Aggregated turnover to be calculated for an entity’s financial year even if group members use different balance date
The Australian Taxation Office (ATO) has issued draft taxation determination TD 2021/D1 (draft TD) which sets out its view that an entity must work out its aggregated turnover by reference to its income year. As such, the annual turnovers of any of the entity’s connected entities or affiliates (whether in Australia or a foreign country) must be calculated using the test entity’s income year even if the connected entity or affiliate has a different financial year end.
What are the rules about?
The concept of aggregated turnover, contained in section 328-115 of the Income Tax Assessment Act 1997, was originally introduced in 2007 to provide various concessions to small business entities and contained a single threshold of $2 million. Since that time, various other tax measures have been introduced that have adopted a particular aggregated turnover threshold as one of the (but not necessarily the only) eligibility criteria.
These tax measures, and the relevant aggregated turnover threshold, include:
Tax measure |
Aggregated turnover threshold |
|---|---|
Small business CGT concessions |
$2 million |
Small business income tax offset |
$5 million |
Small business simplified depreciation and restructure rollover |
$10 million |
Refundable R&D tax offset |
$20 million |
Reduced company tax rate |
$50 million |
Instant asset write-off, backing business investment incentive and temporary full expensing |
$50 million, $500 million or $5 billion* |
Loss carry-back for corporate tax entities |
$5 billion |
*Which threshold applies depends on the date the asset was first used or installed ready for use.
There are various other income tax, GST, FBT and excise concessions available that also depend upon an entity’s aggregated turnover being below a particular threshold. As such, the concept of aggregated turnover is now relevant in several circumstances for entities of all sizes.
How is aggregated turnover determined?
An entity’s aggregated turnover for an income year is the sum of the annual turnovers of the entity, its “connected with” entities and its affiliates whether those entities are resident of Australia or not. Therefore, aggregated turnover is akin to the global annual turnover of a group of which the entity is a member, calculated on a consolidated basis.
Aggregated turnover is determined on an entity-by-entity basis rather than a group basis because entities within the same economic group may not have identical “connected with” entities or affiliates.Where a group includes partnerships, discretionary trusts and individuals it may be somewhat complex to determine which entity’s annual turnovers must be aggregated.
How is annual turnover calculated?
Annual turnover is an entity’s ordinary income derived in the ordinary course of carrying on a business.Importantly, it does not matter whether that ordinary income is assessable income of an entity. Therefore, foreign source income of a foreign resident entity (or attributable to an Australian entity’s foreign permanent establishment) can count towards an entity’s aggregated turnover. Additionally, amounts that are both statutory income and ordinary income can count towards aggregated turnover even if the statutory income provision in the tax law would prevail (e.g.,certain dividends and unit trust distributions).
Certain adjustments are made to eliminate amounts arising from dealings between “connected with” entities and affiliates as well as to adjust for part-year situations (e.g.,where business is carried on for part of the year or an entity is connected with or an affiliate of the test entity for part of the year only).
Further exclusions apply to remove from annual turnover the GST component of taxable supplies and income from the sale of retail fuel.
What is the draft TD about?
The draft TD states the ATO’s view that each entity’s aggregated turnover is determined based on the year of income that applies to it. As such, the entity must calculate aggregated turnover on this basis even if other entities in its group (that are “connected with” entities or its affiliates) have a different accounting period.
This means that two different entities in the same economic group (even where the “connected with”entities and affiliates of both entities are identical) may have different aggregated turnovers if they do not have a common accounting period.
For example, if an Australian company with a 30 June financial year wishes to calculate its aggregated turnover for the 2020-21 income year.The Australian company has subsidiaries in the US and the UK with 31 December and 31 March financial years respectively. To determine the aggregated turnover, the Australian company would need to calculate the annual turnovers of the US and UK subsidiaries for the period of 1 July 2020 to 30 June 2021, making any necessary adjustments and eliminations. This may involve the preparation of accounts that would not normally be required.
What are the implications of the ATO’s view?
What are the next steps?
