a tax invoice.

On rare occasions, payments are made directly to the subcontractors from the developer.

The taxpayer will engage subcontractors either nominated by the developer or alternatively will seek to engage subcontractors that have previously worked on projects managed by the taxpayer.

The taxpayer would seek quotes from various subcontractors prior to engaging their services

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-25,

Income Tax Assessment Act 1997 Division 41,

Income Tax Assessment Act 1997 section 328-120,

Income Tax Assessment Act 1997 Division 328 and

Income Tax Assessment Act 1997 Subdivision 328-D.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

All payments received from developers in the ordinary course of an entity's business form part of the turnover of the business even where payments subsequently need to be paid to subcontractors

Detailed reasoning

The annual turnover for an entity is the total of the ordinary income that the entity derives in the income year in the ordinary course of carrying on a business: section 328-120 of the ITAA 1997. Ordinary income includes all receipts from transactions carried out in the normal course of business.

In your situation, you are contracted by a developer to oversee and coordinate the construction of a particular project to their specifications. Part of your responsibilities in ensuring that the project is brought to completion is the organisation of materials and labour.

The labour is undertaken by subcontractors that you engage on behalf of the developer to complete the work. Although the developer may request certain subcontractors, you are responsible for the control of the project and therefore the manner in which the work is undertaken. As stated in the sample contract with the developer, it is the builder, which is the taxpayer, who retains responsibility for the completion of the work regardless of who they subcontract to complete the work.

The developers pay you the full amount of the contract and although the invoice to the contract may include an itemised account of the expenses incurred for the completion of the project, the developer is not giving you money to hold in trust for each of those expenses. Rather they are paying you for the entire project and it is your responsibility to ensure that payments are made for the required goods and services as part of your contract with the developer.

The subcontractors furnish you, not the developer, with tax invoices. Therefore, the contractors are paid by you, the project manager, rather than by the developer. The funds that are used to pay the subcontractors are furnished from your bank account and not from quarantined funds held on the subcontractor's behalf.

There is not a trust relationship between yourself and the sub contractors therefore you do not hold the amounts on trust for them. Nor are you acting in the capacity of an agent for the developer.

Therefore, the total amount that you receive from the developer for the completion of the project forms part of your turnover for the year.

In order to claim the small business concessions and small business investment tax break, the aggregate turnover of the entity and any connected entities must be under $2 million. If the turnover is greater than $2 million then the entity may still be eligible for the general business tax break.

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