Private ruling: Small Business Entities - aggregated turnover
Date of advice: 1 November 2016
Published: December 2016
Ruling period: year ending 30 June 2016 | year ending 30 June 2017 | year ending 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: For the purpose of calculating the aggregated turnover, under section 328-115 of the Income Tax Assessment Act 1997 (ITAA 97), would the sum of the relevant annual turnovers exclude the following income: a) Company A i. Interest received b) Trust 1 i. Rental income from the commercial properties, and ii. Interest received c) Trust 2 i. Rental income received from Company A d) Taxpayer X and Taxpayer Y i. Rental income from the rental properties ii. Interest received iii. Dividends iv. Managed fund distributions e) Trust 3 i. sales to Company A ii. Plant hire received from Company A iii. Trust distribution from Trust 2 iv. Trust distribution from Trust 1 v. Rental Income from rental property vi. Interest received. | A1: a) (i) No. b) (i) Yes. (ii) Yes. c) (i) Yes. d) (i) Yes. (ii) Yes. (iii) Yes. (iv) Yes. e) (i) Yes. (ii) Yes. (iii) Yes. (iv) Yes. (v) Yes. (vi) No.

Relevant facts and circumstances: All the entities are connected entities, as defined in section 328-125 of the ITAA 1997 Trust 2 Trust 2 is not carrying on a business. Trust 2 holds the land on which Company A and Trust 3 conduct operations. Trust 2 received rental income received from Company A for the use of the property. Company A Company A carries on a primary production business on the land held by Trust 2. Company A received the following types of income: • sales • Government rebates, and • Interest. Trust 1 Trust 1 does not carrying on any other activities other than owning less than five commercial rental properties, both of which are managed by an external agent. Trust 1 received the following types of income: • Rental income from the commercial properties, and • Interest. Taxpayer X and Taxpayer Y Taxpayer X and Taxpayer Y do not carry on a business. Taxpayer X and Taxpayer Y jointly own less than five properties, one being a residential home and the other being a set of units. The properties are managed by an external agent. Taxpayer X and Taxpayer Y received the following types of income: • Rental income from the rental properties, • Interest, • Dividend, and • Managed fund distributions. Trust 3 Trust 3 carries on a business conducting a primary production operation on land owned by Trust 2. Trust 3 received the following types of income: • sales (including sales to Company A) • Plant hire received from Company A • Trust distribution from Trust 2 • Trust distribution from Trust 1 • Rental income, and • Interest. Trust 3 received rental income from a X% interest in the residential rental property which is managed by an external agent.

Relevant legislative provisions: Income Tax Assessment Act 1997 6-5 | Income Tax Assessment Act 1997 328-115 | Income Tax Assessment Act 1997 328-115(3) | Income Tax Assessment Act 1997 328-120(1) | Income Tax Assessment Act 1997 328-125 | Income Tax Assessment Act 1997 995-1

Reasons for decision: Summary: Section 328-115 provides for the method of calculation your aggregated turnover for an income year. Meaning of Aggregated Turnover An entity's aggregated turnover is defined in section 328-115 of the ITAA 1997 to be the sum of the following: • The entity's annual turnover for the income year, and • The annual turnover for the income year of any entity (a relevant entity) that is 'connected' or 'affiliate' with you at any time during the income year. An entity's annual turnover for an income year is the total *ordinary income that the entity *derives in an income year in the ordinary course of carrying on a *business (subsection 328-120(1) of the ITAA 1997). Broadly, your annual turnover is the total of the ordinary income derived by you and relevant entities in the income year in the ordinary course of carrying on a business. Turnover means gross income and not your net profit. Your aggregated turnover for the income year does not include income derived during the income year from: • dealings between you and a 'connected' or 'affiliate' entity, • entities 'connected' or 'affiliate' with you dealings between themselves, or • a period while the entity is not 'connected' or 'affiliate' with you. The term ' ordinary income' is defined in section 6-5 of the ITAA 1997 as income according to ordinary concepts. An entity's annual turnover therefore includes all income according to ordinary concepts derived in the ordinary course of carrying on a business . The ordinary course of business covers the usual transactions, customs and practices of a certain business; a term for activities that are necessary, normal and incidental to the business; common practice. The Commissioner holds the view that principles have been established that income derived in the ordinary course of carrying on a business includes amounts arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity ( Chamber of Manufactures Insurance Ltd v. FC of T (1984) 2 FCR 455; 84 ATC 4315; 15 ATR 599 and C of T v. Commercial Banking Co. of Sydney (1927) 27 SR(NSW) 231). See Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income , at paragraph 31, for an explanation of the Commissioner's view on profits or gains in the ordinary course of business. You must however also be carrying on a business for an entity to have an annual turnover. The term 'business' is defined in subsection 995-1of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. 'Carrying on a business' is not defined in Division 328 of the ITAA 1997 nor is it defined elsewhere in the ITAA 1997. It therefore takes its ordinary meaning. This approach is confirmed in the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Act 2007, which introduced the small business $2 million turnover test and as an alternative to the Maximum Net Assets Value $6 million test. At paragraph 2.15, it is stated: | Detailed Reasoning - What does 'in the ordinary course of carrying on a business' mean?: ........ 2.15 In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or event. Similarly, the income is derived in the ordinary course of carrying on a business if the income although not regularly derived, is a direct result of the normal activities of the business . 2.16 Ordinary income may be derived in the ordinary course of carrying on a business even if it is not the main type of ordinary income derived by the entity. Similarly, the income does not need to account for a significant part of the entity's overall receipts. It is sufficient that the ordinary income is of a kind derived regularly or customarily in the carrying on of a business. [Emphasis added] There is no single test to determine whether a business is being carried, through court cases a number of indicators have developed that are relevant to determining whether activities constitute the carrying on of a business. Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? , at paragraph 13, lists the indicators the courts have held are relevant to determining if a business is being carried on. At law, a trust is not a legal person. It is a collection of rights, duties and powers arising from the relationship to property held by the trustee for the benefit of the beneficiaries. A trustee may carry on a business for the benefit of the beneficiaries and distribute the profit to them. The indicators in TR 97/11 are equally applicable to a whether a business is carried on by the trustee through the trust. Your annual turnover for an income year is the total of its ordinary income derived in that income year in the ordinary course of carrying on a business and that of connected entities for the period the entity is connected with you in that year. But excludes amounts derived by the connected entities from dealings with you and from dealings between another connected entities in that year. The aggregated turnover is the sum of these amounts. Company A carries on a primary production business. Company A's ordinary income includes that earned in the ordinary course of carrying on a business. Interest income is ordinary income according to ordinary concepts. It is considered to be earned as normal and incidental to the business; common practice. Therefore, the interest earned by Company A is included in the aggregated turnover. Trust 1 is a connected entity. Trust 1 holds less than five commercial rental properties, which are managed by an external agent. Trust 1 undertakes no other activates. In applying the indicators in TR 97/11 relevant to determining whether activities constitute the carrying on of a business the activities of Trust 1 are not considered to constitute a business. Therefore, although interest and rent is ordinary income, it is not derived by Trust 1 in the ordinary course of carrying on a business. Trust 2 is a connected entity. It holds the land on which Company A and Trust 3 conduct primary production operations for which rental income is received. As the income is derived from dealings between connected entity the income is not included in the aggregated turnover. Taxpayer X and Taxpayer Y receive income from jointly ownership of the properties, one being a residential home and the other being a set of units. The properties are managed by an external agent. Rental property activities are generally considered a form of investment rather than a business. This is because of the limited scope of the rental property activities and the limited degree to which the co-owners actively participates in rental property activities. The indicators the courts have held are relevant to determining if a business is being carried on are not present, see TR 97/11. For this reason Taxpayer X and Taxpayer Y are not considered to be carrying on a rental property business. Taxpayer X and Taxpayer Y do not carry on any business; therefore they don't have ordinary income derived in the ordinary course of carrying on a business. The income received by Taxpayer X and Taxpayer Y will not be included in the aggregated turnover. Trust 3 carries on a business. Interest income is ordinary income according to ordinary concepts. It is considered to be earned as normal and incidental to the business. The derivation of income by a business is common practice and is a direct result of the normal activities of the business, even if it is not the main type of ordinary income or does not need to account for a significant part of the entity's overall receipts. Therefore, the interest earned by Trust 3 is included in the annual turnover. Trust 3 is a connected entity, therefore income it derives would be included in the annual turnover for the income year, except to the extent that it includes income derived during the income year from dealings with connected entities or dealings between themselves. The relevant incomes excluded are: • sales to Company A • Plant hire received from Company A • Trust distribution from Trust 2 • Trust distribution from Trust 1 As a trust obligation are imposed on the trustee. The trustee is compelled to deal property held by the trust for the benefit of a certain person (the beneficiary) or persons, or for the advancement of certain purposes. The obligations may encompass more than one purpose, a number of duties and powers can be imposed on the trustee. Trust 3 also derived rental income from a X% interest in a rental property, which is managed by an external agent. The trustee is considered to hold this rental property in capacity for the benefit of the beneficiary/beneficiaries, not for the purposed of operating of the primary production business. The rental income is not derived in the ordinary course of a business. Therefore rental income derived will not be included in the annual turnover.