Edited version of your written advice

Authorisation Number: 1012838543978

Date of advice: 17 July 2015

Ruling

Subject: Small business annual turnover test

Question 1

Is the Flower Trust required to include the gross amount received from flower sales in determining its total ordinary income for the purposes of the annual turnover test in subsection 328-120(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the actual reward for services rendered is the net income of flower sales less grower payments (selling fee)?

Answer

No

This ruling applies for the following period

1 July 20xx to 30 June 20yy

The scheme commences on

1 July 20xx

Relevant facts and circumstances

1. The Flower Trust is a discretionary trading trust.

2. The Trust states that its core business activity is:

a. the provision of flower sale services on a subscription and commission basis whereby clients pay annual subscription fees to receive flower marketing information and access to flower marketers who facilitate the sale of their flowers, and

b. the majority of its time and effort is spent providing flower price and marketing information to its subscription clients.

3. The Trust also enters into contracts with flower growers to facilitate flower sales on their behalf. The Trust explains that it does not take on the risk of the flower sale, nor does it purchase the flowers as trading stock. It states that it essentially acts as an agent for the growers such that the only remuneration it receives from the sales are the selling fees received.

4. The proceeds from the flower sales are held in a separate bank account to the main business activity of providing flower marketing information to subscription clients. The Trust further states that the total selling fees it receives from these transactions is relatively minor in comparison to the income it receives from its core business activities.

Relevant legislative provisions

Section 128-120 of the Income Tax Assessment Act 1997

Subsection 328-110(1) of the Income Tax Assessment Act 1997

Subsection 328-120(1) of the Income Tax Assessment Act 1997

Section 328-155 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Is the Flower Trust required to include the gross amount received from flower sales in determining its total ordinary income for the purposes of the annual turnover test in subsection 328-120(1) of the ITAA 1997 when the actual reward for services rendered is the net income of flower sales less grower payments (selling fee)?

SMALL BUSINESS ENTITIES

5. Division 328 of the ITAA 1997 provides for the meaning of a small business entity relevant for the entity to access various tax concessions available in the tax legislation. In determining whether an entity meets the criteria necessary to satisfy the definition of a small business entity, subsection 328-110(1) provides that consideration of the entity's aggregate turnover is required.

6. The meaning of the term 'aggregate turnover' is provided in section 328-115 ITAA 1997, which broadly is the sum of the relevant annual turnovers. Section 328-120 provides for the meaning of 'annual turnover'. The general rule under subsection 328-120(1) is that the annual turnover of an entity for an income year will be the total ordinary income the entity derives in the ordinary course of carrying on its business. Consequently, in order to establish whether an entity is a small business entity it is necessary to consider what constitutes the entity's ordinary income such that its annual turnover for the relevant income year can be established.

7. The legislation does not provide guidance on the meaning of 'ordinary income' however, guidance as to its meaning can be found in case law. For instance, in Scott v. Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215, Jordan CJ held that the meaning of 'income' was to be determined according to 'ordinary concept and usages' at 219 as follows:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts: A.-G. for British Columbia v. Ostrum ([1904] AC 144 at 147); Lambe v. Inland Revenue Commissioners ([1934] 1 KB 178 at 182-3).

8. Where a company holds legal title to the funds in the bank account, but does not have an equitable interest in these funds, it is appropriate, under general principles of trust law, to exclude the funds from the company assets entirely.

9. A trust may be generally defined as an equitable obligation binding a person to deal with property over which they have control for the benefit of other persons. The trustee holds legal title to the trust property, but usually does not have an equitable interest in it. The general principle is that in most cases the trust property cannot be said to be an asset that belongs beneficially to the trustee.

Application to your circumstances

10. The Flower Trust acts as an intermediary between the flower growers and purchasers. As a result, it does not take on the risk of the flower sale, nor does it purchase the flowers as trading stock. The only remuneration the Trust receives from the sales are the selling fees received.

11. Although the Flower Trust may hold legal title to the proceeds from flower sale in its bank account prior to forwarding relevant amounts to the growers, the Trust does not have an equitable interest in these funds. Rather, the equitable owners of the funds are the flower growers for which the Trust has brokered the sale. As such, the general principles of trust law deem it appropriate to exclude the amounts being held on behalf of the growers from the Trust's ordinary income.

12. Consequently, the gross amounts received from flower sales are not considered to be income according to ordinary concepts and should not be included in determining the Trust's annual turnover for the purposes of subsection 328-120(1) ITAA 1997. The Flower Trust is required to include only amounts representing the selling fees when determining its annual turnover.