Edited version of your written advice

Authorisation Number: 1051419042704

Date of advice: 24 August 2018

Ruling

Subject: Significant Global Entities

Question

Is the Company a significant global entity as defined in section 960-555 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

1. The Company is a privately held Australian resident company.

2. The Company’s shares are jointly held by two Australian resident individuals.

3. The Company currently prepares an annual general purpose financial report that is audited and prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards (the financial report).

4. The financial report is prepared on a consolidated basis and includes the following entities:

a. A wholly owned subsidiary of the Company; and

b. The Company Trustee for the Trust - on the basis that the Company has fixed entitlements to all income and capital of the Trust.

5. The annual turnover of the consolidated group is approximately $X.XX billion for the year ended 30 June 2017.

6. These entities are also a consolidated group for income tax purposes.

7. Furthermore, the Company does not have any other subsidiaries or interests in any other fixed trusts.

8. The Company is grandfathered from having to provide their financial report to the Australian Securities and Investments Commission (ASIC) pursuant to subsection 319(4) to subsection 319(6) of the Corporations Act 2001.

9. The Company’s only offshore sales are to unrelated third parties which represented approximately 0.XX% of the Company’s total turnover for the 2017 income year.

10. The Company has no international related parties and therefore has no international related party transactions or dealings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 960-U

Income Tax Assessment Act 1997 section 960-555

Income Tax Assessment Act 1997 subsection 960-555(1)

Income Tax Assessment Act 1997 subsection 960-555(2)

Income Tax Assessment Act 1997 subsection 960-555(3)

Income Tax Assessment Act 1997 section 960-560

Income Tax Assessment Act 1997 section 960-565

Income Tax Assessment Act 1997 paragraph 960-565(a)

Income Tax Assessment Act 1997 section 960-570

Income Tax Assessment Act 1997 subsection 995-1(1)

Taxation Administration Act 1953 section 3CA

Corporations Act 2001

Corporations Act 2001 section 9

Corporations Act 2001 subsection 319(4)

Corporations Act 2001 subsection 319(5)

Corporations Act 2001 subsection 319(6)

Corporations Act 2001 subsection 334(1)

Reasons for decision

Summary

The Company is a member of a group of entities that are consolidated for accounting purposes as a single group whereby it is a global parent entity with an annual global income of $X.XX billion for the relevant period, exceeding the $1 billion threshold.

The Company is therefore a significant global entity as defined by subsection 960-555(1) of the ITAA 1997 for the income year ended 30 June 2017.

Detailed reasoning

Definition of Significant global entity

Significant global entity (SGE) is defined in Subdivision 960-U of the ITAA 1997. Subsection 960-555(1) and subsection 960-555(2) of the ITAA 1997 provide that:

960-555(1)

An entity is a significant global entity for a period if the entity is a *global parent entity:

(a) whose *annual global income for the period is $1 billion or more; or

(b) in relation to whom the Commissioner makes a determination under subsection (3) for the period.

960-555(2)

An entity is also a significant global entity for a period if:

(a) the entity is a member of a group of entities that are consolidated for accounting purposes as a single group; and

(b) one of the other members of the group is a *global parent entity:

(i) whose *annual global income for the period is $1 billion or more; or

(ii) in relation to whom the Commissioner makes a determination under subsection (3) for the period.

…

Broadly, an entity is an SGE for a period if it is one of the following:

● A global parent entity whose annual global income is A$1 billion or more, or

● a member of a group of entities consolidated (for accounting purposes) where the global parent entity has an annual global income of A$1 billion or more.

Subsections (1) and (2) in section 960-555 are alternative limbs of the definition of significant global entity. The first limb is directed at an entity that is a global parent entity. The second limb is directed at an entity that is not a global parent entity, but is a member of a group of entities consolidated with another entity that is a global parent entity.

Meaning of global parent entity

Global parent entity is defined in section 960-560 of the ITAA 1997, which provides the following:

A global parent entity is an entity that, according to:

(a) accounting principles; or

(b) if accounting principles do not apply in relation to the entity – commercially accepted principles relating to accounting;

is not controlled by another entity.

An entity is considered to be a global parent entity provided that it is not controlled by another entity, according to accounting principles or if accounting principles do not apply to the entity, according to commercially accepted principles relating to accounting.

Subsection 995-1(1) of the ITAA 1997 defines accounting principles and accounting standards as follows.

accounting principles: A matter is in accordance with accounting principles if it is in accordance with:

(a) accounting standards; or

(b) if there are no accounting standards applicable to the matter – authoritative pronouncements of the Australian Accounting Standards Board that apply to the preparation of financial statements.

...

accounting standards has the same meaning as in the Corporations Act 2001.

Accounting standards is defined in section 9 of the Corporations Act 2001 to mean:

a) an instrument in force under section 334 of the Corporations Act 2001; or

b) provision of such an instrument as it so has effect.

Subsection 334(1) of Corporations Act 2001 states that the Australian Accounting Standards Board (AASB) may make accounting standards for the purposes of the Corporations Act 2001 by legislative instrument (Australian Accounting Standards). The standards must not be inconsistent with the Corporations Act 2001 or the regulations.

AASB 10 Consolidated Financial Statements (AASB 10) establishes principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities. Under AASB 10, control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. To determine whether an entity is controlled by another, paragraphs 5 - 9 state:

5 An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee.

6 An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

7 Thus, an investor controls an investee if and only if the investor has all the following:

(a) power over the investee (see paragraphs 10–14);

(b) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs15 and 16); and

(c) the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs 17 and 18).

8 An investor shall consider all facts and circumstances when assessing whether it controls an investee. The investor shall reassess whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed in paragraph 7 (see paragraphs B80–B85).

9 Two or more investors collectively control an investee when they must act together to direct the relevant activities. In such cases, because no investor can direct the activities without the co-operation of the others, no investor individually controls the investee. Each investor would account for its interest in the investee in accordance with the relevant standards, such as AASB 11 Joint Arrangements, AASB 128 Investments in Associates and Joint Ventures or AASB 9 Financial Instruments.

In the present case, the Company prepares a financial report on a consolidated basis, on the basis that the Company has fixed entitlements to all income and capital of the Trust.

Based on the facts provided there is no another entity that controls the Company for accounting purposes and the Company is a global parent entity under section 960-560 of the ITAA 1997.

As the Company is a global parent entity, the relevant limb of the definition of significant global entity is subsection 960-555(1). It then becomes necessary to determine whether the criteria for subsection (1) are met for the test period (year ending 30 June 2017). It will be met if either:

● The annual global income of the Company for the period is $1 billion or more, or

● The Commissioner has made a determination under subsection 960-555(3).

Annual global income

Annual global income is defined in section 960-565 of the ITAA 1997:

The annual global income of a global parent entity for a period is:

(a) if the entity is a member of a group of entities that are consolidated for accounting purposes as a single group - the total annual income of all the members of the group; or

(b) otherwise - the total annual income of the entity;

as shown in the latest *global financial statements for the entity for the period.

The annual global income of the Company under paragraph 960-565(a) of the ITAA 1997, is its total annual income of all the members of the group as shown in its latest global financial statements for the income year ended 30 June 2017.

The term ‘global financial statements’ is defined in section 960-570 of the ITAA 1997 and generally refers to financial statements that have been prepared and audited in accordance with accounting principles and auditing principles for the relevant period.

The Company prepared an annual general purpose financial report audited and prepared in accordance with Australian Accounting Standards. Those statements show an annual income of exceeding $1 billion.

The criteria in subsection 960-555(1) is met for the year ending 30 June 2017 - specifically that the Company had annual global income of $1 billion or more.

The applicant has suggested that the definition of significant global entity should be interpreted with reference to the word “global” contained within the term. The Oxford definition of global has been noted as “relating to the whole world; worldwide”. It is further suggested that this means the concept of significant global entity should not apply to entities that operate solely domestically.

This is not accepted, for two reasons. Firstly while the word global is part of the terms being identified (global parent entity, annual global income, global financial statements, significant global entity), the meaning of these terms must be found in the text of the definition for each. The text of each definition has no criteria or requirement relating to cross border operations. Secondly, even if some significance could be attributed to the word “global”, the meaning of the word is not confined to the meaning offered by the applicant. The Oxford Concise dictionary provides the further definition “pertaining to or embracing the whole of a group of items etc; total.” The Macquarie Dictionary says “all-embracing; comprehensive”. The use of “global” in the term significant global entity should be read as simply a name for the entity whose totality meets the criteria in the definition.

Thus, the definition is not limited to entities that are members of a multinational group and can be an entity in a group that only has operations in Australia, including those that are privately owned.

Therefore, the Company is a significant global entity under section 960-555 of the ITAA 1997 for the year ending 30 June 2017. It will continue to be a significant global entity in subsequent periods provided its annual global income is greater than $1 billion for the relevant periods

The applicant has also referred to a perceived conflict between section 3CA of the Taxation Administration Act 1953 (TAA 1953) and the grandfathering of subsections 391(4) to (6) of the Corporations Law (as preserved in the Corporations Act 2001). This is not considered relevant to determining the meaning of significant global entity. Section 3CA is one of the provisions that uses the concept of “significant global entity” but does not have relevance to interpreting the meaning of the term. The meaning is to be determined elsewhere - by referring to Subdivision 960-U of the ITAA 1997.

In any case section 3CA requires certain entities that do not otherwise lodge general purpose financial statements with the Australian Securities and Investment Commission (ASIC) to provide a general purpose financial statement to the ATO. Thus, the very purpose of section 3CA is to apply to those entities that are not otherwise required to lodge general purpose financial statements under the Corporations Act 2001 with ASIC. This includes grandfathered large proprietary companies, as provided in our guidance.

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