Aggregated turnover thresholds for loss carry-back and super-charged instant asset write-off measures

09 October 2020

In brief

On 6 October 2020, Treasurer Josh Frydenberg handed down the 2020-21 Australian Federal Budget. From a tax perspective, there were a range of measures to stimulate business investment and jobs growth, such as a temporary loss carry-back for companies and a new and improved instant asset write-off.

As the loss carry-back measures and super-charged instant asset write-off are only available to entities that have annual ‘aggregated turnover’ of less than $5 billion, how an entity’s ‘aggregated turnover’ is calculated and tested is an important concept.

The reliance on the aggregated turnover test has elevated the importance of a concept that many large taxpayers (particularly multinational corporations) would not have needed to focus on before as the concept has historically applied to measures which applied at a much lower threshold. This alert sets out the relevant rules so that you can consider how these rules might apply to you.

In detail

Aggregated Turnover

An entity’s “aggregated turnover” is defined as the sum of the following relevant annual turnovers:

• your annual turnover for the income year; and
• the annual turnover for the income year of any entity (a relevant entity) that is connected with you at any time during the income year; and
• the annual turnover for the income year of any entity (a relevant entity) that is an affiliate of yours at any time during the income year.

It should be noted that aggregated turnover for an income year does not include income that is derived by an entity from dealings with its affiliates or entities connected with it. This ensures that income is not double counted, i.e. effectively a consolidated view of the relevant entities is taken. It is also important to note that connected or affiliate entities do not need to be Australian residents for tax purposes to be included and that the concept of a connected entity or affiliate is not the same as an 'associate'.

Any ordinary income that was derived by an entity during a period when it was not connected with, or an affiliate of the test entity is also excluded from the calculation of annual turnover.

Note: Whilst the loss carry-back rules are only available to companies, for the purposes of the aggregated turnover test, it will be important to consider the annual turnover of all types of entities (trust, partnership etc) regarded as affiliates of, or connected with, the company.

Relevant income years for the calculation

The legislation to give effect to instant asset write-off and temporary loss carry-back measure, (Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020), adopts definitions from Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997) that inform the relevant income years for calculating the aggregated turnover for the purposes of eligibility. Under these provisions, the aggregated turnover test should be calculated based on your (and your connected and affiliate entities) for the prior income year(s), or based on your (and your connected and affiliate entities) likely turnover for the current year.

We note that the aggregated turnover tests are relevant in many other areas of tax (including the application of the taxation of financial arrangements rules, and access to the lower company tax rate and other special tax concessions). Care should be taken in determining the relevant periods that are used based on the relevant provision.

Annual turnover

Annual turnover is defined as the “total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business”, but specifically excludes ordinary income that is derived from the sale of retail fuel.

As ‘ordinary income’ is income of a kind that is regularly or customarily derived by the entity in the course of its business (or is a direct result of the normal activities of the business), statutory income (e.g capital gains) should be excluded from the calculation of an entity’s annual turnover. Further, this concept is not limited to income that is assessable in Australia - this means that the annual turnover of a connected or affiliate foreign entity includes all of its ordinary income, irrespective of the source. As a result, there may be practical difficulties in determining the annual turnover of those non-Australian entities.

Special rules apply if a relevant entity has dealings with associates and those dealings are not at arm’s length, and if the entity does not carry on a business for the whole income year.

Connected entity

For an entity to be regarded as connected with another entity, the element of ‘control’ must exist. In particular, one of the entities must control the other entity, or both entities must be controlled by the same third party. Such control can be both direct and indirect. Importantly these terms are defined in the legislation (which distinguishes between discretionary trusts and other entities) and typically have a lower control threshold than large businesses are familiar with, such as accounting control or Significant Global Entity (SGE) definitions.

Indirect control may exist between an entity (first entity) and another entity that is controlled by a second entity, where that the second entity is also controlled by the first entity. However, there are certain exceptions, for example indirect control will not apply if the second entity (i.e. interposed entity) is a certain widely held entity (including publicly traded unit trust and listed companies).

Affiliates

An individual or company is an affiliate of an entity where that individual or company “acts or could reasonably be expected to act, in accordance with your [the entity’s] directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company” (see section 328-130 of the ITAA 1997).

However, “the individual or company is not an affiliate merely because of the nature of the business relationship you and the individual or company share”. A note to the law explains that this exclusion could be relevant to partners in a partnership, and also to company directors. However, the full scope of the exclusion is unclear.

Some factors which are indicative of parties acting in concert may include family relationship between parties, financial relationships or dependencies, directors or shareholders or degree of consultation, to name a few.

Practical issues

As taxpayers consider these rules and how they might apply to their Australian entities, there are a number of practical issues that may need to be considered:

• Where an entity has a different year end to its connected and affiliate entities, consideration may need to be given to how the annual turnover can be calculated for the relevant period for each connected and affiliate entity.
• As the aggregated turnover threshold is quoted in AUD, the annual turnovers for any foreign connected or affiliate entities will need to be converted into AUD before being summed to calculate aggregated turnover. Depending on the foreign exchange movements over the relevant periods, this may lead to drastically different outcomes.
• Where taxpayers join or leave a group or ownership structure during the year, specific consideration will need to be given to which entities may be considered ‘connected entities’ and ‘affiliate’ entities for each relevant income year, and which income is included in the calculation of aggregated turnover.
• Taxpayers with corporate limited partnerships and fund structures, and / or incorporated joint ventures, will need to consider whether certain entities are aggregated for these purposes.
• Taxpayers that have non-share equity arrangements (e.g. profit participating loans) in their global structure may also need to consider whether those arrangements could also give rise to control under the “connected with” test.
• Where an entity is required to include the annual turnover of entities that are not members of a wholly-owned group (e.g. in fund structures that have a single investor that holds an interest greater than 40 per cent), difficulties may arise in trying to obtain the relevant information to determine the relevant annual turnovers. This difficulty will be exacerbated where, for example, that 40 per cent interest is held by a foreign parent that is a connected entity.
• The definition of affiliate involves concepts that might be new to larger businesses, and can involve difficult questions of fact and degree. They are concepts that are perhaps more easily applied to private and family groups, and examples in existing ATO materials mainly focus on family dealings. An example of an arrangement that might seem unclear is the relationship between franchisor and franchisee. Careful consideration may be needed for these and similar relationships.

The takeaway

The aggregated turnover provisions are relevant to a range of existing and new measures in the Australian tax regime. Under the new 2020-21 Federal Budget measures, taxpayers will need to calculate their ‘aggregated turnover’ to determine their eligibility for the loss carry-back and new instant asset write-off provisions.

As these rules are anticipated to be available to taxpayers immediately (subject to the enactment of legislation), it will be important for taxpayers to consider their eligibility early. Particular care should be taken where taxpayers need to consider whether an entity has an ability to ‘control’ another entity, e.g joint venture arrangements, consortium arrangements, fund ownership and other indirect common ownership.