Edited version of private advice

Authorisation Number: 1052221884848

Date of advice: 15 May 2024

Ruling

Subject: Base rate entity

Question

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

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity A Pty Limited is an Australian resident company.

Entity A Pty Limited operate a XX store in XX, as well as another XX store in nearby XX.

XX is owned by XX individual shareholders, they each have approximately XX% ownership:

The directors of XX are XX and XX.

The annual turnover of XX for the year ended 30 June 20XX was $XX and for the year ended 30 June 20XX was $XX, which are both less than $XX million.

No more than XX% of XX assessable income for 20XX or 20XX was base rate entity passive income.

XX is the head company of an income tax consolidated group. The group comprises of:

•         XX

•         XX

•         XX

•         XX

•         XX.

XX is owned equally by the same XX individual shareholders of XX. Each shareholder has XX ordinary shares, and thus they each have approximately XX% ownership of XX.

The directors of XX are XX and XX.

The annual turnover of XX (as head company of the tax consolidated group) for the year ended 30 June 20XX was $XX, which is greater than $XX million.

The annual turnover of XX (as head company of the tax consolidated group) for the year ended 30 June 20XX is estimated to be $XX, but in any case, can be assumed to be greater than $XX million.

Individual Shareholders

None of the individual shareholders, operate a business or enterprise in their own capacity as individuals.

The business activity is conducted by the XX and XX.

XX and XX jointly own a warehouse which is rented to the XX business.

XX and XX are together partners in a XX partnership which is not related to the business of XX or XX.

Activities of Individuals

XX is no longer a director of XX or XX, and now has limited day to day involvement in the management of either business.

XX and XX are each directors of the various entities.

XX and XX are both independently involved in the business. XX tends to have a greater focus on the 'XX' operations and XX has a greater focus on the 'XX' operations. XX has a greater focus on general financial affairs across all businesses while XX has a focus on stock issues.

XX and XX are directors of each entity, they provide services to each company in that capacity, and it is not the case that XX is making its directors available to XX (or vice versa).

If one of the directors has an idea for a significant change to the business, they would typically develop this independently and then need to convince the other director of the relevant company to proceed with it. An example of this was when XX was investigating the purchase of XX. XX did all the due diligence before approaching XX regarding the purchase which both then agreed upon. A differing example was when XX wanted to give XX equity in the business. XX did not agree to this happening, and it did not proceed.

Relationship between XX and XX

The various XX group entities undertake separate, but in some ways related business activities (XX and XX products), in a range of geographic locations.

XX operate a separate XX business in XX, the XX in nearby XX, geographical locations where XX does not operate.

XX employs separate store managers to those used by XX.

XX has separate employees that work at the sites in XX and XX and the XX group has its own separate employees for its business locations in XX, XX, XX and XX.

XX has separate business premises in XX and XX and the XX group has its own separate business premises in XX, XX, XX and XX.

XX has its own debtors and creditor ledgers and maintains its own credit insurance.

XX provides 'back office' and administrative functions to all entities in the XX, including XX. This involves the provision of accounting, health and safety, IT and financing and banking functions. In effect, XX provides these 'back office' functions under a shared services model.

XX pays XX a fee for these services based on cost recovery.

The joint sharing of services is purely driven by administrative convenience and cost savings. The day-to-day management of the businesses are conducted independently, from different business premises.

The core business operations of selling to customers and buying products from suppliers are conducted separately and independently by each company and business.

There is no formal agreement between XX and XX for the 'back office' function performed.

The following functions are performed by XX for XX:

XX employs the Directors, Chief Financial Officer, Group Accountant, Office Manager, Accounts Payable Clerks, Credit Controller, Stock Controller, and Safety Advisor. It also owns all the computer equipment which is used by XX and XX.

The following functions are performed by staff members:

• Chief Financial Officer - Accounting functions, general queries, preparation of statutory accounts and tax return and annual Stocktakes.
• Group Accountant - Accounting functions, general queries, preparation of statutory accounts and tax return Annual.
• Office Manager - Accounting functions, general queries, preparation of statutory accounts, payroll and stocktakes.
• Accounts Payable Clerk - Processing of supplier invoices, reconciliation of supplier statements and payment of suppliers.
• Credit Controller - Manages customer overdue accounts, debtor's month end and manages customer credit applications.
• Stock Controller - Manages and reviews stock and stocktakes.
• Safety Advisor - Manages Work, Health and Safety.

XX has the right to refuse services to XX.

XX has never engaged another service entity on a similar agreement prior to using XX.

Costs incurred by XX are recovered from XX at cost with no margin. These costs include computer expenses and wages. Wages are allocated to XX on an estimate of staff hours and other expenses are allocated based on sales revenue.

Fees paid to XX from XX for the services 'based on cost recovery' are for the provision of use of computer equipment and network, along with duties performed by staff. Amounts paid for June 20XX and June 20XX are $XX and $XX respectively. Non-wages costs are allocated based on an apportionment of sales revenue of other entities including XX.

XX choose to use another entities bank account rather than establish their own so that there are reduced bank fees, one overdraft facility and only one bank account to reconcile. The accounting software developed in house only allows one bank account to receive EFTPOS transactions.

The bank account used by XX is owned by XX, which is a member of the XX consolidated group. The account is also utilised by XX, XX and XX.

The portion of funds belonging to XX in the common fund are processed through an intercompany loan account between XX and XX. Separate debtor and creditor accounts are maintained for each company and the transactions in the loan account are traced back to source documentation. Payments are traced back to supplier invoices and debtor receipts are traced back to invoices. Non-debtor receipts are traced back to POS dockets.

The single account maintained by XX has been adopted for administrative convenience and cost savings rather than for financing or to rely on other entities to support cash flow.

There is a loan agreement between XX and XX to charge/pay interest on the loan between the two entities. For example, when a XX sale is deposited into the XX bank account, the loan balance owing by XX to XX increases. No other agreements exist.

Bank fees are incurred on the common account apportioned between entities using the account. For example, bank fees in relation to EFTPOS transactions are processed through to the relevant entity.

Interest on the common bank account is not apportioned to other entities.

No sales are made by XX to XX. XX recovers administration fees from XX.

No portion of XX sales, are made to XX.

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 Act 1997 section 328-130

Reasons for decision

Company tax rates

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

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 $50 million from the 2019 income year onwards.

Section 23AA of the ITRA 1986 provides the applicable tax rates for the relevant years, being 25 percent for the 2022 income year onwards.

Base rate entity passive income

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

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.

'Connected with' and 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.

Application to your circumstances

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

The company does not control any other entities, nor is it controlled by any other entity, with no single shareholder having majority control.

XX is not an affiliate of any of XX, XX or XX. XX and XX are each one of two directors, and each is a minority shareholder. It could not be said that there is reason for the other director to act in accordance with the other's direction or wishes. Nor do the shareholders operate in this manner.

XX is not an affiliate of any of XX, XX or XX for the same reasons.

Neither are XX, XX or XX affiliates of either:

•         XX

•         XX.

Nor each other because they do not carry on business individually.

It needs to be considered whether XX is an affiliate of XX.

According to the Commissioner, another business would not usually be acting in concert with you if:

•         There are different employees working at each business premises.

•         They conduct separate business operations with their own customer bases and geographic operations.

•         They service different geographical regions and have their own customer base and employee guests.

•         One is not a significant customer of the other and they are not dependant on each other for sales.

As such the company does not have any connected or affiliate entities in accordance with sections 328-125 and 328-30 of the ITAA 1997 and its aggregated turnover will only include its annual turnover for the relevant income years.

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.

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.

The second condition is that the entity's aggregated turnover (for the year of income) is less than $50 million from the 2019 income year onwards.

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

Conclusion

The company does satisfy the conditions of a base rate entity under section 23AA of the ITRA 1986 for the income years ending 30 June 20XX and 30 June 20XX. The company will continue to be a base rate entity in the income years ended 30 June 20XX, 30 June 20XX and 30 June 2XX6 provided there are no changes to the control and operations of the entity and the income does not exceed $50 million in any year.