Edited version of private advice

Authorisation Number: 1051942243197

Date of advice: 25 January 2022

Ruling

Subject: Aggregated turnover

Question 1

For the purpose of calculating the Trust's aggregated turnover for the year ending 30 June 20XX pursuant to section 328-115 Income Tax Assessment Act 1997 (ITAA 1997), is the Partnership's annual turnover its ordinary business income from the Business from 1 July 20XX until settlement of the business sale on 31 July 20XX?

Answer

No.

Question 2

If the answer to Question 1 is no, for the purpose of calculating the Trust's aggregated turnover for the year ending 30 June 20XX pursuant to section 328-115 ITAA 1997, is the Partnership's annual turnover the ordinary business income from the Business from 1 July 20XX until the partnership's dissolution on 1 September 20XX, despite the business being owned by an unrelated party from 31 July 20XX?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust is a discretionary trust whose beneficiaries include the Individuals and their related trusts and companies.

The Trust is considering selling assets.

It is anticipated that these assets may be sold in the 20XX financial year.

The Trust, its affiliates and connected entities have net assets in excess of $XXX.

The Trust is connected to the Partnership.

The Partnership previously owned and operated the Business.

The sale of the Business was settled on 31 July 20XX. The Partnership itself was not sold.

The Partnership ceased 1 September 20XX

Relevant legislative provisions

Division 328 of the Income Tax Assessment Act 1997

Subdivision 328-C of the Income Tax Assessment Act 1997

Section 328-110 of the Income Tax Assessment Act 1997

Subsection 328-110(4) of the Income Tax Assessment Act 1997

Section 328-115 of the Income Tax Assessment Act 1997

Subsection 328-115(5) of the Income Tax Assessment Act 1997

Section 328-120 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Summary

You must estimate what the annual turnover of the Partnership would have been had it been in business the full year in accordance with subsection 328-120(5) of the Income Tax Assessment Act 1997 (ITAA 1997). It is this annual turnover that the Trust will use to work out it's aggregated income in accordance with section 328-115 of the ITAA 1997.

Detailed reasoning

To qualify as a small business under Division 328 of the ITAA 1997 an entity must satisfy the requirements under Subdivision 328-C of the ITAA 1997.

An entity may be a small business entity for the current year if it carries on a business in the current year and has less than $10 million in turnover worked out as at the end of the year in accordance with subsection 328-110(4) of the ITAA 1997.

The meaning of aggregated turnover is provided under section 328-115 of the ITAA 1997 to mean the sum of the relevant annual turnovers for the entity and any entity connected or affiliated with the first entity in the income year. Certain exclusions apply under subsection 328-115(3) of the ITAA 1997, with paragraph 328-115(3)(c) of the ITAA 1997 excluding amounts derived by an affiliated or connected entity while it was not affiliated or connected with the entity.

Annual turnover is defined under section 328-120 of the ITAA 1997 to mean the ordinary income that the entity derived in the income year in the ordinary course of business. Where an entity does not carry on a business for the full income year, the special rule under subsection 328-120(5) of the ITAA 1997 applies to require the entity to work out the annual turnover using a reasonable estimate as if the entity had operated the business for the full income year.

Paragraph 2.29 of the Explanatory Memorandum to Tax Laws Amendment (Small Business) Bill 2007 (EM) states that the intention of subsection 328-120(5) of the ITAA 1997 is:

'to ensure that the eligibility test of turnover, as an indicator of the size of a business, is based on income for a full year. Without this rule, entities that carry on a business for part of an income year would have a lower turnover than is truly representative of the size of the business.'

The application of this provision is to ensure the true size of the business is taken into account is further supported by ATO ID 2009/49 Income Tax Small Business Concessions: small business entity test - annual turnover - business carried on part year only.

As noted above, amounts derived by entities while they were not affiliated or connected with you are not included in the aggregated turnover calculation. As the business was sold as a going concern to a third party that was not affiliated or connected with you, the amount actually derived by the third party in operating the business is not to be included in the aggregated turnover calculation.

This exclusion does not work to restrict the estimation of an entity's annual turnover under subsection 320-120(5) of the ITAA 1997, as it only excludes amounts derived by entities while they are not connected or affiliated.

Example 2.12 of the EM provides the following example:

"From 1 July 2007 to 31 December, Nerida beneficially owned interests in QYX Pty Ltd that carry between them the right to receive 50 per cent of any distribution from QYX Pty Ltd.

On 1 January 2008, Nerida disposed of her interest in QYX Pty Ltd.

Nerida was only connected with QYX Pty Ltd from 1 July 2007 to 31 December 2007 and therefore only needs to include the ordinary income derived by QYX Pty Ltd during that period of time in her aggregated turnover. The income derived by QYX Pty Ltd from 1 January 2008 to 30 June 2008 is an excluded amount for the purposes of Nerida's aggregated turnover in the 2007-08 income year."

This example demonstrates that the actual amount derived by QYX Pty Ltd after they are no longer connected or affiliated to Nerida is not to be included in the aggregated turnover calculation.

For the purpose of calculating the Trust's aggregated turnover for the year ending 30 June 20XX pursuant to section 328-115 Income Tax Assessment Act 1997 (ITAA 1997), the Partnership's annual turnover is its ordinary business income estimated for the full income year ending 30 June 20XX under subsection 328-120(5) of the ITAA1997.

Question 2

Summary

You must estimate what the annual turnover of the Partnership would have been had it been in business the full year in accordance with subsection 328-120(5) of the ITAA 1997. This will not include any turnover the business derived while it was not affiliated or connected with you.

Detailed reasoning

To qualify as a small business under Division 328 of the ITAA 1997 an entity must satisfy the requirements under Subdivision 328-C of the ITAA 1997.

An entity may be a small business entity for the current year if it carries on a business in the current year and has less than $10 million in turnover worked out as at the end of the year in accordance with subsection 328-110(4) of the ITAA 1997.

The meaning of aggregated turnover is provided under section 328-115 of the ITAA 1997 to mean the sum of the relevant annual turnovers for the entity and any entity connected or affiliated with the first entity in the income year. Certain exclusions apply under subsection 328-115(3) of the ITAA 1997, with paragraph 328-115(3)(c) of the ITAA 1997 excluding amounts derived by an affiliated or connected entity while it was not affiliated or connected with the entity.

Annual turnover is defined under section 328-120 of the ITAA 1997 to mean the ordinary income that the entity derived in the income year in the ordinary course of business. Where an entity does not carry on a business for the full income year, the special rule under subsection 328-120(5) of the ITAA 1997 applies to require the entity to work out the annual turnover using a reasonable estimate as if the entity had operated the business for the full income year.

Paragraph 2.29 of the Explanatory Memorandum to Tax Laws Amendment (Small Business) Bill 2007 (EM) states that the intention of subsection 328-120(5) of the ITAA 1997 is:

'to ensure that the eligibility test of turnover, as an indicator of the size of a business, is based on income for a full year. Without this rule, entities that carry on a business for part of an income year would have a lower turnover than is truly representative of the size of the business.'

The application of this provision is to ensure the true size of the business is taken into account is further supported by ATO ID 2009/49 Income Tax Small Business Concessions: small business entity test - annual turnover - business carried on part year only.

As noted above, amounts derived by entities while they were not affiliated or connected with you are not included in the aggregated turnover calculation. As the business was sold as a going concern to a third party that was not affiliated or connected with you, the amount actually derived by the third party in operating the business is not to be included in the aggregated turnover calculation.

This exclusion does not work to restrict the estimation of an entity's annual turnover under subsection 320-120(5) of the ITAA 1997, as it only excludes amounts derived by entities while they are not connected or affiliated.

Example 2.12 of the EM provides the following example:

"From 1 July 2007 to 31 December, Nerida beneficially owned interests in QYX Pty Ltd that carry between them the right to receive 50 per cent of any distribution from QYX Pty Ltd.

On 1 January 2008, Nerida disposed of her interest in QYX Pty Ltd.

Nerida was only connected with QYX Pty Ltd from 1 July 2007 to 31 December 2007 and therefore only needs to include the ordinary income derived by QYX Pty Ltd during that period of time in her aggregated turnover. The income derived by QYX Pty Ltd from 1 January 2008 to 30 June 2008 is an excluded amount for the purposes of Nerida's aggregated turnover in the 2007-08 income year."

This example demonstrates that the actual amount derived by QYX Pty Ltd after they are no longer connected or affiliated to Nerida is not to be included in the aggregated turnover calculation.

For the purpose of calculating the Trust's aggregated turnover for the year ending 30 June 20XX pursuant to section 328-115 Income Tax Assessment Act 1997 (ITAA 1997), the Partnership's annual turnover is its ordinary business income estimated for the full income year ending 30 June 20XX under subsection 328-120(5) of the ITAA1997.