Private ruling: Entitlement to R&D tax offset
Published: August 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and Answers: | 1. For the year ended 30 June 20YY, will the Commissioner exercise his discretion under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine you are a small business entity? | Answer: Yes | 2. For the year ended 30 June 20YY, if you are entitled to an research and development (R&D) tax offset under section 355-100 of the ITAA 1997, will your rate of R&D tax offset be X%? | Answer: Yes

Relevant facts and circumstances: You are an Australian Proprietary Company, limited by shares, where Y% of your shares are ordinary shares and X% of your shares are preference shares. The preference shares have no voting or capital rights and only have preferential rights to dividends. The preference shares are held by an overseas company, with an aggregate turnover exceeding $200 million. For the years ended 30 June 20XX and 20YY, your total income lodged in your tax return and BAS was less than $2 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-115 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 355-100

Reasons for decision: Summary: Section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides you are a small business entity for an income year (the current year ) if you carry on a business in the current year and your aggregated turnover for the previous year was less than $2 million or your aggregated turnover for the current year is likely to be less than $2 million. Subsection 328-115(2) of the ITAA 1997 provides your relevant annual turnover is the combined annual turnover for the income year of you, of any entity (a relevant entity) that is connected with you at any time during the income year and of any entity (a relevant entity) that is an affiliate of yours at any time during the income year. However, subsection 328-115(3) of the ITAA 1997 excludes from your aggregated turnover for an income year any amounts that are dealings between connected and/or affiliated entities. Subsection 328-125(1) of the ITAA 1997 states an entity is connected with another entity if: (a) either entity controls the other entity in a way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 states an entity (the first entity ) controls another entity if the first entity, its affiliates or the first entity together with its affiliates: (a) except if the other entity is a discretionary trust - beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of: (i) any distribution of income by the other entity; or (ii) if the other entity is a partnership - the net income of the partnership; or (iii) any distribution of capital by the other entity; or (b) if the other entity is a company - beneficially own, or have the right to acquire the beneficial ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. Subsection 328-125(6) of the ITAA 1997 states the Commissioner may determine that an entity does not control another entity: If the control percentage referred to in subsection (2) or (4) is at least 40%, but less than 50%, the Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its affiliates. In your case, despite your preference shareholder being a connected entity under subparagraph 328-125(2)(a)(i) of the ITAA 1997, the Commissioner is satisfied and determines, under subsection 328-125(6) of the ITAA 1997, that your preference shareholder does not control you. It follows you are a small business entity under section 328-110 of the ITAA 1997 and, if you are entitled to an R&D tax offset under section 355-100 of the ITAA 1997, your rate of R&D tax offset will be X%.