Private ruling: Small business entity test
Published: April 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you required to include the proceeds from the sale of consignment stock in your calculation of your turnover for the purposes of determining if you are a small business entity? | A1: No

Relevant facts and circumstances: You are a franchisee of a business. The franchise agreement authorises you to operate the business and appoints you to act as the franchisor's agent to offer, sell and supply the franchisor's product (referred to as consignment stock) The franchise agreement states at various clauses that the consignment stock delivered to you will remain the property of the franchisor at all times and that any revenue you receive from the sale of the consignment stock is held on trust for the franchisor.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 328-110(1)

Reasons for decision: Summary: You are a small business entity if you carry on a business and your business turnover (aggregated turnover) is less than $2 million. Your turnover includes all income earned in the ordinary course of business for the income year. Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income is income according to ordinary concepts. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Subsection 6-5(4) of the ITAA 1997 states: In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. You case is similar to a real estate agent who collects rent on behalf of a property owner; the real estate agent or agency is never entitled to the rent income. Similarly, apart from the amount deducted as your commission, the income you receive from customers for the consignment stock it is only ever held on trust for the franchisor. You do not ever gain beneficial ownership of this income and it is applied or dealt with on the franchisor's behalf. Accordingly, you have not derived any income from the sale of the consignment stock. Apart from the amount deducted for your commission, any revenue relating to the sale of the consignment stock will not be included in your turnover calculation for the small business entity test.