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Finalised Tax Determination on Aggregated Turnover and Connected Entities – Commissioner’s Discretion That an Entity Does Not ‘Control’ Another Entity

After previously issuing a draft ruling in June 2023, the ATO in September 2023 has now finalised and published Tax Determination TD  2023/5 on aggregated turnover and connected entities – Commissioner’s discretion that an entity does not ‘control’ another entity.

Under the R&D Tax Incentive a company’s rate of R&D tax offset and whether it is refundable or not depends primarily on the R&D entity’s aggregated turnover:

• If an entity’s aggregated turnover is less than $20 million and it is not controlled by any exempt entities, then the company can claim the refundable tax offset.
  • The refundable tax offset rate is equal to the company’s corporate tax rate plus an additional premium rate of 18.5%.
• If an entity’s aggregated turnover is $20 million or more, or it is controlled by exempt entities, then the company can claim the non-refundable tax offset.
  • The non-refundable tax offset rate is equal to the company’s corporate tax rate plus an additional premium rate of 8.5% or 16.5% depending on R&D Intensity.

A series of rules apply to groups and include turnover of entities deemed connected or affiliated.

Aggregation will be necessary where there is a connection between the entities based on ‘control’. Subsections 328-125(2) and (4) set out primary tests of control for the purposes of section 328-125. These subsections provide for the calculation of a ‘control percentage’, where an entity (the first entity) holds a percentage of at least 40% of the relevant interests in another entity.

Where the first entity has a control percentage of at least 40% but less than 50%, subsection 328-125(6) provides the Commissioner with a discretion to determine that it does not control the test entity (the Commissioner’s discretion). To make that determination, the Commissioner must think the test entity is controlled by an entity or entities (the third entity or entities) that is not, or 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 by a third entity or entities. It is not sufficient to merely show that the first entity is not a controller.

The principles in TD 2023/5 on aggregated turnover and connected entities may be relevant to entities in determining eligibility for the Refundable R&D Tax Offset.

Please get in touch with our office if you would like to speak to someone about a potential claim, or check out our website for more information.