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Ruling

Subject: aggregated turnover

Question 1

Are sub-consultant fees included in the calculation of your aggregated turnover under section 61-510(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a small business entity as you carry on a business and your aggregated turnover is less than $2 million.

You are a partner in a partnership offering professional services.

You commenced business in the 2011 income year.

During this period you had one client.

The client required you to co-ordinate the relevant sub-consultants.

The sub-consultants invoiced you on a monthly basis for work done. You were responsible for payment of these invoices.

The full fee for the sub-consultants was then on-charged to the client. This was clearly itemised on the client invoice.

You did not receive any financial benefit from these transactions.

You held the insurances and professional indemnities for the job. The sub-consultants were required to hold the relevant insurances in order for you to obtain this insurance.

Relevant legislative provisions

Income Tax Assessment Act 1997 - subsection 6-5

Income Tax Assessment Act 1997 - subsection 61-510

Income Tax Assessment Act 1997 - subsection 61-525(2)

Reasons for decision

Summary

Your annual turnover includes all ordinary income you earned in the ordinary course of business for the income year and includes sub-consultant fees on-charged through the partnership.

Detailed reasoning

Entrepreneurs Tax Offset

Subsection 61-510(1) of the ITAA 1997 states that each of the partners in a partnership that is a small business entity may be eligible for the entrepreneurs tax offset where the partnerships aggregated turnover for the year is less than $75,000.

Aggregated turnover

Aggregated turnover is the partnerships' annual turnover plus the annual turnovers of any business you are connected with or that is your affiliate.

Small business entity turnover

Section 61-525(2) of the ITAA 1997 provides that an entity's small business entity 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. GST amounts are specifically excluded when calculating the turnover amount.

Ordinary course of business

In general, you derive income in the ordinary course of carrying on a business if you:

· regularly or customarily derive the income in the course of carrying on your business, not from any special circumstance or unusual event

· don't regularly derive the income but you do derive it directly from your normal business activities.

You may derive ordinary income in the ordinary course of carrying on your business, even if the income is not the main type of ordinary income you derive. The income does not need to account for a significant part of your business' overall receipts. It is enough that the ordinary income is of a kind derived regularly or customarily in the course of carrying on your business.

Taxation Ruling TR 97/6 provides that an amount representing a recoupment of a disbursement is ordinary income where the recouping of disbursements occurs as part of the normal outgoings and revenue flow of the business.

In your case, you make payment to the sub-consultant(s) on receipt of the monthly invoice. This cost is on-charged to the client, along with your fees. The client and the sub-consultant do not have any direct financial dealings. In the event of non payment by the client, you would sustain the loss.

It is considered these invoice payments are an integral part of the business activities and under ordinary accounting concepts would be considered to be accounts payable and accounts receivable.

Accordingly, the receipts are income under ordinary concepts and are ordinary income for the purposes of section 6-5 of the ITAA 1997. They are therefore to be included as income when calculating the small business entity turnover of the partnership.