Contents
- Satisfying the $10 million aggregated turnover test
- Meaning of aggregated turnover
- Meaning of annual turnover
- Meaning of connected with an entity
- Meaning of affiliate
An entity is a small business entity if it:
- carries on a business, and
- satisfies the $10 million aggregated turnover test
A CGT small business entity is an entity that is a small business entity that also satisfies an aggregated turnover test of $2 million
TR 2019/1 contains the ATO’s guidelines as to when an entity is carrying on a business for the purpose of determining whether it is a small business entity.
Satisfying the $10 million aggregated turnover test
There are 3 ways an entity can satisfy the $10 million aggregated turnover test:
- the entity’s aggregated turnover for the previous income year was less than $10 million
- the entity’s aggregated turnover for the current income year is likely to be less than $10 million, calculated as at the first day of the income year (or the first day the entity started to carry on the business, if later). This method is not available if the entity carried on business for the 2 income years before the current year and the entity’s aggregated turnover for each of those income years was $10 million or more, or
- the entity’s actual aggregated turnover for the current income year was less than $10 million calculated as at the end of the income year.
Meaning of aggregated turnover
An entity’s aggregated turnover for an income year is the sum of:
- the entity’s annual turnover for the income year
- the annual turnover of any entity that is connected with it at any time during the income year, and
- the annual turnover of any entity that is its affiliate at any time during the income year.
An entity that is an affiliate or connected entity mentioned above is referred to as a relevant entity. In calculating the aggregated turnover the following amounts are excluded:
- amounts derived from dealings between the entity and a relevant entity, or between 2 or more relevant entities, at a time when the relevant connection or affiliation exists
- amounts derived by a relevant entity at a time when the relevant connection or affiliation does not exist.
In working out a taxpayer’s aggregated turnover, the relevant annual turnovers of the entities connected with the taxpayer and the taxpayer’s affiliates are determined by reference to the relevant period that aligns with the taxpayer’s income year (TD 2021/7). If the entity has no affiliates or connected entities at any time during the income year, its aggregated turnover for the income year will be the same as its annual turnover.
In determining whether the CGT small business concessions are available for a passively held CGT asset, the following special rules apply for calculating the aggregated turnover of the relevant business entity that is the affiliate of, or connected with, the asset owner:
- an individual’s spouse or child under the age of 18 years is deemed to be the individual’s affiliate where the relevant business entity is only treated as being an affiliate of, or an entity connected with, the asset owner for the CGT small business concessions because the individual’s spouse or child is deemed to be that individual’s affiliate
- an entity that is an affiliate of, or connected entity with, the asset owner is treated as being an affiliate of, or connected entity with, the business entity, and
- where the asset owner is a partner in 2 or more partnerships and the asset is used in, held ready for use in, or is inherently connected with a business carried on by at least 2 of those partnerships, each of those partnerships will be treated as being connected with the business entity.
Meaning of annual turnover
An entity’s annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. The term in the ordinary course of carrying on a business bears its ordinary meaning and can include transactions that were part of the ordinary and common flow of transactions of the business although not usually undertaken. Income derived from dealings with associates is to be worked out on an arm’s length basis.
In working out an entity’s annual turnover, the following amounts are excluded:
- GST, and income derived from sales of retail fuel.
If an entity carries on a business for only part of an income year, its annual turnover is to be worked out using a reasonable estimate of what the entity’s annual turnover would be if it carried on business for the whole income year.
Meaning of connected with an entity
An entity is connected with another entity if it controls the other entity or both entities are controlled by the same third party in a way described in ITAA97 s 328-125. The provision contains separate control tests for different entities.
Control of entity other than a discretionary trust: 40% ownership test
An entity controls another entity (other than a discretionary trust) where the first entity, its affiliates or the first entity together with its affiliates own or have the right to acquire ownership of interests in the other entity that between them give the right to receive at least 40% of any distribution of income, capital or (in the case of a partnership) net income by the other entity.
Control of a company: 40% of voting rights test
An additional alternative test applies to determine whether an entity controls a company. If either the 40% ownership or 40% of voting rights test is satisfied, the entity controls the company. The 40% of voting rights test is satisfied if an entity, its affiliates or the entity together with its affiliates, between them own, or have the right to acquire ownership of, at least 40% of the voting power in the company.
Control of a discretionary trust
An entity controls a discretionary trust if either:
- for any of the 4 years before the current income year, at least 40% of the total amount of income or capital paid or applied by the trustee for that previous income year was paid to or for the benefit of the entity and/or its affiliates, or
- a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates or the entity together with its affiliates.
The 40% distribution test does not apply to determine whether an exempt entity or deductible gift recipient controls a discretionary trust.
Indirect control of any entity
If an entity controls another entity, and the second entity (directly or indirectly) controls a third entity, the first entity is taken to control the third entity. However, this does not apply to:
- a company whose shares (other than shares carrying a right to a fixed dividend rate) are listed on an approved stock exchange
- a publicly traded unit trust
- a mutual insurance company
- a mutual affiliate company, or
- a 100% subsidiary company of any of the above entities.
ATO's discretion where control percentage below 50%
Where an entity (ie the first entity) has a control percentage of at least 40% but less than 50% in the test entity, the Commissioner of Taxation has discretion to determine that the first entity does not control the test entity. To make that determination, the Commissioner must “think” that the test entity is controlled by a third entity, or entities, that does not include the first entity or any of its affiliates.
The statutory condition for exercising the Commissioner’s discretion requires that the Commissioner positively conclude that there is actual control of the test entity by a third entity or entities. It is not sufficient to merely show that the first entity does not have actual control of the test entity.
The first issue the ATO considers is the relevance of who has responsibility for managing day-to-day business. It notes that while the sole or primary responsibility for day-to-day management of the affairs of the test entity is not immaterial, it does not itself constitute control for the purposes of the Commissioner’s discretion. According to the ATO, this is because the nature of control in the statutory context is typically associated with ownership of a business entity or entitlements to income and capital of the entity, as well as participation in decision-making on key matters.
The second issue the ATO considers is that applicants for the Commissioner’s discretion suggesting that their control percentage is between 40% and 50% should be disregarded because the remaining holders of interests in the test entity will together necessarily control the entity, irrespective of their relationship to each other. The ATO will not accept as correct that an entity’s control percentage between 40% and 50% should be disregarded. While the ATO may look beyond a single third entity for relevant control, the discretion will not be exercised merely on the basis of identifying a group of unrelated entities that, when individual control percentages are aggregated, holds interests in the test entity amounting to a control percentage of more than 50%.
In order to form a view that a group of third entities controls the test entity, the ATO would need to form a view that the group has agreed to operate, and does operate, as a single controlling “mind” when it comes to decision-making. The conclusion that there is a single controlling mind is more readily reached in circumstances if the group consists of associated entities in terms of common ownership or close familial relationships – a mere alignment of purpose (eg shareholders wanting to maximise profits) on certain issues will not be sufficient.
Deemed connected entities for passively held CGT assets
Special rules apply to treat certain entities as being connected with a business entity for the purpose of calculating the aggregated turnover of that business entity when applying the small business CGT concessions to passively held CGT assets.
Nominated controllers of certain discretionary trusts for CGT provisions
A trustee of a discretionary trust is able to make an election that nominates up to 4 beneficiaries as being controllers of the trust for an income year in which the trustee did not make a distribution of income or capital if the trust had a tax loss, or no net income, for that year. The nomination is required to be in writing and signed by the trustee and by each nominated beneficiary.
Meaning of affiliate
Only an individual or a company can be an affiliate. An individual or company will be an affiliate of another entity if the individual or company acts, or could reasonably be expected to act, in accordance with the entity’s directions or wishes, or in concert with the entity, in relation to the affairs of the business of the individual or company. The test is applied in relation to the affairs of the business generally, not merely in relation to the CGT asset. A family member will not necessarily be an affiliate.
However, an individual or company will not be an entity’s affiliate merely because of the nature of the business relationship that they share. For example, a partner in a partnership would not be an affiliate of another partner merely because the first partner acts in accordance with the wishes of, or in concert with, the other partner in relation to the affairs of the partnership. Directors of the same company, trustees of the same trust, or a company and one of its directors would be in a similar position.
For the purpose of applying the CGT small business concessions to passively held CGT assets:
- an individual’s spouse or child under the age of 18 years will be taken to be an affiliate of the individual for the purpose of determining whether a business entity is an affiliate of, or connected with, the asset owner
- if an entity is an affiliate of, or connected with, another entity as a result of the above deeming rule, then that spouse or child is taken to be an affiliate of the individual for the purposes of the CGT small business concessions, and the determination of whether an entity is a small business entity
- an entity that is an affiliate of, or connected with, the asset owner is treated as being an affiliate of, or connected with, the business entity for calculating the aggregated turnover.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.