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Edited version of your private ruling
Authorisation Number: 1012434617762
Ruling
Subject: Small Business Entity
Question 1
Are amounts received from a government department and passed on to third parties considered assessable income of the entity?
Answer
No
Question 2
Is the entity a small business entity?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
The entity operates a business.
The entity acts as an intermediary between individuals and the Government Department.
Individuals are independent contractors who provide services to third parties.
Individuals submit time sheets on a weekly or fortnightly basis to the entity.
The Government Department, upon receipt of time sheets from the entity, remit money in the entity's account.
The entity keeps an admin levy from the total payment.
The role of the entity is to supervise, from a compliance point of view, provide administration (including verifying and submission of time sheets to the Government Department, to individuals and act as a custodian of individuals' money from the Government Department.
Deposits from the payments from the Government Department are more than $2 million per year. This payment is made up of amounts to be given to individuals and the admin levy.
The Government Department also gives operational grants to the entity which is not to be given to individuals.
The entity also receives other very small grants.
The aggregated turnover of the entity for the two years prior to the current year was less than $2,000,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 328-110
Income Tax Assessment Act 1997 Section 328-115
Income Tax Assessment Act 1997 Section 328-120
Reasons for decision
Derivation of Income
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) discusses income according to ordinary concepts
Subsection 6-5(1) of the ITAA 1997 states your assessable income includes income according to ordinary concepts, which is called ordinary income.
Subsection 6-5(2) states if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Subsection 6-5(4) states in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
In this case the individuals derive the income from the Government Department and the entity is merely acting as an intermediary between the Government Department and the individuals. The total amount received from the Government Department is worked out according to the time sheets submitted by the individuals through the entity to the Government Department. When the total amount is received by the entity it takes out an admin levy and pays the remaining amount to the individuals according to their timesheets. The only part of the total payment received which is derived, and thereby assessable income to the entity, is the portion of the total payment which is retained as an admin levy. The amounts which are passed on to individuals have not been derived by the entity and are therefore not assessable income to the entity.
Small Business Entities
Subdivision 328-C of the ITAA 1997 discusses what a small business entity (SBE) is.
Subsection 328-110(1) states 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) states you work out your aggregated turnover for the current year for the purposes of subparagraph (1)(b)(ii):
(a) as at the first day of the current year; or
(b) if you start to carry on a business during the current year - as at the day you start to carry on the business.
There is an exception under subsection 328-110(3) however where your aggregated turnover for 2 previous income years was $2 million or more.
It states 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.
There is an additional rule under subsection 328-110(4) which is based on aggregated turnover worked out as at the end of the current income year.
It states you are also a small business entity for an income year (the current year) if:
(a) you carry on a business in the current year; and
(b) your aggregated turnover for the current year, worked out as at the end of that year, is less than $2 million.
Subsection 328-115(1) states 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).
Subsection 328-115(2) states 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.
Subsection 328-120(1) states an entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.
In this case the entity carried on a business in the current year and its annual turnover in the current year was below $2million. As the entity meets all conditions under Subdivision 328-C, it is considered a SBE.
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