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Edited version of private ruling
Authorisation Number: 1011715262724
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Ruling
Subject: Small business entities
Relevant facts and circumstances
You receive consultancy fees from commercial property project management and business mentoring. Your business commenced in October 2008.
A carried forward loss of more than $16,000 was incurred in relation to this business for the financial year ended 30 June 2009 partly as a result of a $17,501 claim under the small business investment allowance tax break.
Your fees are received on a contract basis and are not received under a master/servant relationship.
You expect that the consultancy revenue for the 2009-10 income year will be around $8,000. This is an increase from the previous income year.
You state that the type of business that you are conducting often requires considerable investments of time and effort at the initial stages of development - and that this can be dependent on the success of the projects that require your consultancy services and you estimate that this could be in the range of $10,000 to $100,000.
A review of our records indicates that you are a director of several corporate entities. One of these entities reported assessable income for the 2007-08 and 2008-09 income years that either exceeded $4,000,000 or around 4,000,000, respectively.
Reasons for decision
Small business entity
Section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the following as a definition of the term 'small business entity':
328-110(1)
You are a small business entity for an income year (the current year) if:
(a) you carry on a business in the current year; and
(b) one or both of the following applies:
(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million;
(ii) your aggregated turnover for the current year is likely to be less than $2 million.
Subsection 328-110(2) of the ITAA 1997 provides that the first relevant day in determining the aggregated turnover for an income year is either the first day of that income year or the first day within that income year that you commenced business.
Subsection 328-110(3) of the ITAA 1997 states the following:
However, you are not a small business entity for an income year (the current year) because of subparagraph (1)(b)(ii) if:
(a) you carried on a business in each of the 2 income years before the current year; and
(b) your aggregated turnover for each of those income years was $2 million or more.
Aggregated turnover is defined in section 328-115 of the ITAA 1997. This section states the following:
328-115(1)
Your aggregated turnover for an income year is the sum of the relevant annual turnovers (see subsection (2)) excluding any amounts covered by subsection (3).
328-115(2)
The relevant annual turnovers are:
(a) your annual turnover for the income year; and
(b) the annual turnover for the income year of any entity (a relevant entity) that is connected with you at any time during the income year; and
(c) the annual turnover for the income year of any entity (a relevant entity) that is an affiliate of yours at any time during the income year.
328-115(3)
Your aggregated turnover for an income year does not include the following amounts:
(a) amounts derived in the income year by you or a relevant entity from dealings between you and the relevant entity while the relevant entity is connected with you or is your affiliate;
(b) amounts derived in the income year by a relevant entity from dealings between the relevant entity and another relevant entity while each relevant entity is connected with you or is your affiliate;
(c) amounts derived in the income year by a relevant entity while the relevant entity is not connected with you and is not your affiliate.
The term affiliate as it is applied in these sections is defined in subsection 328-130(1) of the ITAA 1997 which states the following:
An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.
Application of law to your circumstances
In your case, your aggregated turnover should include the annual turnover of any entity that is either 'connected with you' or is an 'affiliate' with reference to sections 328-125 and 328-130 of the ITAA 1997. You have not provided details of any entities that could be either connected with you or be an affiliate of yours with your application for a private ruling.
A review of our records indicates that you are a director of a corporate entity that disclosed assessable income of around $4,000,000 for the 2008-09 income year. This entity also disclosed assessable income in the 2007-08 income year that exceeded $4,000,000.
As a director of this company, it can be accepted that this entity is an affiliate of yours as defined in subsection 328-130(1) of the ITAA 1997. This is because it can be reasonably expected that this company acts in accordance with your directions or wishes or acts in concert with you as you are a director of this company.
Therefore, your aggregated turnover for the 2007-08 and 2008-09 income year has exceeded the $2,000,000 threshold provided in section 328-110 of the ITAA 1997.
Where your aggregated turnover exceeds the threshold in an income year, you do not meet the definition of a small business entity in that income year.
To be regarded as a small business entity in the 2009-10 income year your aggregated turnovers for the past two income years must be less than $2,000,000 and you must have been in business in both these previous income years. In your case, you commenced business in October 2008 which is part of the 2008-09 income year.
While we believe that it is likely that Company X will disclose assessable income of more than $2,000,000 annual turnover for the 2009-10 income year, however, the company has not lodged a company return for this income year that demonstrates this to be the case.
Therefore, we advise that as you were not conducting a business in the first of the two previous income years referred to in subsection 328-110(3) of the ITAA 1997, you will meet the definition of a small business entity for the 2009-10 income year.
Should the corporate entity's annual turnover exceed $2,000,000 in the 2009-10 income year, the facts relied on in this private ruling will have altered, rendering this decision invalid.
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