Edited version of your written advice

Authorisation Number: 1051342258741

Date of advice: 27 February 2018

Ruling

Subject: Significant Global Entity

Question 1

Is Company A a significant global entity under subsection 960-555(1) or (2) of the Income Tax Assessment Act (ITAA) 1997 for the 2016 income year?

Answer

No

Question 2

Is Company A a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for the 2017 income year?

Answer

No

Question 3

In the event that Company A has annual global income of less than $1 billion for the 2018 income year, will Company A be a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for that income year?

Answer

No

Question 4

In the event that Company A has annual global income of less than $1 billion for the 2019 income year, will Company A be a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for that income year?

Answer

No

Question 5

In the event that Company A has annual global income of less than $1 billion for the 2020 income year, will Company A be a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for that income year?

Answer

No

Question 6

In the event that Company A has annual global income of less than $1 billion for the 2021 income year, will Company A be a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for that income year?

Answer

No

This ruling applies for the following periods:

2016 to 2021 Income years

The scheme commences on:

1 January 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A is an Australian resident.

Company A’s shares are held by Group One and Group Two entities.

Company A Constitution

The Company A Constitution requires that certain business of the company be carried out with the ‘total voting power of the Company A Board’ These restrictions are mirrored in the Agreement entered into with Group One and Group Two.

The Agreement

The Agreement mirrors the restrictions in the Company A Constitution that require certain business of the company be carried out with the ‘total voting power of the Company A Board’.

Group One financial statements

Company A is not consolidated into the Group One financial statements in accordance with AASB 10 Consolidated Financial Statements.

Group Two financial statements

Company A is not consolidated into the Group Two financial statements in accordance with AASB 10 Consolidated Financial Statements.

Company A financial statements

Company A’s financial statements for the 2016 and 2017 income years have been prepared and audited in accordance with the accounting principles and auditing principles defined in the ITAA 1997.

The total revenue in Australian dollars, as reported by Company A in their statutory accounts for the 2016 and 2017 income years, was less than $1 billion.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 960-U

Income Tax Assessment Act 1997 Section 960-555

Income Tax Assessment Act 1997 Section 960-560

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

Company A is not a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for the 2016 and 2017 income years.

In the event that Company A has annual global income of less than $1 billion for each of the 2018 to 2021 income years, Company A is not a significant global entity for the particular income year under subsection 960-555(1) or (2) of the ITAA 1997.

Detailed reasoning

Significant global entity is defined in Subdivision 960-U of the ITAA 1997. Subsections 960-555(1) and (2) of the ITAA 1997 provide that:

960-555(1)

An entity is a significant global entity for a period if the entity is a *global parent entity:

(a) whose *annual global income for the period is $1 billion or more; or

(b) in relation to whom the Commissioner makes a determination under subsection (3) for the period.

960-555(2)

An entity is also a significant global entity for a period if:

(a) the entity is a member of a group of entities that are consolidated for accounting purposes as a single group; and

(b) one of the other members of the group is a *global parent entity:

(i) whose *annual global income for the period is $1 billion or more; or

(ii) in relation to whom the Commissioner makes a determination under subsection (3) for the period.

…

Meaning of global parent entity

Global Parent Entity is defined in Subdivision 960-560 of the ITAA 1997, it provides that:

A global parent entity is an entity that, according to:

(a) *accounting principles; or

(b) if accounting principles do not apply in relation to the entity - commercially accepted principles relating to accounting;

is not controlled by another entity.

Based on the definitions in section 995-1(1) of the ITAA 1997:

accounting principles: A matter is in accordance with accounting principles if it is in accordance with:

(a) *accounting standards; or

(b) if there are no accounting standards applicable to the matter - authoritative pronouncements of the Australian Accounting Standards Board that apply to the preparation of financial statements.

...

accounting standards has the same meaning as in the Corporations Act 2001.

Accounting standards is defined in section 9 of the Corporations Act 2001 to mean:

a) an instrument in force under section 334 of the Corporations Act 2001; or

b) provision of such an instrument as it so has effect.

Subsection 334(1) of Corporations Act 2001 states that the Australian Accounting Standards Board (AASB) may make accounting standards for the purposes of the Corporations Act 2001 by legislative instrument. The standards must not be inconsistent with the Corporations Act 2001 or the regulations.

AASB 10 Consolidated Financial Statements (AASB 10) establishes principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities. Under AASB 10, control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. To determine whether an entity is controlled by another, paragraphs 5 - 9 state:

5 An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee.

6 An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

7 Thus, an investor controls an investee if and only if the investor has all the following:

(a) power over the investee (see paragraphs 10–14);

(b) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16); and

(c) the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs 17 and 18).

8 An investor shall consider all facts and circumstances when assessing whether it controls an investee. The investor shall reassess whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed in paragraph 7 (see paragraphs B80–B85).

9 Two or more investors collectively control an investee when they must act together to direct the relevant activities. In such cases, because no investor can direct the activities without the co-operation of the others, no investor individually controls the investee. Each investor would account for its interest in the investee in accordance with the relevant Standards, such as AASB 11 Joint Arrangements, AASB 128 Investments in Associates and Joint Ventures or AASB 9 Financial Instruments.

Company A’s Constitution and the Agreement set out the key decisions that require unanimous approval from all directors. This indicates Group 1 and Group 2 have collective control of Company A as they must act together to direct key activities of Company A.

In accordance with paragraph 9 of AASB 10, Company A is not controlled by any of its individual shareholders.

This conclusion is consistent with AASB 11 Joint Arrangements which defines a joint arrangement as one in which two parties have joint control. In joint arrangements, parties are bound by a contractual arrangement and the contractual arrangement gives two or more parties joint control of the arrangement. The standard states that this arrangement is either a joint operation or a joint venture.

Therefore, Company A is not controlled by another entity according to Australian Accounting Standards and is a global parent entity under section 960-560 of the ITAA 1997.

Annual global income

Annual global income is defined in section 960-565:

The annual global income of a *global parent entity for a period is:

(a) if the entity is a member of a group of entities that are consolidated for accounting purposes as a single group - the total annual income of all the members of the group; or

(b) otherwise - the total annual income of the entity;

as shown in the latest *global financial statements for the entity for the period.

As previously discussed, Company A is collectively controlled by two separate groups (Group one and Group Two) as they must act together to direct key activities of Company A. Neither Group One nor Group Two control Company A on its own. Therefore, Company A is not a member of the consolidated group of Group One or Group Two for accounting purposes under paragraph 960-565(a) of the ITAA 1997.

Consequently, the annual global income of Company A is its total annual income shown in its global financial statements for the relevant periods under paragraph 960-565(b) of the ITAA 1997.

The phrase ‘global financial statements’ is defined in section 960-570 of the ITAA 1997 and generally refers to financial statements that have been prepared and audited in accordance with accounting principles and auditing principles for the relevant period.

In respect of question 1 and question 2, Company A’s total annual income as shown in its audited financial statements for the 2016 and 2017 income years are less than $1 billion. Company A is therefore not a significant global entity for those periods.

In respect of questions 3 to 6, there is an inbuilt assumption in each of those questions that for the relevant income year referenced in each of those ruling questions, that Company A’s total annual income for that specified income year will be less than $1 billion.

Accordingly, Company A does or would fail the annual global income test under subsection 960-555(1)(a).

In relation to paragraph 960-555(1)(b) of the ITAA 1997, it does not or will not apply to Company A when Company A prepares financial statements in accordance with accounting principles and auditing principles for the relevant income years.

Therefore, Company A is not a significant global entity under subsection 960-555(1) of the ITAA 1997 provided its annual global income is less than $1 billion for the relevant income year.

Member of a group of entities consolidated for accounting purposes

An entity can also be a significant global entity under subsection 960-555(2) of the ITAA 1997 if it is a member of a group of entities that are consolidated for accounting purposes as a single group and one of the members of the group is a global parent entity who meets the annual global income threshold.

In reference to paragraph 960-555(2)(a) of the ITAA 1997, Law Companion Guideline LCG 2015/3 Subdivision 815-E of the Income Tax Assessment Act 1997: Country-by-Country reporting states that ‘a subsidiary of a global group that is not included in the global parent entity’s consolidated financial statements will not meet the definition of a significant global entity…’

AASB 10 provides that consolidated financial statements should be prepared where a parent entity controls an investee.

Following on from the above, Company A has not been and will not be consolidated for accounting purposes by Group One or Group Two for the years to which this ruling applies. Consequently, Company A will not be a significant global entity for the years to which this ruling applies under paragraph 960-555(2)(a) of the ITAA 1997. It is not necessary to consider paragraph 960-555(2)(b) of the ITAA 1997.

Therefore, Company A is not a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for the years to which this ruling applies.