Edited version of private advice

Authorisation Number: 1052035109549

Date of advice: 16 September 2022

Ruling

Subject: Base rate entity

Question

Is the company a base rate entity for the financial years ending 30 June 20YY to 20YY according to section 23AA of the Income Tax Rate Act of 1986?

Answer

Yes, for the income years ending 30 June 20YY,20YY and 20YY

No, for the income year ending 30 June 20YY, as the company's aggregated turnover is above the base rate entity aggregated turnover threshold.

This private ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

1.         The company is an Australian resident company incorporated on the DD MM YYYY with three (equal) shareholders (person 1, person 2 and person 3).

2.         The company is retail business with a number of store locations.

3.         The company is a part of the larger family group of entities but conducts its business independently of other entities and is not and does not control any other entities.

4.         In addition, there is no individual or company that acts or could reasonably be expected to act in accordance with the directions or wishes of the company as either an affiliate or 'working in concert.'

5.         In the records of the corporate minutes (directors and shareholders) all relevant persons have been present and decisions resolved according to the company's constitution.

6.         The shareholders resolved unanimously to subdivide the fully paid ordinary shares into X fully paid ordinary shares.

7.         In a general meeting, the company agreed to buy back XX ordinary shares from person 1 for $X.

8.         On DD MM YYYY, a change of directorship occurred with the existing directors resigning and appointing X new directors based upon business operational needs.

9.         On DD MM YYYY, a subdivision of share capital occurred resulting in the following X number of shares.

10.      Person 1 resigned from the business on DD MM YYYY and their shareholdings were sold as X parcels of X ordinary shares which were acquired by Trust A and Trust B.

11.      For each of the income years ending 30 June 20YY, 30 June 20YY, 30 June 20YY and 30 June 20YY, the company has lodged income tax returns, paying tax at a rate of 30 percent.

12.      The majority of income in each of these years has been generated through sales of goods and service with additional income received through interest.

Relevant legislative provisions

Income Tax Rates Act 1986 section 23

Income Tax Rates Act 1986 section 23AA

Income Tax Rates Act 1986 section 23AB

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Question

Is the company a base rate entity for the income years ending 30 June 20YY to 30 June 20YY according to section 23AA of the Income Tax Rate Act of 1986 (ITRA 1986)?

Summary

The company has an aggregated turnover of less than $50 million in each of the income years ending 30 June 20YY to 20YY and less than 80 percent of its assessable income is base rate passive entity income.

However, for the income year ending 30 June 20YY, the company's aggregated turnover is greater than $25 million.

Therefore, the company satisfies the requirements of section 23AA of the ITRA 1986 as a base rate entity for the incomes years ending 30 June 20YY to 20YY, but does not meet the requirements for the income year ending 30 June 20YY

Detailed reasoning

Company tax rates

13.          Section 23 of the ITRA 1986 provides the rates of tax payable by a company, other than a company in the capacity of a trustee with the applicable tax rate determined dependent on whether the company is a base rate entity as described in section 23AA of the ITRA 1986.

Base Rate Entities

14.          An entity is a base rate entity for a year of income if no more than 80% of its assessable income for the year of income is base rate entity passive income; and its aggregated turnover (for the year of income) is less than:

•                     $25 million for the 20YY income year, and

•                     $50 million from the 20YY income year onwards.

15.          Section 23AA of the ITRA 1986 provides the applicable tax rates for the relevant years, being:

•                     27.5 percent for the income tax years 20YY, 20YY and 20YY, and

•                     26 percent for the 20YY income year.

Base rate entity passive income

16.          Section 23AB of the ITRA 1986 defines the term base rate entity passive income assessable income as:

•                     a distribution by a corporate tax entity, other than a non-portfolio dividend

•                     an amount of franking credit on such a distribution

•                     a non-share dividend by a company

•                     interest (or a payment in the nature of interest), royalties and rent

•                     a gain on a qualifying security

•                     a net capital gain; or

•                     an amount included in the assessable income of a partner in a partnership or of a beneficiary of a trust, to the extent that the amount is referable directly or indirectly to another amount that is BREPI.

Aggregated turnover

17.          Section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the meaning of aggregated turnover for an income year (which is the sum of the relevant annual turnovers) and includes:

(a)          your annual turnover for the income year; and

(b)          the annual turnover for the income year of any entity (a relevant entity) that is connected with you at any time during the income year; and

(c)           the annual turnover for the income year of any entity (a relevant entity) that is an affiliate of yoursat any time during the income year.

'Connected with' & affiliates

18.          Pursuant to section 328-125 of the ITAA 1997 an entity is connected with another entity if either entity controls the other entity or both entities are controlled by the same third entity.

19.          Section 328-130 of the ITAA 1997 provides that an individual or a company is an affiliate if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company but is not an affiliate merely because of the nature of the business relationship between the you and the individual or company.

Application to your circumstances

20.          Although the company falls within the family group of entities, it is conducted as an independent entity.

21.          The company does not control any other entities nor is it controlled by any other entity, with no single shareholder having majority control and this is reflected in the company minutes with all decisions resolved according to the company's constitution.

22.          As such the company is not affected by sections 328-125 and 328-30 of the ITAA 1997 and it aggregated turnover will only include its annual turnover for the relevant income years.

23.          In satisfying section 23AA of the ITRA 1986 as a base rate entity, the first condition requires that the entity must receive less than 80 percent of its income from base rate entity passive income[1].

24.          As the company has received the majority of its income through the sale of goods and services for each of the relevant income years, this condition is met.

25.          The second condition is that the entity's aggregated turnover (for the year of income) is less than:

•                     $25 million for the income years before 2018, and

•                     $50 million from the 2019 income year onwards

26.          For the income year ending 30 June 20YY the company's annual income is greater than the $25 million threshold.

27.          Therefore, the company does not meet the requirements of a base rate entity for the income year ended 30 June 20YY.

28.          For each of the income years ending 30 June 20YY to 20YY the company's aggregated turnover is less than $50 million, therefore satisfying the second condition of 23AA of the ITRA 1986.

Conclusion

29.          The company does not satisfy the conditions of a base rate entity under section 23AA of the ITRA 1986 for the income year ending 30 June 20YY but does satisfy the conditions of a base rate entity for the income years ending 30 June 20YY to 20YY.

[1] Section 23AB of the ITRA 1986