Edited version of private advice

Authorisation Number: 1052186807058

Date of advice: 10 November 2023

Ruling

Subject: Aggregated turnover - base rate entity

Question

Does a company's turnover include gaming payouts for the purposes of determining whether it is a base rate entity?

Answer

Yes.

This ruling applies for the following period:

year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1. There are X Australian resident companies that are controlled by one family group.
2. Each entity is carrying on a hotel business.
3. Each hotel business has gaming revenue derived from poker machines.
4. The poker machines generate revenue based on the amount of money customers contribute to the machine.
5. The poker machines are designed and required to payout prizes and jackpots which are system generated based on a certain percentage of the revenue running through the machine.
6. The entities meet the connected entity test.
7. The annual turnover of the six entities is aggregated.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 126

A New Tax System (Goods and Services Tax) Act 1999 Section 126-10

A New Tax System (Goods and Services Tax) Act 1999 Division 188

A New Tax System (Goods and Services Tax) Act 1999 Section 188-32

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Income Tax Rates Act 1986 section 23

Income Tax Rates Act 1986 section 23AA

Income Tax Rates Act 1986 section 23AB

Reasons for decision

Question

Summary

The receipts from the operation of the gaming machines are ordinary income of the hotel business for each company and are included in their annual turnover as defined in section 328-120 of the Income Tax Assessment Act 1997 (ITAA 1997). As gambling payouts and prizes are not one of the items excluded by either section 328-120 of the ITAA 1997 in relation to annual turnover, or section 328-115 of the ITAA 1997 in relation to aggregated turnover, the amounts of payouts, prizes and jackpots from the poker machines are included in the calculation of the annual turnover of each company and in turn the aggregated turnover of the connected entities for the purposes of determining whether each company is a base rate entity.

Detailed reasoning

Section 23 of the Income Tax Rates Act 1986 (ITRA 1986) provides the rates of tax payable by a company, other than a company in the capacity of a trustee, is determined dependent on whether the company is a base rate entity as described in section 23AA of the ITRA 1986. Eligibility for the lower company tax rate of 25% is available if the company is a base rate entity, with the full company tax rate of 30% applicable to all companies that are not eligible for the lower company tax rate (subsection 23(2) of the ITRA 1986).

Base Rate Entities

Section 23AA of the ITRA 1986 provides that an entity is a base rate entity for a year of income if:

(a) no more than 80% of its assessable income for the year of income is base rate entity passive income; and

(b) its aggregated turnover (within the meaning of the Income Tax Assessment Act 1997 (ITAA 1997) for the year of income, is less than $50 million.

Aggregated turnover

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 yours at any time during the income year.

To calculate your aggregated turnover, you need to:

•           work out your annual turnover

•           include the annual turnover of any affiliates or connected entities

•           work out your aggregated turnover.

Annual turnover

'Annual turnover' is defined in section 328-120 of the ITAA 1997. Subsection 328-120(1) of the ITAA 1997 says:

An entity's annual turnover for an income year is the total *ordinary income that the entity *derives in the income year in the ordinary course of carrying on a *business.

A receipt will be included in aggregated turnover if it is both:

•           'ordinary income', and

•           derived in the 'ordinary course' of carrying on a business.

Ordinary income - general principles

Section 995-1 of the ITAA 1997says that 'ordinary income' has the meaning given by section 6-5 of the ITAA 1997. Subsection 6-5(1) of the ITAA 1997 says assessable income includes income according to ordinary concepts, which is called ordinary income.

'Income according to ordinary concepts' is not defined. However, there is a substantial body of case law addressing whether receipts are ordinary income under section 6-5 of the ITAA 1997 or similar predecessor provisions. Taxation Ruling 2006/3: Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business (TR 2006/3) at paragraph 85 summarises some general guidelines, taken from this case law. Very broadly:

•           whether receipts are classified as 'income' for a business taxpayer depend on the circumstances of the receipt and the nature of the taxpayer's business

•           receipts are not income if they are characterised as 'capital' - such as payments for realising capital assets or part of the business' profit earning structure

•           receipts are likely to be income if they are received periodically, regularly, or on a recurring basis, or are consideration for the performance of services

•           receipts from isolated transactions, entered into with the intention to profit, may be income in some circumstances.

The character of receipts will depend on the character of the business.

Derived in the ordinary course of carrying on a business

The phrase 'ordinary course of carrying on a business' is not defined, so its meaning must be taken from its ordinary usage and context.

The Macquarie Dictionary says the meanings of:

•           'ordinary' include 'commonly met with, of the usual kind' or 'customary; normal'

•           'course' include 'customary manner of procedure; regular or natural order of events', 'a mode of conduct; behaviour' or 'a particular manner of proceeding'.

'Business' is defined in section 995-1 of the ITAA 1997 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides further guidance on whether an activity carried on by a taxpayer amounts to a business.

A receipt will be 'in relation to' carrying on a business when there is a real connection between the payment and the business. The term 'in relation to' includes within its scope payments that have a direct or indirect connection to the business. As stated by Hill J in the First Provincial case (1995) 56 FCR 320 at 333

The words 'in relation to' are words of wide import. They are capable of referring to any relationship between two subject matters in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other.....the degree of connection will be 'a matter of judgment on the facts of each case'... What is necessary, at the least, in the present context is that there be a real connection...the relationship need not be direct, it may also be indirect.

Your annual turnover is your gross income of proceeds, not your net profit.

In calculating your annual turnover there are exclusions in subsections 328-120(2), 328-120(3) and 328-120(4) of the ITAA 1997 to consider.

Broadly your annual turnover does not include the following amounts:

•           GST you are charged on a transaction

•           amounts you have borrowed for the business

•           proceeds from the sale of business capital assets

•           insurance proceeds for the loss or destruction of a business asset

•           retail fuel sales

Subsection 328-120(5) of the ITAA 1997 also impacts on the calculation as it requires that if an entity does not carry on a business for a whole income year, its annual turnover is worked out using a reasonable estimate of what it would be if it carried on a business for the whole income year.

Connected entities & affiliates

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.

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.

Working out your aggregated turnover

To work out your aggregated turnover you add the annual turnovers of the relevant business entities excluding the amounts set out in subsection 328-115(3) as follows:

(a) amounts derived in the income year by you or a relevant entity from dealings between you and the relevant entity while the relevant entity is connected with you or is your affiliate

(b) amounts derived in the income year by a relevant entity from dealings between the relevant entity and another relevant entity while each relevant entity is connected with you or is your affiliate

(c) amounts derived in the income year by a relevant entity while the relevant entity is not connected with you and is not your affiliate

GST turnover and gambling supplies

The aggregated turnover, annual turnover and connected entities are all income tax concepts governed by the Income Tax Assessments Act 1936 and 1997. Goods and services tax (GST) is a separate and distinct, broad-based tax of 10% on most goods and services and other items sold or consumed in Australia. It is governed by A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The meaning of GST turnover for the purposes of GST is set out in Division 188 of the GST Act. These provisions contain special rules that apply when calculating the GST turnover in relation to gambling supplies. Section 188-32 of the GST Act states:

188-32 The value of gambling supplies

For the purposes only of this Division, the value of all the * gambling supplies that an entity makes during a particular period is taken to be an amount equal to 11 times:

(a) the entity's * global GST amount for that period; or

(b) if that period is not a tax period - what would have been the entity's global GST amount for the period if that period had been a tax period.

An entity's 'global GST amount' is defined by section 126-10 of the GST Act as:

126-10 Global GST amounts

(1) Your global GST amount for a tax period is as follows:

(Total amount wagered - Total monetary prizes) × 1/11

where:

total amounts wagered is the sum of the consideration for all of your gambling supplies that are attributable to that tax period.

total monetary prizes is the sum of:

(a) the monetary prizes you are liable to pay, during the tax period, on the outcome of gambling events (whether or not any of those gambling events, or the gambling supplies to which the monetary prizes relate, take place during the tax period); and

(b) any amounts of money or digital currency you are liable to pay, during the tax period, under agreements between you and recipients of your gambling supplies, to repay to them a proportion of their losses relating to those supplies (whether or not the supplies take place during the tax period).

Under the GST provisions the GST is payable on the margin between money received and money paid out for a gambling event. This is unique to the GST law in relation to gambling.

The Goods and Services Tax Ruling, Goods and services tax: prizes (GSTR 2002/3) sets out the Commissioner's view in relation to gambling supplies and explains:

174. The general rule for working out the net amount of GST that applies to entities for a tax period is contained in Division 17. Subsection 17-5(1) provides that the net amount for a tax period applying to entities is worked out using the formula:

GST - Input tax credits

175. However, Division 126 provides the way of working out an entity's net amount by incorporating their net profits from taxable supplies involving gambling.

Further:

181. GST on gambling supplies is dealt with by using the global accounting system described in Division 126.

Application to your circumstances

To calculate the aggregated turnover under section 328-115 of the ITAA 1997, for the purposes of determining whether the company is a base rate company under section 23AA of the ITRA 1986, requires you to add the annual turnovers of each of the connected entities.

As all the related companies carry on a hotel business their annual turnover is their ordinary income derived from their trading activities. This will include all receipts that are in relation to the hotel business.

As part of their business, each hotel offers poker gaming machines which generate income for the business based on the amount of money customers contribute to play the machine. Receipts from the operation of the gaming machines would be ordinary income for each company and will be included in their annual turnover.

In calculating each company's annual turnover, the exclusions in subsections 328-120(2), 328-120(3) and 328-120(4) of the ITAA 1997 apply. Certain items including GST charged on transactions, amounts borrowed for the business, any proceeds from the sale of business capital assets and insurance proceeds for the loss or destruction of a business asset for example, will not be included in the calculation of their annual turnover.

The payout prizes and jackpots that are system generated and are based on a certain percentage of the revenue running through the machine, while they are a necessary expense incurred by each company to operate the poker machines as part of their business, the amounts are still included in the gross income of each company's business. As they do not fall within one of exclusions, they make up part of the ordinary income of the business and are included in the company's annual turnover. For each hotel business with poker machines, their ordinary income includes all the gaming machine transactions.

While special rules exist in the GST legislation to calculate your GST turnover in relation to gambling supplies, that uses the margin between money received and money paid out, there is no equivalent provision in Income Tax Assessment Acts 1936 and 1997 that allows revenue for gambling to be calculated using a global accounting system like that provided in section 126-10 of the GST Act.

The receipts from the operation of the gaming machines are ordinary income of the hotel business for each company and therefore are included in their annual turnover as defined in section 328-120 of the ITAA 1997. As gambling payouts and prizes are not one of the items excluded by either section 328-120 of the ITAA 1997 in relation to annual turnover, or section 328-115 of the ITAA 1997 in relation to aggregated turnover, the amounts of payouts, prizes and jackpots from the poker machines are included in the calculation of the annual turnover of each company and in turn the aggregated turnover of the connected entities for the purposes of determining whether the company is a base rate entity.