Edited version of your written advice

Authorisation Number: 1051485557178

Date of advice: 27 February 2019

Ruling

Subject: Significant global entity

Question

Is Company A a significant global entity as defined in subsection 960-555(1) or (2) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2018 income year?

Answer

No

This ruling applies for the following period:

2018 income tax year

Relevant facts and circumstances

Company A is a proprietary company under the Corporations Act 2001 and is an Australian tax resident.

Company A conducts a business and derives 100% of its income from Australian sources.

Company A has income for the 2018 income tax year of less than A$25 million.

Company A has no investments in any other entities.

Company A is owned by the following shareholders in the following proportions:

● Company B, a foreign resident company, owns 50% of the shares of Company A. The annual global income of Company B does not exceed A$1 billion.

● Company C, a foreign resident company, owns the remaining 50% of the shares of Company A. Company C is ultimately owned by a privately-owned foreign group with annual global income in excess of A$1 billion.

Company A is not controlled by any single shareholder according to Australian accounting standard AASB 10 Consolidated Financial Statements. Neither of the foreign shareholder groups consolidate Company A for accounting purposes.

Company A’s financial statements will be prepared in accordance with accounting principles as defined in subsection 995-1(1) of the ITAA 1997. However, as it is a small proprietary company that is not foreign controlled, its financial statements are not required to be audited under the Corporations Act 2001.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 960-U

Income Tax Assessment Act 1997 Section 960-555

Income Tax Assessment Act 1997 Section 960-560

Income Tax Assessment Act 1997 Section 960-565

Income Tax Assessment Act 1997 Section 960-570

Income Tax Assessment Act 1997 Section 995-1

Reasons for Decision

Summary

Company A is not a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for the 2018 income year.

Detailed reasoning

Significant global entity is defined in Subdivision 960-U of the ITAA 1997. Section 960-555 of the ITAA 1997 provides 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.

960-555(3)

The Commissioner may make a determination under this subsection in relation to a *global parent entity for a period if:

(a) *global financial statements have not been prepared for the entity for the period; and

(b) on the basis of the information available to the Commissioner, the Commissioner reasonably believes that, if such statements had been prepared for the period, the entity's *annual global income for the period would have been $1 billion or more.

The Commissioner must give a notice of the determination to the global parent entity, or to another entity that becomes a *significant global entity as a result of the determination.

…

Is Company A a global parent entity?

Global parent entity is defined in section 960-560 of the ITAA 1997, as follows:

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.

Definitions in subsection 995-1(1) of the ITAA 1997 provide:

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

Subsection 334(1) of the 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. 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 and sets out what it means for an entity to control another entity in paragraphs 5 to 9.

Application to your circumstances

Company A is not controlled by any single shareholder according to accounting standard AASB 10. Therefore, Company A is a global parent entity under section 960-560 of the ITAA 1997 and will be a significant global entity under subsection 960-555(1) if it satisfies paragraph 960-555(1)(a) or paragraph 960-555(1)(b).

Does Company A have annual global income of $1 billion or more?

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.

Global financial statements is defined in section 960-570 as follows:

Global financial statements for a *global parent entity for a period (the relevant period) are the financial statements that:

(a) have been prepared and audited in relation to that entity, or that entity and other entities, in accordance with:

(i) *accounting principles and *auditing principles; or

(ii) if such principles do not apply - commercially accepted principles, relating to accounting and auditing, that ensure the statements give a true and fair view of the financial position and performance of that entity (or that entity and the other entities on a consolidated basis); and

(b) are for the most recent period ending:

(i) no later than the end of the relevant period; and

(ii) no earlier than 12 months before the start of the relevant period.

Application to your circumstances

Company A is not controlled by any other single entity according to accounting standard AASB 10 and is not consolidated in the accounts of either of the foreign shareholder groups. Nor does it have any investments in any other entities. Therefore, its annual global income as defined in section 960-565, and for the purposes of paragraph 960-555(1)(a) of the ITAA 1997, for the 2018 income year is its total annual income for the 2018 income year as shown in its latest global financial statements for the period (i.e. financial statements for the period that have been prepared and audited in accordance with accounting principles and auditing principles as defined in subsection 995-1(1) of the ITAA 1997).

As Company A is not required to audit its financial statements, its unaudited financial statements will not be global financial statements under the definition in subsection 960-570. Therefore, it will not have annual global income within the meaning of section 960-565 of the ITAA 1997.

Therefore, paragraph 960-555(1)(a) will not apply to Company A.

Is Company A a significant global entity under subsection 960-555(1) of the ITAA 1997?

An entity will also be a significant global entity under subsection 960-555(1) of the ITAA 1997 if paragraph 960-555(1)(b) applies to the entity. Paragraph 960-555(1)(b) applies if the Commissioner makes a determination under subsection 960-555(3).

The Commissioner has not made such a determination. Furthermore, the Commissioner can only make a determination under subsection 960-555(3) of the ITAA 1997 if, on the basis of the information available, the Commissioner reasonably believes that if global financial statements had been prepared, the entity’s annual global income for the period would have been $1billion or more. Having regard to the facts set out in this Ruling, the Commissioner could not hold that belief and therefore could not make such a determination in respect of Company A. Therefore, paragraph 960-555(1)(b) will not apply.

In conclusion, Company A is not a significant global entity under subsection 960-555(1) of the ITAA 1997.

Is Company A a significant global entity under subsection 960-555(2) of the ITAA 1997?

An entity can also be a significant global entity under subsection 960-555(2) of the ITAA 1997 if it is a member of a group of entities that are consolidated for accounting purposes as a single group and one of the other members of the group is a global parent entity who meets the annual global income threshold.

Company A is not consolidated for accounting purposes by either of the foreign shareholder groups. Therefore, Company A will not be a significant global entity for the 2018 income year under subsection 960-555(2) of the ITAA 1997.

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