Edited version of private advice

Authorisation Number: 1051522264567

Date of advice: 05 June 2019

Ruling

Subject: Significant global entity

Question 1

Is Company A a significant global entity for the purposes of section 960-555 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.      Company A is an Australian incorporated and tax resident company. It has one class of shares on issue.

2.      Company A is an incorporated joint venture established in 20XX.

3.      50% of its shares are held by another Australian company (AusCo 1), which is ultimately 100% owned by a foreign company OthCo.

4.      The remaining 50% of the shares in Company A are held by an Australian company (AusCo 2), which is ultimately 100% owned by a foreign company, ParCo.

5.      ParCo and OthCo, through their subsidiaries, must act together to direct the relevant activities of Company A. Neither one can direct the activities of Company A without the cooperation of the other.

6.      The joint venture agreement and any associated arrangements do not affect the ownership rights of Company A in any way that would enable one shareholder to control Company A without the cooperation of the other shareholder.

7.      ParCo and OthCo and are global parent entities in their own right in accordance with Subdivision 960-560 of the ITAA 1997.

8.      Company A's annual turnover for the 2018 financial year was below one billion dollars. Company A has prepared global financial statements for itself for the 20XX financial year.

9.      Both OthCo and ParCo's have turnovers are in excess of one billion dollars.

10.   OthCo has included 50% of Company A's gross assets, liabilities, revenue and expenses in its financial statements.

11.   ParCo has included 50% of Company A's gross assets, liabilities, revenue and expenses in its financial statements.

12.   Company A has no subsidiaries.

Relevant legislative provisions

Corporations Act 2001 Section 334

Income Tax Assessment Act 1997 Section 960-555

Income Tax Assessment Act 1997 Section 960-560

Income Tax Assessment Act 1997 Section 960-565

Income Tax Assessment Act 1997 Section 960-570

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Summary

13.   Company A is not a significant global entity for the purpose of section 960-555.

Detailed reasoning

14.   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.

...

15.   It is noted for completeness that subsection 960-555(3) does not apply as global financial statements have been prepared for Company A.

Meaning of global parent entity

16.   Global parent entity is defined in section 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.

17.   Based on the definitions in subsection 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.

18.   '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.

19.   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.

20.   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 assist in the determination of 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 asAASB 11 Joint Arrangements, AASB 128 Investments in Associates and Joint Ventures or AASB 9 Financial Instruments.

21.   In the present case, OthCo and ParCo each ultimately hold a 50% interest in Company A respectively. They must act together to direct the relevant activities of Company A. Neither one can direct the activities of Company A without the cooperation of the other.

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

23.   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.

24.   In the present case, the OthCo has accounted for Company A as a joint operation in its 2018 Annual Reports; while ParCo has accounted for Company A as a joint venture in its 2018 Annual Reports according to International Financial Reporting Standards (IFRS).

25.   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

26.   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.

27.   As previously discussed, OthCo and ParCo through their subsidiaries jointly control Company A as they must act together to direct key activities of Company A. Neither OthCo nor ParCo can individually control Company A. Therefore, Company A is not a member of the consolidated group of OthCo or ParCo for accounting purposes under paragraph 960-565(a) of the ITAA 1997.

28.   Consequently, the annual global income of Company A is its own total annual income for the relevant years under paragraph 960-565(b) of the ITAA 1997.

29.   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.

30.   As Company A's total annual income for the 2018 income year was below $1 billion, Company A is not a significant global entity for that year pursuant to paragraph 960-555(1)(a).

31.   In relation to paragraph 960-555(1)(b), it does not apply to Company A when Company A prepares financial statements in accordance with accounting principles and auditing principles for the relevant income years as they have prepared global financial statements. Thus paragraph 960-555(1)(b) will not apply for the 2018 income year.

32.   Accordingly, Company A is not a significant global entity under subsection 960-555(1) for the 2018 income year.

33.   The Commissioner cannot determine whether Company A is a significant global entity for subsequent years. However, if the material facts are unchanged, and Company A's total annual income remains below $1 billion, Company A will not be a significant global entity for those years.

Member of a group of entities consolidated for accounting purposes

34.   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.

35.   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...'

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

37.   Following on from the above, Company A has not been and will not be consolidated for accounting purposes by OthCo or ParCo 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 for the reasons discussed in paragraph 30.

38.   Therefore, Company A is not a significant global entity under subsection 960-555(1) or (2) of the ITAA 1997 for the 2018 income year, nor the subsequent years to which this ruling applies if the material facts do not change.