Edited version of private advice

Authorisation Number: 1051862463860

Date of advice: 7 July 2021

Ruling

Subject: Small business entity rules

Question

Are you a small business entity pursuant to Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997) for the financial year ending 30 June 20xx?

Answer

No

The ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1.     You are a proprietary company limited by shares and incorporated in Australia

2.     Your principal business activities consist of the sale and distribution of fuel, fuel products and the sale of merchandise from service stations.

3.     You sell fuel to both retail customers and commercial customers.

4.     Retail customer sales are from the following categories:

• sales from your service stations which are retail outlets, and
• direct sales to customers in the transport industry.

5.     'Commercial customers' are customers who on-sell the fuel in the ordinary course of their business. Commercial customers consist of third-party service station owners and operators.

6.     Your distribution process for commercial fuel sales is identical to your sale of fuel to retail customers. You collect fuel form the fuel refinery and deliver this to the third-party service station.

7.     The sale of fuel to commercial customers is generally on identical or less favourable terms to you, than sales to retail customers.

8.     You have no connected entities or affiliates whose annual turnover is to be included in your aggregated turnover.

9.     You also have non-fuel retail sales within service stations that include food, newspapers and other retail products.

10.     Your turnover for the year ending 30 June 20xx exceeded $10m after retail fuel sales were excluded i.e. commercial fuel sales combined with non-fuel retail sales within service stations exceeded $10m.

11.     Your passive income consists of minor amounts that are not in excess of 80% of your total assessable income for the income year.

12.     You expect to derive similar quantities of income in the following income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 section 6-5

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

Fuel Tax Act 2006 (Cwlth)

Tax Laws Amendment (Small Business) Act 2007 (Cwlth)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Summary

You are not a small business entity under Subdivision 328-C for the financial year ending 30 June 20xx.

Detailed reasoning

Small business entity

To meet the requirement in subsection 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 $10 million

                        (ii)          your aggregated turnover for the current year is likely to be less than $10 million

For the purposes of subsection 328-110(1), the current year will be the year ending 30 June 20xx (the 20xx income year) and the previous year will be the year ending 30 June 20xx (the 20xx income year).

Carrying on a business

The term 'business' is defined to include any profession, trade employment, vocation or calling, but does not include occupation as an employee under subsection 995-1(1). 'Carrying on a business' is not defined in the ITAA 1997 and, therefore, takes its ordinary meaning.

Aggregated turnover

The term 'aggregated turnover' for an income year is defined in subsection 328-115(1) as the sum of the relevant annual turnovers listed in subsection 328-115(2), excluding any amounts covered by subsection 328-115(3).

Under subsection 328-115(2), the relevant annual turnovers are

(a)   your annual turnover for the income year

(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.

Under subsection 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

An entity's aggregated turnover is the same as its annual turnover if there are no other entities it is connected with or affiliated with.

Annual turnover

An entity's 'annual turnover' for an income year is defined in subsection 328-120(1) as the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

'Ordinary income' is defined as income according to ordinary concepts under section 6-5.

The Macquarie Dictionary (revised third edition, 2001) defines 'income' as:

•        the returns that come in periodically, especially annually, from one's work, property, business, etc.; receipts.

•        something that comes in

An entity's annual turnover therefore includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.

However, subsection 328-120(3) states:

In working out an entity's *annual turnover for an income year, do not include any amounts of *ordinary income the entity *derives from sales of *retail fuel.

The Explanatory Statement to the simplified tax system (STS) average turnover test provided for in the Income Tax Assessment Regulations 2003 (No.1) explained the following purpose, background and calculation of STS group turnover that were in effect prior to the enactment of subsection 328-120(3):

Purpose

The purpose of the new regulation is to enable low profit fuel retailers access to the STS by prescribing an alternative calculation of STS group turnover for certain industry groups. This assists entities selling retail fuel by reducing their compliance costs. Previously, there were no regulations to this effect.

Background

Certain criteria must be met for a business to be eligible to enter the STS. One criterion is that the value of STS average turnover of a business and its related businesses for the year must be less than $1 million.

The less than $1 million turnover test excluded small businesses with high turnover but low profit. This was particularly the case for businesses in the retail fuel industry. These businesses are small in nature but were excluded from the STS because of their high turnover.

Despite the high level of turnover from fuel, these businesses tend to be low profit. Profit margins from fuel are so low that sale of fuel is insufficient to be a viable business on its own. All service stations operate a convenience store or a workshop or both in order to remain viable. Retail fuel entities with three components still only return a gross profit of approximately $500,000.

Entities selling retail fuel are essentially small businesses which are generally family owned and operated, employ few staff and have uncomplicated taxation affairs. They are the types of business the STS measure was intended to assist by reducing their high compliance costs.

Calculation of simplified tax system group turnover

The STS group turnover for fuel retailers is calculated by subtracting the value of business supplies for retail fuel from the value of business supplies for all business operations such as the workshop, sales of non-fuel items and non-retail sales of fuel.

The Explanatory Memorandum to subsection 328-120(3) explains that this special rule was inserted into to the act because it was previously a regulation that applied to STS taxpayers. It states at paragraph 2.17:

The STS average turnover test provided for regulations to be made to allow for different methods of calculating turnover for certain entities. Such a regulation was made for the purposes of fuel retailers, recognising that entities involved in the sale of retail fuel will often have high levels of turnover with a very low margin, so that the ordinary turnover figure would not be a true indicator of size. This Bill retains that result by bringing the effect of this regulation in to the ITAA 1997.

Retail fuel

Retail fuel is defined in subsection 995-1(1) as taxable fuel within the meaning of the Fuel Tax Act 2006, that is sold by retail. Very broadly, 'taxable fuel' means fuel in respect of which duty is payable under customs and excise acts.

Meaning of retail

There is no statutory definition of the term 'retail', reference must therefore be made to the ordinary meaning of the word shaped by the context in which it is found.

The Macquarie Dictionary,2020 8th edition defines 'retail' to mean:

•        the sale of commodities to household or ultimate consumers, usually in small quantities (opposed to wholesale)

An extensive review on the meaning of the expression "retail sale" was considered in Collector of Customs v. Chemark Services Pty Ltd (1993) 114 ALR 531 (1993) 17 AAR 424 (1993) 42 FCR 585 (Chemark Services). In this Full Federal Court case it was found that a "'retail sale" generally requires a sale to an ultimate consumer.

In this case the applicant imported into Australia metham sodium, a fumigant used by professional horticulturalists. 93% was sold to wholesalers and 7% was sold directly by the applicant to end-users, after attaching, as required by Victorian law, a label with safety details and usage instructions.

This appeal case was from a decision of a single judge of the same Court that was hearing an appeal from the Administrative Appeals Tribunal. It raised issues relating to the interpretation of heading 3808 of Schedule 3 to the Customs Tariff Act 1987.

On the meaning of the expression "retail sale", the primary Judge made an extensive review of authority. His Honour at paragraph 12 held:

In my view, the meaning of the expression "retail sale" depends on both the quantity of the goods involved and the nature of the purchaser of the goods. A retail sale is thus a sale usually possessing both of the following characteristics:

1.     It is a sale to an ultimate consumer and not to a wholesaler or other person, including a retailer, who acquires the goods for resale.

2.     It is a sale of goods in a quantity not larger than is necessary immediately or shortly to satisfy the requirements of ..."the ordinary man in the street". The size or bulk of an article of the goods may be large or small according to the nature of the goods.

...

The Chemark Services judgement from paragraphs 15 to 25 went on further to say:

15. Words in a statute are to be given their ordinary and natural meaning unless that meaning leads to an absurdity, or some repugnance or inconsistency with the rest of the Act: Grey v Pearson (1857) 6 HLC 61 at 106; 10 ER 1216 at 1234 per Lord Wensleydale; Australian Boot Trade Employees' Federation v Whybrow and Co (1930) 11 CLR 311 at 341-2 per Higgins J. ...

16. "Retail sale" has been defined as "the sale of commodities in small quantities": Oxford English Dictionary (2nd ed., 1989); and "the sale of commodities to household or ultimate consumers, usually in small quantities": Macquarie Dictionary (2nd ed., 1991).

17. In Plummer and Adams v Needham (1954) 56 WALR 1, Dwyer CJ stated at 5-6:

According to the Oxford Dictionary, retail is selling goods in small quantities; Webster's Dictionary gives an alternative meaning, viz. a sale directly to a consumer. That alternative has justification in the decision of the Court of Appeal in Phillips v Parnaby, in which case the goods consisted of one parcel of two tons of coal, not a small quantity. In my opinion, where the commodity is sold is, as in the case before us, a single unit and in the form in which it is commonly purchased by a buyer for his own use, its bulk and price are immaterial.

18. Similarly, Virtue J held at 15-16:

Some support for the appellants' interpretation of "sale by retail" as referring to a sale in small quantities may no doubt be derived from the etymology of the word and also from its primary meaning as given in the standard dictionaries. But the word has undoubtedly acquired a specialised meaning of sales to an ultimate consumer as opposed to sales to the trade for the purpose of resale.

19. In Chappell and Co Ltd v Nestl Co Ltd [1960] AC 87, Viscount Simonds observed at 102:

It is a sale to a consuming member of the public and I know of no other factor which distinguishes a retail sale from other sales. Put negatively, it is not a sale wholesale to a purchaser who proposes himself to sell it retail.

20. Similar support for this "ultimate consumer" test can be found in Treacher and Co Ltd v Treacher (1874) WN 4; Phillips v Parnaby [1934] 2 KB 299 at 304 per Lord Hewart CJ; Provident Life Assurance Co Ltd v Official Assignee (1963) NZLR 961 at 965 per North P and Turner J.

...

24. The weight of authority seems to us to support a conclusion that the words "retail sale" have generally acquired a specialised meaning of a sale to an ultimate consumer. We do not think that the usage of the term limits such consumers to ordinary members of the public. The fact that in the present case almost all of the goods imported by the respondent were directly sold to professional horticulturalists and not ordinary gardeners as ultimate consumers is in our opinion irrelevant. Professionals can still be described as ultimate consumers...

25. Likewise, although more often than not a retail sale will be both a sale to the ultimate consumer and a sale of goods in a quantity not larger than necessary to satisfy the ordinary non-professional purchaser, some sales in larger quantities will also be retail. Thus his Honour's second criterion of the size or quantity of the sale cannot in our view be determinative.

Application to your circumstances

You carry on business and derive income through the sale and distribution of fuel and the sale of merchandise from service stations. As you are not connected with, or affiliated with, any other entities, your aggregated turnover is the same as your annual turnover under section 328-115.

Through the ordinary course of carrying on a business Your turnover for the year ending 30 June 20xx exceeded $10m after retail fuel sales were excluded i.e. commercial fuel sales combined with non-fuel retail sales within service stations exceeded $10m.

Retail fuel is defined in subsection 995-1(1) as taxable fuel within the meaning of the Fuel Tax Act 2006, that is sold by retail. This is a distinguishing factor of a retail sale. It is not a sale to a wholesale purchaser who proposes to sell it retail. A retail sale possesses the following characteristics:

•        is a sale to an ultimate consumer, not to a wholesaler, other person or retailer acquiring the goods for resale

•        "retail" is not limited to small consumers and ordinary members of the public. Goods can be directly sold to other businesses who can be described as ultimate consumers

•        bulk and price are immaterial. Usually a retail sale will be to ultimate consumers in quantities satisfying a non-business purchaser, but some sales in larger quantities are also retail, beyond a quantity usually purchased by buyers for their own use. The size or quantity is not determinative, it depends on the quantity of goods involved and nature of the purchaser.

Income derived from retail sales of fuel is specifically excluded from working out the annual turnover for an income year for the purpose of subsection 328-120(3).

Your commercial fuel was sold on less favourable terms and conditions than the retail fuel. This is expected for the market segment in which you operate. The commercial fuel was sold to wholesalers for resale instead of to household or ultimate customers.

The intention behind the introduction of the Income Tax Assessment Regulations 2003 (No.1) and subsection 328-120(3), specifically focuses on the exclusion of retailfuel sales from the definition of annual turnover. Having regard to the definition of 'retail', this exclusion does not extend to your fuel sales to commercial customers. They are sales to other service stations for the purpose of resale.

Your aggregated turnover in the relevant income year exceeds $10m from the sale of non-fuel retail products and commercial fuel sales, excluding retail fuel sales. Furthermore, you expect to derive similar quantities of income for the following income year.

Your aggregated turnover was more than $10 million for the relevant income year and is likely to be more than $10 million for the following income year. Therefore, you are not a small business entity for the relevant financial year under subsection 328-10(1).

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).