Concepts
Connected entity
A connected entity is one that you control, that controls you, or that is controlled by the same third party, and its turnover can be counted with yours for certain tax tests.
A connected entity is a concept used in income tax to deal with groups of related businesses. An entity is connected with you if either of you controls the other, or if both of you are controlled by the same third entity. The test is based on control, with the legislation giving a threshold for what counts as control, for example holding a significant percentage of the voting rights, distributions or capital of a company or trust.
The concept matters for turnover tests. When you work out your aggregated turnover for the small business entity test and related concessions, you must include the turnover of entities connected with you, as well as that of your affiliates, though sales between connected entities are generally left out to avoid double counting. This stops a larger business from splitting into several smaller entities to qualify for concessions meant for small businesses.
Control can arise in different ways for different kinds of entity. In a company, it typically means holding a certain share of the voting power, rights to dividends or rights to capital. In a trust, it usually means being entitled to a share of the income or capital or being in a position to control the trustee. Partnerships have their own rules. Because these tests are technical, a quick estimate of ownership is not always enough.
Practically, this means anyone who owns more than one business needs to consider the group as a whole. For instance, a person who runs a retail shop through a company and a property business through a trust may find their connected entity group is larger than they expected. They need to track turnover for each entity and combine it where the connection rules apply. Keeping consistent monthly sales records for each entity helps.
Connected entities are not the same as associates, although the two concepts overlap in some tests. The term associate is used in other parts of the tax system, for instance in rules about market value, fringe benefits and trust distributions. A connected entity relationship is primarily about control. GST has its own related concepts, such as GST groups, which allow certain closely related entities to be treated as one for GST.
A common misunderstanding is believing that using separate entities means the turnover is always separate. The tax system looks through to control and relationships. Another is forgetting to review the position when ownership changes, such as when a new shareholder or beneficiary arrives. This is general information only, so confirm whether entities are connected with the ATO or a registered tax professional.
Worked example
Lena owns 100% of a cafe company with turnover of $900,000 and 100% of a catering company with turnover of $700,000. The companies are connected because she controls both. When testing small business entity eligibility, the aggregated turnover for each company includes the other's turnover, so each is tested against $1,600,000, less any sales between the two businesses, rather than its own turnover alone.
Practical tips
- List all businesses you control and track their turnover together, not in isolation.
- Exclude sales between connected entities where the rules allow, but keep records to show the calculation.
- Review connections whenever ownership or control of any entity changes.