Edited version of your private ruling

Authorisation Number: 1012576292656

Ruling

Subject: Aggregated turnover

Question 1

For the purpose of calculating "annual turnover" under s 328-120 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), are the drawings made from the company's Administration Account, ordinary income which it derives in an income year in the ordinary course of carrying on a business?

Answer

No.

This ruling applies for the following periods:

· Income year ending 30 June 2013

· Income year ending 30 June 2014

· Income year ending 30 June 2015

The scheme commences on:

01 July 2012

Relevant facts and circumstances

· The company is a statutory body corporate.

· The company acts as Trustee for various superannuation schemes.

· The company's principal functions are to:

· administer the schemes

· invest and manage the fund of the schemes

· provide for the custody of the assets and securities of the schemes

· ensure scheme benefits are properly paid

· determine disputes under the schemes.

· The company holds on trust for the persons who are or will be entitled to benefits under the schemes, all assets, contributions, and other money paid or payable to the company.

· Where administration costs are incurred in relation to the various schemes, the amounts are drawn from the reserves or accounts of the relevant fund, and paid to an account which the company is required to maintain (the Administration Account). The costs are subsequently paid out of the Administration Account by the company.

· The amounts drawn from the various schemes, and in turn, from the Administration Account to pay for administration costs incurred with third parties, are reported as management fee income in the company's annual report. The administration costs that are incurred with third parties are reported as an expense in the company's annual report. However, it is clear that these costs are payable by the various company's scheme stakeholders, and not the company.

· The company has no capital or retained earnings, and is never at risk (provided it maintains its fiduciary obligation).

· There is no accumulation of income or transfer to the reserve of the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 238-115

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

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

Explanatory Memorandum to the Tax Laws Amendment (Small Business) Act 2007

Reasons for decision

In accordance with subsection 328-120(1) of the ITAA 1997, an entity's annual turnover for an income year is the total ordinary income that the entity derives in an income year in the ordinary course of carrying on a business.

The term 'ordinary income' is defined in section 6-5 of the ITAA 1997 as income according to ordinary concepts. An entity's annual turnover includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.

The term 'business' is defined in subsection 995-1(1) of the ITAA 1997 to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

'Carrying on a business' is not defined in Division 328 of the ITAA 1997 nor is it defined elsewhere in the ITAA 1997. It therefore takes its ordinary meaning. This approach is confirmed in the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Act 2007, which introduced the small business $2 million turnover test and as an alternative to the Maximum Net Assets Value $6 million test. At paragraph 2.14, it is stated:

The phrase 'in the ordinary course of carrying on a business' is not defined in income tax law. It must therefore be interpreted according to its ordinary meaning.

Implicit from the analysis above, is that for an entity to have an annual turnover it must be carrying on a business.

The Commissioner's view on whether an entity is carrying on of a business is found in a number of places.

Taxation Ruling TR 97/11, (TR 97/11) whether a taxpayer is carrying on a business, states the question of whether a person is carrying on a business is determined by the facts in each individual case. This is done by considering case law which provides a number of indicators that are relevant to determining whether an activity constitutes the carrying on of a business. These indicators are set out below:

· Whether the activity has a significant commercial purpose or character;

· Whether the taxpayer has more than just an intention to engage in business;

· Whether the taxpayer has a purpose of profit as we as a prospect of profit from the activity;

· Whether there is repetition and regularity of the activity;

· Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; and

· The size, scale and permanency of the activity.

TR 97/11 states at paragraph 16 that the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). No one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

In the current scenario, the most relevant indicator in terms of 'carrying on a business' could be the company's potential to make a profit. In Hope v The Council of the City of Bathurst (1980) 144 CLR 1, Mason J indicated, at CLR8-9, that the carrying on of a business is usually such that the activities are:

'…engaged in for the purpose of profit on a continuous and repetitive basis'.

You have stated that the objective of the company is to act as Trustee for the company's schemes. The company does not conduct itself with a view to a profit and it does not derive a fee for providing its services, and is never at risk.

Included in the information you provided were extracts from the company's annual report which states that the Administrative Expenses (disclosed as "management fees" in the company's annual reports) consist of Trustee Expenses, Executive Expenses and Fund Expenses.

A significant portion of the administrative expenses is incurred to a second company, being the administrator of the company's schemes. It offers a range of services including: collecting contributions from employers and members, keeping and maintaining member records, providing information to member, processing claims and paying benefits, reporting to trustee and compliance advice and technical services etc. The second company charges fees for the services it provides to the company's schemes.

Other administration expenses include fees paid to consultants, audit fees and fees for other services.

According to the annual report of the company's schemes, for which the company is the trustee, the Scheme Administration Expenses disclosed reconciles with the Management Fees disclosed in the company's annual report. This demonstrates that the company's Management Fees (i.e. scheme administration expenses) are incurred by the company's scheme. The annual report also confirms that there is no accumulation of income or transfer to the reserve of the company.

In accordance with facts given, the objective of the company is to act as Trustee for the company's schemes. The company does not conduct itself with a view to profit, and is never at risk. The company's relationship with the company's schemes and scheme members is a fiduciary relationship; as such the amounts drawn by the company from the reserves or accounts of the relevant company schemes, which in turn, from the company's Administration Account, should not be regarded as the company's income according to ordinary concepts derived by it, in the course of carrying on a business, as it is not (legally and beneficially) their money. Rather it is applied for a particular purpose. Funds are held in trust only, no separate invoicing occurs, the transactions are not part of a normal outgoing and revenue flow of a business and the company is not exposed the loss or risk.