Edited version of private ruling

Authorisation Number: 1011619953340

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Ruling

Subject: Small Business Entity

Question

For the purpose of determining the aggregated turnover under section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997) of the company, does the company include foreign sourced income from a foreign entity that is connected to the company?

Answer: Yes.

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The company is an Australian resident for tax purposes.

The company has a turnover of less than $2 million.

The company shares are owned in equal proportions by two individuals who are connected to the company.

Both of the individuals are non-residents of Australia for tax purposes.

One of the individuals operates a business overseas.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 6-5(3)(a)

Income Tax Assessment Act 1997 paragraph 328-115(2)(b)

Income Tax Assessment Act 1997 subsection 328-120(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for Decision

Under paragraph 328-115(2)(b) your aggregated turnover includes the annual turnover for the income year of any entity that is connected with you at any time during the income year.

Subsection 328-120(1) states that 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.

According to paragraph 6-5(3)(a) if you are a foreign resident, your assessable income includes the ordinary income you derived directly or indirectly from all Australian sources during the income year. This means that where you derive ordinary income does not affect the nature of that income merely the assessability of that income.

Applying this principle to the definition of an entities annual turnover in subsection 328-120(1), its total ordinary income will include its foreign sourced ordinary income derived in the course of carrying on a business regardless of the residential status of the entity.

In your case, when the company calculates its aggregated income it must include all income derived from a business carried on by the connected individual shareholders regardless of where that income is derived or whether the shareholder is a resident of Australia.