Private ruling: Aggregation rules
Date of advice: 7 June 2017
Published: October 2017
Ruling period: Year ended 31 December 2016
Date scheme commenced: 1 January 2016

Ruling: Q1: Will aggregation rules apply in determining the application of the small business entity concessions? | A1: No | Q2: Are you entitled to the reduced company tax rate? | A2: Yes

Relevant facts and circumstances: A LTD is an Australian Branch of B Ltd which is a X registered company. B Ltd is not an Australian Controlled Foreign Company and has no Australian shareholders. A LTD, the Australian Branch, has a turnover of less than $2million. A LTD pays rent for an office in Australia.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 328 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Rates Act 1986 Subsection 23(2) | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Section 5 Convention between the Government of Australia and the Government of the X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains Article 7

Reasons for decision: Summary: Subsection 23(2) of the Income Tax Rates Act 1986 states the rate of tax in respect of the taxable income of a company is: a. if the company is a small business entity for a year of income – 28.5%; or b. otherwise – 30% Subsection 328-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states you are a small business entity for an income year ( the current year ) if: (a) You carry on a business in the current year; and (b) One or both of the following applies: (i) You carried on a business in the income year (the previous year ) before the current year and your aggregated turnover for the previous year was less than $10 million; (ii) Your aggregated turnover for the current year is likely to be less than $10 million. Generally, an entity's turnover is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. An entity calculates its aggregated turnover by including the turnover of other entities connected entities and affiliates. An affiliate includes a company that acts, or could reasonably be expected to act, in concert with you in relation to the business affairs of the company. A connected entity include is an entity that controls by you. In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The X Convention is listed in section 5 of the Agreements Act. The X Convention is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The X Convention operates to avoid the double taxation of income received by residents of Australia and X. Article 7(1) of the X Convention advises that the profits of an X enterprise shall be taxable only in the X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If the enterprise carries on business in Australia through a permanent establishment in Australia, the profits of the enterprise may be taxed in Australia but only so much of them as is attributable to that permanent establishment. Article 7(2) goes on to state that where an enterprise of the X carries on business in Australia through a permanent establishment situated in Australia, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises. Permanent establishment is defined in Article 5(1) of the X Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term enterprise applies to carrying on a business.(Article 3) The term "permanent establishment" includes a place of management, a branch, and an office. | Detailed Reasoning - Application to your circumstance: You rent an office in Australia. This office will be a permanent establishment in Australia for the purposes of the X Convention. As you are carrying on a business in Australia you are considered to be an enterprise for the purposes of the X Convention. Consequently, under article 7 of the X Convention the profits of the Australian permanent establishment may be taxed in Australia but only to the extent that the profits are attributable to the Australian permanent establishment. Therefore, the income of your connected entities and/or affiliates in the X will not be included in the calculation of your aggregated turnover in Division 328 of the ITAA 1997. Consequently, if the turnover of A is less than $10 million I will be a small business enterprise and entitled to the 28.5% tax rate.