Edited version of private advice

Authorisation Number: 1052231371676

Date of advice: 12 March 2024

Ruling

Subject: Base rate entity

Question 1

Will the Company be a base rate entity for the income year ending 30 June 2022 and income year ending 30 June 2023 under section 23AA of the Income Tax Rates Act 1986 (ITRA 1986)?

Answer

No.

Question 2

For the income years ending 30 June 2022 and 30 June 2023 does the Company have an aggregated turnover less than $20 million as per item 1 in the table in section 355-100 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2022

Year ended 30 June 2023

Relevant facts and circumstances

The Company is limited by shares in Australia whose shares are publicly listed on Australian Stock Exchange. The company engages in XXXX research and development activities.

The Company has a 100% interest in Company B.

The Company and Company B are consolidated for tax purposes.

No single entity had 40% of the ordinary shares (or the right to acquire further shares such that they could hold 40%) in the Company, with the maximum shareholding of any entity during the 2022 year ending 30 June and 2023 year ending 30 June being less than 15%.

The Company does not act in concert with any entity or vice versa in respect of their business and does not act according to the directions or wishes of another (except merely because of the nature of the business relationship they share).

The consolidated financial statements for the Company and controlled entities for 2022 and 2023 financial year show the breakdown of revenue as below:

Table 1: Breakdown of revenue

Other revenue is related to the recoupment of a service.

The assessable income for the Company's tax consolidated group is as follows:

Table 2: Consolidated group assessable income

Relevant legislative provisions

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 328-120

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 section 355-100

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

All subsequent legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Reasoning

For a company to qualify as a 'base rate entity', it must meet the following criteria under section 23AA of the Income Tax Rates Act 1986 (ITRA 1986):

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

b)            its aggregated turnover (within the meaning of ITAA 1997) for the year of income, worked out as at the end of that year, is less than $50 million.

Section 23AB of the ITRA 1986 provides the meaning of BREPI and paragraph 23AB(1)(d) of the ITRA 1986 states that BREPI is assessable income that is interest (or a payment in the nature of interest), royalties and rent.

The Company's 2022 assessable income included $XX of interest income and no other income (i.e. 100% interest income) and for 2023 $XX,XXX of interest income and $XX,XXX of other assessable income (interest income greater than 80%).

We note that although 23AB(2) indicates that interest can be excluded from BREPI, broadly this is for entities whose business in the financing sector while the Company is in the business of XXXX research and this will not apply.

Additionally, paragraph 8 of Law Companion Ruling 2019/5 Base rate entities and base rate passive income explains that:

•         eligibility for the lower corporate tax rate depends on an entity's BREPI and aggregated turnover in an income year

•         a corporate tax entity's tax rate may change if there are fluctuations in either their BREPI, as a percentage of their assessable income, or their aggregated turnover, and

•         the Commissioner does not have a discretion to allow an entity to be a base rate entity in an income year, if its BREPI is more than 80% of its assessable income or its aggregated turnover exceeds the applicable threshold in that income year.

Overall, this means the Company does not meet the criteria under paragraph 23AA(a) of the ITRA 1986 as its interest income is more than the 80% of its assessable income in 2022 and 2023. Therefore, given the Commissioner has no discretion to treat a company as a base rate entity when the section 23AA of the ITRA 1986 criteria are not satisfied, the Company is not a base rate entity and as such is ineligible for the lower company income tax rate under section 23 of the ITRA 1986.

Question 2

Reasoning

Aggregated turnover is defined in subsection 328-115(1) to include the sum of the relevant annual turnovers. Subsection 328-115(2) explains that the relevant annual turnovers include the entities annual turnover from the income year plus the annual turnover of connected entities and affiliate entities (noting in 328-115(3) that you do not include amounts from dealings between these entities nor amounts while these entities are not connected/affiliated).

Connected entities are defined in 328-125 to broadly be where one entity controls the other or both entities are controlled by the same third entity where control requires a minimum of 40% of the distribution income or voting power (or right to acquire such an interest). The Company has no shareholders which hold more than 15% of the ordinary shares (or right to acquire an interest of 40%) but it does hold 100% of Company B. Therefore, the only connected entity for the Company is Company B.

Affiliates are defined in 328-130(1):

An individual or a company is an affiliate of yours 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.

Noting the following exception in 328-130(2):

However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

Based on the information provided, no individuals or companies are acting in concert/in accordance with directions of the Company except as what would be expected given the nature of the business relationship. On this basis no other entities annual turnover is needed to be included in the calculation.

Annual turnover is defined in 328-120 and includes the ordinary income of that entity (with exclusions for certain income for example dealings with associates and GST). The income for the Company and Company B for both 2022 and 2023 is under the $20 million therefore the aggregated turnover for each of these years is less than $20 million as per item 1 in the table in section 355-100.