Edited version of your written advice

Authorisation Number: 1012910637219

Date of advice: 11 November 2015

Ruling

Subject: The small business annual turnover test

Question 1

Are you required to include the gross amounts received from the fees collected in your ordinary income for the purposes of the annual turnover test in subsection 328-120(1) of the Income Tax Assessment Act 1997, when the actual payment for services rendered is the commissions received?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are a booking agency.

You collect commissions from the supply of approximately 10% of the total supply.

You reported in accounting records the gross amounts of income. The full amount is billed to your clients even though the majority of the income is charged back out as an expense to the actual supplier.

You deal with many suppliers; all of which are unrelated entities.

Relevant legislative provisions

The Income Tax Assessment Act 1997 subsection 6-5(4),

The Income Tax Assessment Act 1997 subsection 328-110(1) and

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

Reasons for decision

Division 328 of the Income Tax Assessment Act 1997 (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.

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.

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).'

Taxation Ruling TR 93/36 deals with the assessability of commissions paid by investment funds to intermediaries. Paragraph 19 of TR 93/36 states that if an intermediary has a legal right to receive a commission from an investment fund but does so, on the client's behalf, the intermediary has no beneficial interest in the commission but merely serves as a conduit for the passing on of the commission for the investment fund to the investor.

Subsection 6-5(4) of the ITAA 1997expresses that an entity has derived an amount of ordinary income if they are taken to have receive the amount as soon as it is applied or dealt with in any way on their behalf or as directed. An entity, acting on behalf of another does not have an equitable interest in those funds according to ordinary concepts.

Application to your circumstances

You act as an intermediary between clients and suppliers. As a result, you do not take on any of the associated risks and do not incur costs associated.

Although you may hold legal title to the proceeds in its bank account prior to forwarding relevant amounts to the providers, you do not have an equitable interest in these funds. Rather, the equitable owners of the funds are the suppliers.

Consequently, the gross amounts received from fees collected are not considered to be income according to ordinary concepts and should not be included in determining your annual turnover for the purposes of subsection 328-120(1) ITAA 1997. You are required to include only amounts representing the selling fees when determining its annual turnover.