Exceptions
701‑70 Adjustments to taxable income where identities of parties to arrangement merge on joining group
701‑75 Adjustments to taxable income where identities of parties to arrangement re‑emerge on leaving group
701‑80 Accelerated depreciation
701‑85 Other exceptions etc. to the rules
(1) If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period.
Head company core purposes
(2) The purposes covered by this subsection (the head company core purposes) are:
(a) working out the amount of the *head company’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
(b) working out the amount of the head company’s loss (if any) of a particular *sort for any such income year.
Note: The single entity rule would affect the head company’s income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.
Entity core purposes
(3) The purposes covered by this subsection (the entity core purposes) are:
(a) working out the amount of the entity’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
(b) working out the amount of the entity’s loss (if any) of a particular *sort for any such income year.
Note: An assessment of the entity’s liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.
What is a sort of loss?
(4) Each of these paragraphs identifies a sort of loss:
(a) *tax loss;
(b) *film loss;
(c) *net capital loss;
(d) overall foreign loss in respect of interest income (within the meaning of section 160AFD of the Income Tax Assessment Act 1936);
(e) overall foreign loss in respect of modified passive income (within the meaning of that section);
(f) overall foreign loss in respect of offshore banking income (within the meaning of that section);
(g) overall foreign loss in respect of other assessable foreign income (within the meaning of that section).
This subsection lists all the sorts of loss.
For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company.
Note 1: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701‑10 and tax loss history is affected by Division 707).
Note 2: Section 73BAC of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.
Note 3: Section 165‑212E overrides this rule for the purposes of the same business test.
701‑10 Cost to head company of assets of joining entity
(1) This section has effect for the head company core purposes when the entity becomes a *subsidiary member of the group.
Assets to which section applies
(2) This section applies in relation to each asset that would be an asset of the entity at the time it becomes a *subsidiary member of the group, assuming that subsection 701‑1(1) (the single entity rule) did not apply.
Note: See subsection 705‑35(3) for the treatment of a goodwill asset resulting from the head company’s ownership and control of the joining entity.
Object
(3) The object of this section (and Division 705 which relates to it) is to recognise the cost to the *head company of such assets as an amount reflecting the group’s cost of acquiring the entity.
Setting tax cost of assets
(4) Each asset’s *tax cost is set at the time the entity becomes a *subsidiary member of the group at the asset’s *tax cost setting amount.
Multiple setting of tax cost for same trading stock
(5) However, if:
(a) the asset is *trading stock; and
(b) the asset’s *tax cost is set by this section at more than one time (each of which is a setting time) for the same income year;
then, except where subsection (6) applies, only the amount at which the tax cost is set at the last of the setting times is to be taken into account.
(6) If:
(a) the *head company’s *terminating value for the asset; or
(b) the *value of the asset at the start of the income year;
is required to be worked out for one or more occasions when an entity (whether or not the same entity) ceases to be a *subsidiary member of the group in the income year, then the amount at which the asset’s *tax cost is set by this section at a particular setting time is only taken into account in working out the head company’s terminating value for a particular occasion if:
(c) the setting time occurs before the occasion; and
(d) there is no intervening setting time or occasion.
Excluded assets
(7) If an asset is an excluded asset under subsection 705‑35(2), its *tax cost is not set.
Note: Excluded assets are assets such as entitlements to tax deductions.
701‑15 Cost to head company of membership interests in entity that leaves group
(1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the head company core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.
Note: This section could have effect, for example, if an entity ceases to be a subsidiary member of the group because:
(a) it ceases to satisfy the requirements to be a subsidiary member; or
(b) the head company ceases to satisfy the requirements to be a head company (thereby bringing the group to an end).
Object
(2) The object of this section is to preserve the alignment of the *head company’s costs for *membership interests in each entity and its assets by recognising, when an entity ceases to be a *subsidiary member of the group, the cost of those interests as an amount equal to the cost of the entity’s assets at that time reduced by the amount of its liabilities.
Note: The head company’s costs for membership interests in entities was aligned with the costs of their assets when the entities became subsidiary members of the group.
Setting tax cost of membership interests
(3) For each *membership interest that the *head company of the group holds in an entity that ceases to be a *subsidiary member, the interest’s *tax cost is set just before the entity ceases to be a subsidiary member at the interest’s *tax cost setting amount.
Note 1: The membership interests would include those that are actually held by subsidiary members of the group, but which are treated as those of the head company under the single entity rule.
Note 2: If the entity is a partnership, Subdivision 713‑E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership.
(1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the head company core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.
Assets to which section applies
(2) This section applies in relation to each asset, consisting of a liability owed by the entity, that becomes an asset of the *head company because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member. This is a liability that, ignoring that subsection, is owed to a *member of the group.
Object
(3) The object of this section is to set a cost for the asset to enable income tax consequences for the *head company in respect of the asset to be determined.
Setting tax cost of assets
(4) The asset’s *tax cost is set at the time the entity ceases to be a *subsidiary member of the group at the asset’s *tax cost setting amount.
Note: If the entity is a partnership, Subdivision 713‑E sets the tax cost of assets consisting of a partner’s share of a liability owed by the partnership to a member of the group.
701‑25 Tax‑neutral consequence for head company of ceasing to hold assets when entity leaves group
(1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the head company core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.
Assets to which section applies
(2) This section applies in relation to an asset if:
(a) the asset is *trading stock of the *head company; and
(b) the asset becomes an asset of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group; and
(c) the asset is not again an asset of the head company at or before the end of the income year.
Object
(3) The object of this section is to ensure that there is no income tax consequence for the *head company in respect of the asset.
Note: In the case of assets other than trading stock, the fact that the head company ceases to hold them when the single entity rules ceases to apply to them would not constitute a disposal or other event having tax consequences for the head company.
Setting value of trading stock at tax‑neutral amount
(4) The asset is taken to be *trading stock of the *head company at the end of the income year (but not at the start of the next income year) and its *value at that time is taken to be equal to:
(a) if the asset was trading stock of the head company at the start of the income year (including as a result of its *tax cost being set)—the asset’s value at that time; or
(b) if paragraph (a) does not apply and the asset is *livestock that was acquired by natural increase—the *cost of the asset; or
(c) in any other case—the amount of the outgoing incurred by the head company in connection with the acquisition of the asset;
increased by the amount of any outgoing forming part of the cost of the asset that was incurred by the head company during its current holding of the asset.
Note: As a consequence of fixing the trading stock’s value at the end of the income year under this subsection, no election would be available under section 70‑45 to value the trading stock at that time.
701‑30 Where entity not subsidiary member for whole of income year
Object
(1) The object of this section is to provide for a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them.
When section has effect
(2) This section has effect for the entity core purposes if:
(a) the entity is a *subsidiary member of the group for some but not all of an income year; and
(b) there are one or more periods in the income year (each of which is a non‑membership period) during which the entity is not a subsidiary member of any *consolidated group.
Tax position of each non‑membership period to be worked out
(3) For every non‑membership period, work out the entity’s taxable income (if any) for the period, the income tax (if any) payable on that taxable income and the entity’s loss (if any) (a non‑membership period loss) of each *sort for the period. Work them out:
(a) as if the start and end of the period were the start and end of the income year; and
(b) ignoring the operation of this section in relation to each other non‑membership period (if any); and
(c) so that each relevant item is either:
(i) allocated to only one of the non‑membership periods or to a period that is all or part of the rest of the income year; or
(ii) apportioned among such periods (for example, by Subdivision 716‑A (see note to this subsection)).
Note: Other provisions of this Part are to be applied in working out the taxable income or loss, for example:
· section 701‑40 (Exit history rule); and
· Subdivision 716‑A (about assessable income and deductions spread over several membership or non‑membership periods); and
· section 716‑850 (about grossing up threshold amounts for periods of less than 365 days).
Subdivision 716 also affects the tax position of the head company of a group of which the entity has been a subsidiary member for some but not all of the income year.
(3A) For the purposes of working out the entity’s taxable income (if any) for the non‑membership period, determine:
(a) whether the entity can *utilise a loss of any *sort transferred to the entity in the period; and
(b) if the period started at the start of the income year—whether the entity can utilise a loss of any sort:
(i) made by the entity, without a transfer, for an earlier income year; or
(ii) transferred to the entity in an earlier income year;
as if the time just after the end of the period were the end of the income year and the entity carried on at that time the same business that it carried on just before that time. Paragraph (3)(a) has effect subject to this subsection.
Note 1 This means that things that happen in relation to the entity at the time it becomes a subsidiary member of the group are taken into account in determining whether the entity can utilise such a loss to affect its taxable income for the non‑membership period.
Note 2: Companies whose total income for an income year is more than $100 million cannot satisfy the same business test for that year (even if the company carries on the same business): see section 165‑212A.
Income tax for the financial year
(4) The entity’s income tax (if any) for the *financial year concerned is the total of every amount of income tax worked out for the entity under subsection (3).
Taxable income for the income year
(5) The entity’s taxable income for the income year is the total of every amount of taxable income worked out for the entity under subsection (3).
(6) The entity’s income tax worked out under subsection (4) is taken to be payable on the entity’s taxable income for the income year worked out under subsection (5), even if the amount of the tax differs from the amount that would be worked out by reference to that taxable income apart from subsection (5).
Loss for the income year
(7) The entity has a loss of a particular *sort for the income year if and only if it has a non‑membership period loss of that sort for the non‑membership period (if any) ending at the end of the income year. The amount of the loss for the income year is the amount of the non‑membership period loss.
Utilisation and transfer of non‑membership period loss
(8) However, the provisions of this Act relating to transfer or *utilisation of a loss of any *sort have effect in relation to a non‑membership period loss of that sort for any non‑membership period as if the non‑membership period loss were the entity’s loss for an income year that:
(a) started at the start of the period; and
(b) ended at the end of the period.
(9) Subsection (8) has effect not only for the entity core purposes, but also (despite subsection (2)) for other purposes.
Excess franking deficit tax offset for the income year
(10) For the purposes of applying section 205‑70 in relation to an income year after the income year (the current income year) to which this section applies, the entity has an excess mentioned in paragraph 205‑70(1)(c) (about excess franking deficit tax offsets) for the current income year only if it has such an excess for the non‑membership period (if any) ending at the end of the current income year. The amount of the excess for the current income year is the amount of the excess for the non‑membership period.
701‑35 Tax‑neutral consequence for entity of ceasing to hold assets when it joins group
(1) When the entity becomes a *subsidiary member of the group, this section has effect for the entity core purposes.
Assets to which section applies
(2) This section applies in relation to an asset if the asset is *trading stock of the entity just before it becomes a *subsidiary member of the group.
Object
(3) The object of this section is to ensure that there is no income tax consequence for the entity in respect of the asset.
Note: In the case of assets other than trading stock, the fact that the entity ceases to hold them when the single entity rule begins to apply to them would not constitute a disposal or other event having tax consequences for the entity.
Setting value of trading stock at tax‑neutral amount
(4) The *value of the *trading stock at the end of the income year that ends, or, if section 701‑30 applies, of the income year that is taken by subsection (3) of that section to end, when the entity becomes a *subsidiary member is taken to be equal to:
(a) if the asset was trading stock of the entity at the start of the income year—the asset’s value at that time; or
(b) if paragraph (a) does not apply and the asset is *livestock that was acquired by natural increase—the *cost of the asset; or
(c) in any other case—the amount of the outgoing incurred by the entity in connection with the acquisition of the asset;
increased by the amount of any outgoing forming part of the cost of the asset that was incurred by the entity during its current holding of the asset.
Note: As a consequence of fixing the trading stock’s value at the end of the income year under this subsection, no election would be available under section 70‑45 to value the trading stock at that time.
(1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to any thing covered by subsection (2) (an eligible asset etc.) after it becomes that of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity.
Note: Section 73BAD of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.
Assets, liabilities and businesses covered
(2) This subsection covers the following:
(a) any asset;
(b) any liability or other thing that, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability;
(c) any business;
(d) any registration under section 39J of the Industry Research and Development Act 1986 for particular research and development activities;
that becomes that of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group.
Head company history inherited
(3) Everything that happened in relation to any eligible asset etc. while it was that of the *head company, including because of any application of section 701‑5 (the entry history rule), is taken to have happened in relation to it as if it had been an eligible asset etc. of the entity.
Note 1: If the eligible asset etc. was brought into the group when an entity became a subsidiary member, section 701‑5 (the entry history rule) would have had the effect that things happening to the eligible asset etc. while it was that of the entity would be taken to have happened as if it was that of the head company. Such things will in turn be taken by this subsection to have happened in relation to the eligible asset etc. as if it were that of the entity that takes the asset out of the group.
Note 2: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701‑45).
701‑45 Cost of assets consisting of liabilities owed to entity by members of the group
(1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.
Assets to which section applies
(2) This section applies in relation to an asset if:
(a) it becomes an asset of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group; and
(b) the asset consists of a liability owed to the entity by a *member of the group.
Object
(3) The object of this section is to set the cost of the asset to enable income tax consequences for the entity in respect of the asset to be determined.
Note: In the case of other assets, the fact that the entity inherits their history under section 701‑40 when the entity ceases to be a subsidiary member of the group means that the assets would be treated as having the same cost as they would for the head company at that time. However, assets consisting of liabilities do not have such a history because they are only recognised when the entity ceases to be a subsidiary member and the single entity rule ceases to apply.
Setting the asset’s tax cost
(4) The asset’s *tax cost is set at the time the entity ceases to be a *subsidiary member of the group at the asset’s *tax cost setting amount.
Note 1: If section 701‑30 (Where entity not subsidiary member for whole of income year) applies, the time the entity ceases to be a subsidiary member will be treated as the start of an income year.
Note 2: If the entity is a partnership, Subdivision 713‑E sets the tax cost of a partner’s interest in an asset consisting of a liability that a member of the group owes to the partnership.
701‑50 Cost of certain membership interests of which entity becomes holder on leaving group
(1) If:
(a) the entity and one or more other entities cease to be *subsidiary members of the group at the same time because of an event happening in relation to one of them; and
(b) when the entity ceases to be a subsidiary member, it holds an asset consisting of a *membership interest in any of the other entities;
this section has effect for the entity core purposes.
Object
(2) The cost of any *membership interest that one of the entities holds in another is to be treated in the same way as membership interests held by the *head company. In both cases the object is to preserve the alignment of costs for membership interests and assets (that was established when each entity became a *subsidiary member) by recognising the cost of those interests, when it ceases to be a subsidiary member, as an amount equal to the cost of the entity’s assets at that time reduced by the amount of its liabilities.
Setting tax cost of membership interests
(3) The asset’s *tax cost is set just before the entity ceases to be a *subsidiary member of the group at the asset’s *tax cost setting amount.
Note: If the asset consists of a membership interest in a partnership, Subdivision 713‑E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership.
701‑55 Setting the tax cost of an asset
(1) This section states the meaning of the expression an asset’s tax cost is set at a particular time at the asset’s *tax cost setting amount.
Depreciating asset provisions
(2) If any of Subdivisions 40‑A to 40‑D, sections 40‑425 to 40‑445 and Subdivision 328‑D, and sections 73BA and 73BF of the Income Tax Assessment Act 1936, is to apply in relation to the asset, the expression means that the provisions apply as if:
(a) the asset were *acquired at the particular time for a payment equal to its *tax cost setting amount; and
(b) at that time the same method of working out the decline in value were chosen for the asset as applied to it just before that time; and
(c) where just before that time the prime cost method applied for working out the asset’s decline in value and the asset’s tax cost setting amount does not exceed the joining entity’s *terminating value for the asset—at that time an *effective life were chosen for the asset equal to the remainder of the effective life of the asset just before that time; and
(d) where just before that time the prime cost method applied for working out the asset’s decline in value and the asset’s *tax cost setting amount exceeds the joining entity’s terminating value for the asset—the *head company were required to choose at that time an effective life for the asset in accordance with subsections 40‑95(1) and (3) and any choice of an effective life determined by the Commissioner were limited to one in force at that time; and
(e) where neither paragraph (c) nor (d) applies—at that time an effective life were chosen for the asset equal to the asset’s effective life just before that time.
Trading stock provisions
(3) If Division 70 is to apply in relation to the asset, the expression means that the Division applies as if the asset were *trading stock at the start of the income year in which the particular time occurs and its *value at that time were equal to its *tax cost setting amount.
Qualifying security provisions
(4) If Division 16E of Part III of the Income Tax Assessment Act 1936 is to apply in relation to the asset, the expression means that the Division applies as if the asset were acquired at the particular time for a payment equal to the asset’s *tax cost setting amount.
Capital gain and loss provisions
(5) If Part 3‑1 or 3‑3 is to apply in relation to the asset, the expression means that the Part applies as if the asset’s *cost base or *reduced cost base were increased or reduced so that the cost base or reduced cost base at the particular time equals the asset’s *tax cost setting amount.
Other provisions
(6) If any provision of this Act that is not mentioned above is to apply in relation to the asset, the expression means that the provision applies as if the asset’s cost at that time were equal to its *tax cost setting amount.
(1) This section applies if:
(a) the *tax cost of an asset was set at the time (the joining time) an entity became a *subsidiary member of a *consolidated group, at the asset’s *tax cost setting amount; and
(b) ignoring the operation of subsection 701‑1(1) (the single entity rule), the entity held the asset at the joining time; and
(c) taking into account the operation of subsection 701‑1(1) (the single entity rule), the *head company of the group did not hold the asset at the joining time.
Example: A debt owed by a member of the group to the joining entity at the joining time.
(2) To avoid doubt, the asset’s *tax cost setting amount mentioned in paragraph (1)(a) is not to be taken into account in applying the provisions mentioned in subsections 701‑55(2), (3), (4), (5) and (6) in relation to the asset at and after the joining time.
701‑60 Tax cost setting amount
The asset’s tax cost setting amount is worked out using this table.
|
Tax cost setting amount |
||
|
Item |
If the asset’s tax cost is set by: |
The asset’s tax cost setting amount is: |
|
1 |
section 701‑10 (Cost to head company of assets of joining entity) |
the amount worked out in accordance with Division 705 |
|
2 |
section 701‑15 (Cost to head company of membership interests in entity that leaves group) |
the amount worked out in accordance with section 711‑15 or 711‑55 |
|
3 |
section 701‑20 (Cost to head company of assets consisting of certain liabilities owed by entity that leaves group) or section 701‑45 (Cost of assets consisting of liabilities owed to entity by members of the group) |
the *market value of the asset |
|
4 |
section 701‑50 (Cost of certain membership interests of which entity becomes holder on leaving group) |
the amount worked out in accordance with section 711‑55 |
Note 1: The tax cost setting amount of certain interests in partnership assets is worked out under Subdivision 713‑E.
Note 2: The tax cost setting amount of certain assets of a life insurance company is worked out under Subdivision 713‑L.
701‑65 Net income and losses for trusts and partnerships
Net income of partnerships and trusts
(1) If:
(a) another provision of this Division applies for the purpose of:
(i) working out the amount of the entity’s liability (if any) for income tax calculated by reference to an income year; or
(ii) working out the amount of the entity’s taxable income for an income year; and
(b) the entity is a trust or partnership;
the provision instead applies in a corresponding way for the purpose of working out the amount of the entity’s net income, as defined in the Income Tax Assessment Act 1936, (if any) for the income year.
Note: Subsection 701‑30(3) requires non‑membership periods mentioned in that subsection to be treated as the start and end of an income year. This section would therefore also apply to those periods.
Partnership losses
(2) If:
(a) another provision of this Division applies for the purpose of working out the amount of the entity’s loss (if any) of a particular *sort for an income year; and
(b) the entity is a partnership;
the provision instead applies in a corresponding way for the purpose of working out the amount of an entity’s partnership loss, as defined in section 90 of the Income Tax Assessment Act 1936, (if any) for the income year.
Note: The provision applies normally to a trust, as it can have a loss of any sort worked out in the same way as a loss of the same sort for an entity of another kind.
Section applies to certain arrangements
(1) This section applies for the head company core purposes and the entity core purposes if, just before the time (the joining time) when the entity becomes a *subsidiary member of the group, an *arrangement is in force under which:
(a) expenditure is to be, or has been, incurred in return for the doing of some thing; and
(b) the persons incurring the expenditure and *deriving the corresponding amount (each of which is a combining entity) are the entity and either:
(i) another entity that became a subsidiary member at the same time; or
(ii) the *head company.
Note 1: If expenditure incurred under an arrangement consists of a payment of loan interest or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the loan principal, or other amount of a similar kind, under the arrangement.
Note 2: If expenditure incurred under an arrangement consists of a payment of rent, a lease payment or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the thing rented or leased, or other thing of a similar kind, under the arrangement.
Note 3: If expenditure incurred under an arrangement consists of a payment of an insurance premium or a payment of a similar kind, the expenditure would be incurred in return for the provision or continued provision of insurance against the risk concerned, or of a thing of a similar kind, under the arrangement.
Object
(2) The object of this section is to align the income tax position of the combining entities at the joining time, because after that time they lose their separate tax identities under the single entity rule in subsection 701‑1(1) and this would preserve any imbalance.
Adjustment for disproportionate deductibility
(3) If the total of a combining entity’s deductions that are allowable for:
(a) the following income year (the joining adjustment year):
(i) if the combining entity is the *head company and the joining time occurs at the start of an income year—the income year before that income year;
(ii) if the combining entity is the head company and subparagraph (i) does not apply—the income year in which the joining time occurs;
(iii) in any other case—the income year that ends, or, if section 701‑30 applies, the income year that is taken by subsection (3) of that section to end, at the joining time; and
(b) all earlier income years;
is not equal to the amount worked out under subsection (4), then:
(c) if the total is less—the entity is entitled to deduct the difference for the joining adjustment year; and
(d) if it is more—the entity’s assessable income for the joining adjustment year includes the difference.
Pre‑joining time proportion of total arrangement deductions
(4) The amount is worked out using the formula:
where:
pre‑joining time services proportion means the proportion of all things to be done under the arrangement in return for the incurring of the expenditure represented by those things that were done before the joining time.
total arrangement deductions means the total of the deductions that, ignoring this Part (other than subsection (7) of this section), would be allowable for expenditure incurred by the combining entity under the arrangement for all income years.
Adjustment for disproportionate assessability
(5) If the total of the amounts included in a combining entity’s assessable income in respect of amounts *derived under the arrangement for the joining adjustment year and all earlier income years is not equal to the amount worked out under subsection (6):
(a) if the total is less—the entity’s assessable income for the joining adjustment year includes the difference; and
(b) if it is more—the entity is entitled to deduct the difference for the joining adjustment year.
Pre‑joining time proportion of total arrangement assessable income
(6) The amount is worked out using the formula:
where:
pre‑joining time services proportion has the same meaning as in subsection (4).
total arrangement assessable income means the total of the amounts that, ignoring this Part (other than subsection (7) of this section), would be included in the combining entity’s assessable income for amounts *derived by it under the arrangement for all income years.
Modified application of section if combining entities previously members of same group
(7) If the combining entities were *members of the same *consolidated group (whether or not the group to which this section applies) on one or more previous occasions, this section applies in relation to the entities as if:
(a) the only things to be done under the arrangement in return for the incurring of the expenditure were those things to be done after the entities ceased to be members of the same group on the previous occasion or the last of the previous occasions; and
(b) the only deductions allowable to an entity for expenditure incurred by it under the arrangement, and the only amounts included in an entity’s assessable income in respect of amounts *derived under the arrangement, were:
(i) if the entity was the *head company of the consolidated group of which the combining entities were members on the previous occasion or last of the previous occasions—those for the income year, in which the previous occasion or the last of the previous occasions occurred, that are attributable to the period after that occasion and those for all later income years; and
(ii) in any other case—those for the income year that started, or, if section 701‑30 applies, the income year that is taken by subsection (3) of that section to have started, when the entity ceased to be a *subsidiary member of the group on the previous occasion or the last of the previous occasions and those for all later income years.
Section applies to certain arrangements
(1) This section applies for the head company core purposes and the entity core purposes if the entity ceases to be a *subsidiary member of the group and, just before the time (the leaving time) when it does so, an *arrangement is in force under which:
(a) expenditure is to be, or has been, incurred in return for the doing of some thing; and
(b) the persons incurring the expenditure and *deriving the corresponding amount (each of which is a separating entity) are the entity and either:
(i) another entity that ceases to be a subsidiary member at the same time; or
(ii) the *head company.
Note: The notes to subsection 701‑70(1) on the application of that subsection to expenditure under certain kinds of arrangements are equally applicable for the purposes of this subsection.
Object
(2) The object of this section is to align the income tax position of the separating entities at the leaving time, because from that time they have separate tax identities as a result of the single entity rule in subsection 701‑1(1) ceasing to apply, and this may create an imbalance.
Adjustment for disproportionate deductibility
(3) If the total of the deductions that are or will be allowable for expenditure incurred by the separating entity under the arrangement for:
(a) the following income year (the leaving adjustment year):
(i) if the separating entity is the *head company—the income year in which the leaving time occurs;
(ii) in any other case—the income year that starts, or, if section 701‑30 applies, the income year that is taken by subsection (3) of that section to start, at the leaving time; and
(b) all later income years;
is not equal to the amount worked out under subsection (4), the deductions are adjusted so that they do equal the amount.
Post‑leaving time proportion of total arrangement deductions
(4) The amount is worked out using the formula:
where:
post‑leaving time services proportion means the proportion of all things to be done under the arrangement in return for the incurring of the expenditure represented by those things that are to be done after the leaving time.
total arrangement deductions means the total of the deductions that, ignoring this Part, would be allowable for expenditure incurred by the separating entity under the arrangement for all income years.
Adjustment for disproportionate assessability
(5) If the total of the amounts that are or will be included in its assessable income in respect of amounts *derived under the arrangement for the leaving adjustment year and all later income years is not equal to the amount worked out under subsection (6), the amounts that are or will be included in its assessable income are adjusted so that they do equal the amount worked out under subsection (6).
Post‑leaving time proportion of total arrangement assessable income
(6) The amount is worked out using the formula:
where:
post‑leaving time services proportion has the same meaning as in subsection (4).
total arrangement assessable income means the total of the amounts that, ignoring this Part, would be included in the separating entity’s assessable income for amounts *derived by it under the arrangement for all income years.
701‑80 Accelerated depreciation
(1) This section has effect for the head company core purposes when the entity becomes a *subsidiary member of the group.
Object
(2) The object of this section is to preserve any entitlement to accelerated depreciation for assets that become those of the *head company because subsection 701‑1(1) (the single entity rule) applies when the entity becomes a *subsidiary member of the group. This is only to apply where the asset’s *tax cost setting amount is not more than the entity’s *terminating value for the asset.
Section applies to certain depreciating assets
(3) This section applies if:
(a) a *depreciating asset to which Division 40 applies becomes that of the *head company because subsection 701‑1(1) (the single entity rule) applies when the entity becomes a *subsidiary member of the group; and
(b) just before the entity became a subsidiary member, subsection 40‑10(3) or 40‑12(3) of the Income Tax (Transitional Provisions) Act 1997 applied for the purpose of the entity working out the asset’s decline in value under Division 40; and
Note: The effect of those subsections was to preserve an entitlement to accelerated depreciation.
(c) the *tax cost setting amount that applies in relation to the asset for the purposes of section 701‑10 when it becomes an asset of the head company is not more than the entity’s *terminating value for the asset.
Preservation of accelerated depreciation
(4) While the asset is held by the *head company under subsection 701‑1(1) (the single entity rule), the decline in its value under Division 40 is worked out by replacing the component in the formula in subsection 40‑70(1) or 40‑75(1) that includes the asset’s *effective life with the rate that would apply under subsection 42‑160(1) or 42‑165(1) of this Act if it had not been amended by the New Business Tax System (Capital Allowances) Act 2001.
701‑85 Other exceptions etc. to the rules
The operation of each provision of this Division is subject to any provision of this Act that so requires, either expressly or impliedly.
Note: An example of such a provision is Division 707 (about the transfer of certain losses to the head company of a consolidated group). That Division modifies the effect that the inheritance of history rule in section 701‑5 would otherwise have.
Division 703—Consolidated groups and their members
703‑1 What this Division is about
A consolidated group and a consolidatable group each consists of a head company and all the companies, trusts and partnerships that:
(a) are resident in Australia; and
(b) are wholly‑owned subsidiaries of the head company (either directly or through other companies, trusts and partnerships).
A consolidatable group becomes consolidated at a time chosen by the company that was the head company at the time.
Table of sections
Basic concepts
703‑5 What is a consolidated group?
703‑10 What is a consolidatable group?
703‑15 Members of a consolidated group or consolidatable group
703‑20 Certain entities that cannot be members of a consolidated group or consolidatable group
703‑25 Australian residence requirements for trusts
703‑30 When is one entity a wholly‑owned subsidiary of another?
703‑33 Transfer time for sale of shares in company
703‑35 Treating entities as wholly‑owned subsidiaries by disregarding employee shares
703‑40 Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries
703‑45 Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group
Choice to consolidate a consolidatable group
703‑50 Choice to consolidate a consolidatable group
Consolidated group created when MEC group ceases to exist
703‑55 Creating consolidated groups from certain MEC groups
Notice of events affecting consolidated group
703‑60 Notice of events affecting consolidated group
Effects of choice to continue group after shelf company becomes new head company
703‑65 Application
703‑70 Consolidated group continues in existence with interposed company as head company and original company as a subsidiary member
703‑75 Interposed company treated as substituted for original company at all times before the completion time
703‑80 Effects on the original company’s tax position
703‑5 What is a consolidated group?
(1) A consolidated group comes into existence:
(a) on the day specified in a choice by a company under section 703‑50 as the day on and after which a *consolidatable group is taken to be consolidated; or
(b) as described in section 703‑55 (about creating a consolidated group from a *MEC group).
Note: The day specified in a choice under section 703‑50 as the day on and after which a consolidatable group is taken to be consolidated may be a day before the choice is made.
(2) The consolidated group continues to exist until the *head company of the group:
(a) ceases to be a head company; or
(b) becomes a member of a *MEC group.
The consolidated group ceases to exist when one of those events happens to the head company.
Note: The group does not cease to exist in some cases where a shelf company is interposed between the head company and its former members: see subsection 124‑380(5) and section 703‑70.
(3) At any time while it is in existence, the consolidated group consists of the *head company and all of the *subsidiary members (if any) of the group at the time.
Note: A consolidated group continues to exist despite one or more entities ceasing to be subsidiary members of the group or becoming subsidiaries of the group, as long as the events described in subsection (2) do not happen to the head company. Thus a consolidated group may come to consist of a head company alone at various times.
703‑10 What is a consolidatable group?
(1) A consolidatable group consists of:
(a) a single *head company; and
(b) all the *subsidiary members of the group.
(2) To avoid doubt, a consolidatable group cannot consist of a *head company alone.
703‑15 Members of a consolidated group or consolidatable group
(1) An entity is a member of a *consolidated group or *consolidatable group while the entity is:
(a) the *head company of the group; or
(b) a *subsidiary member of the group.
(2) At a particular time in an income year, an entity is:
(a) a head company if all the requirements in item 1 of the table are met in relation to the entity; or
(b) a subsidiary member of a *consolidated group or *consolidatable group if all the requirements in item 2 of the table are met in relation to the entity:
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Head companies and subsidiary members of groups |
|||
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
|
1 Head company |
The entity must be a company (but not one covered by section 703‑20) that has all or some of its taxable income (if any) taxed at a rate that is or equals the *general company tax rate |
The entity must be an Australian resident (but not a *prescribed dual resident) |
The entity must not be a *wholly‑owned subsidiary of another entity that meets the requirements in columns 2 and 3 of this item or, if it is, it must not be a subsidiary member of a *consolidatable group or *consolidated group |
|
2 Subsidiary member |
The requirements are that: (a) the entity must be a company, trust or partnership (but not one covered by section 703‑20); and (b) if the entity is a company—all or some of its taxable income (if any) must be taxable apart from this Part at a rate that is or equals the *general company tax rate; and (c) the entity must not be a non‑profit company (as defined in the Income Tax Rates Act 1986) |
The entity must: (a) be an Australian resident (but not a *prescribed dual resident), if it is a company; or (b) comply with section 703‑25, if it is a trust; or (c) be a partnership |
The entity must be a *wholly‑owned subsidiary of the head company of the group and, if there are interposed between them any entities, the set of requirements in section 703‑45, section 701C‑10 of the Income Tax (Transitional Provisions) Act 1997 or section 701C‑15 of that Act must be met |
703‑20 Certain entities that cannot be members of a consolidated group or consolidatable group
(1) The object of this section is to specify certain entities that cannot be *members of a *consolidated group because of the way their income is treated for income tax purposes.
(2) An entity of a kind specified in an item of the table cannot be a *member of a *consolidated group or a *consolidatable group at a time in an income year if the conditions specified in the item exist:
|
Certain entities that cannot be members of a consolidated or consolidatable group |
||
|
Item |
An entity of this kind: |
Cannot be a member of a consolidated group or consolidatable group if: |
|
1 |
An entity of any kind |
At the time, the total *ordinary income and *statutory income of the entity is exempt from income tax under Division 50 |
|
2 |
A company |
The company is a recognised medium credit union (as defined in section 6H of the Income Tax Assessment Act 1936) for the income year |
|
3 |
A company |
The company: (a) is an approved credit union for the income year for the purposes of section 23G of the Income Tax Assessment Act 1936; and (b) is not a recognised medium credit union (as defined in section 6H of that Act) or a recognised large credit union (as defined in that section) for the income year |
|
5 |
A company |
The company is a *PDF at the end of the income year |
|
6 |
A company |
The company is a *film licensed investment company at the time |
|
7 |
A trust |
The trust is: (a) a *complying superannuation entity for the income year; or (b) a non‑complying ADF or non‑complying superannuation fund (as those terms are defined in section 267 of the Income Tax Assessment Act 1936) for the income year |
Note: A subsidiary of a life insurance company cannot be a member of a consolidated group or consolidatable group in certain circumstances: see section 713‑510.
703‑25 Australian residence requirements for trusts
A trust described in an item of the table must meet the requirements specified in the item to be able to be a *subsidiary member of a *consolidated group or a *consolidatable group at a time in an income year:
|
Australian residence requirements for trusts |
||
|
Item |
A trust of this kind: |
Can be a member of a consolidated group or consolidatable group only if these requirements are met: |
|
1 |
A trust (except a unit trust) |
The trust must be a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 |
|
2 |
A unit trust (except a *corporate unit trust or a *public trading trust for the income year) |
The trust must be: (a) a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936; and (b) a *resident trust for CGT purposes for the income year |
|
3 |
A *corporate unit trust or a *public trading trust for the income year |
The trust must be a *resident unit trust for the income year |
703‑30 When is one entity a wholly‑owned subsidiary of another?
(1) One entity (the subsidiary entity) is a wholly‑owned subsidiary of another entity (the holding entity) if all the *membership interests in the subsidiary entity are beneficially owned by:
(a) the holding entity; or
(b) one or more wholly‑owned subsidiaries of the holding entity; or
(c) the holding entity and one or more wholly‑owned subsidiaries of the holding entity.
(2) An entity (other than the subsidiary entity) is a wholly‑owned subsidiary of the holding entity if, and only if:
(a) it is a wholly‑owned subsidiary of the holding entity; or
(b) it is a wholly‑owned subsidiary of a wholly‑owned subsidiary of the holding entity;
because of any other application or applications of this section.
Note: This Part also operates in some cases as if an entity were a wholly‑owned subsidiary of another entity, even though the entity is not covered by the definition in this section because of:
(a) ownership of shares under certain arrangements for employee shareholding (see section 703‑35); or
(b) interposed trusts that are not fixed trusts (see section 703‑40).
(3) For the purposes of this section, one entity is not prevented from being the beneficial owner of a *membership interest in another entity merely because the first entity is or becomes:
(a) an externally‑administered body corporate within the meaning of the Corporations Act 2001; or
(b) an entity with a status under a *foreign law similar to the status of an externally‑administered body corporate under the Corporations Act 2001.
703‑33 Transfer time for sale of shares in company
(1) This section applies if:
(a) under a contract:
(i) a person (the seller) stops being entitled to be registered as the holder of a *share in a company at a time (the transfer time); and
(ii) another person (the buyer) becomes entitled to be registered as the holder of the share in the company at the transfer time; and
(b) as a result of the contract, the seller stops being the beneficial owner of the share, and the buyer becomes the beneficial owner of the share; and
(c) the seller and the buyer dealt with each other at *arm’s length in relation to the contract; and
(d) the seller and the buyer were not *associates of one another at any time during the period:
(i) starting when the contract was entered into; and
(ii) ending at the transfer time.
(2) For the purposes of subsection 703‑30(1):
(a) the seller is taken to have stopped being the beneficial owner of the share at the transfer time; and
(b) the buyer is taken to have become the beneficial owner of the share at the transfer time.
703‑35 Treating entities as wholly‑owned subsidiaries by disregarding employee shares
(1) The object of this section is to ensure that an entity is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because there are minor holdings of *shares in a company issued under *arrangements for employee shareholdings. (It does not matter whether the company is the entity or is interposed between the entity and a *member of the group.)
Note: A company that is prevented from being a subsidiary member of a consolidated group may be a head company (so there could be 2 consolidated or consolidatable groups, instead of the one that this section ensures exists).
(2) This Part (except Division 719) operates as if a company that meets the requirement of subsection (3) at a particular time were a *wholly‑owned subsidiary of an entity (the holding entity) at the time.
(3) The company must be one that would be a *wholly‑owned subsidiary of the holding entity at the time if the *shares in the company that are to be disregarded under subsection (4) did not exist.
(4) Disregard each of the *shares described in subsection (5) if the total number of those shares is not more than 1% of the number of ordinary shares in the company.
(5) A *share in the company that is beneficially owned by an entity may be disregarded under subsection (4) if:
(a) the entity acquired (as defined in section 139G of the Income Tax Assessment Act 1936) the share either:
(i) in the circumstances described in subsection 139C(1) or (2) of that Act; or
(ii) by exercising a right the entity acquired (as so defined) in those circumstances; and
(b) all the shares in the company available for acquisition in those circumstances are ordinary shares and all the rights available for acquisition in those circumstances are rights to acquire ordinary shares; and
(c) if the entity acquired the share in those circumstances—at the time of the acquisition, at least 75% of the permanent employees (as defined in section 139GB of that Act) of the employer (as defined in section 139GA of that Act) were or had earlier been entitled to acquire in those circumstances:
(i) shares in the company or rights to acquire shares in the company; or
(ii) shares in a holding company (as defined in section 139GC of that Act) of the company or rights to acquire such shares; and
(d) the conditions in subsections 139CD(6) and (7) of that Act are met in relation to the acquisition of the share by the entity; and
(e) the company is not covered by section 139DF of that Act.
Note: Section 139CD of the Income Tax Assessment Act 1936 sets out certain preconditions for shares and rights acquired under employee share schemes to be qualifying shares and qualifying rights. Section 139C of that Act explains when a share or right is acquired under an employee share scheme. Section 139DF prevents shares and rights relating to certain companies from being qualifying shares and rights.
(6) The *share may be disregarded under subsection (4) even though the condition in paragraph (5)(c) is not met, if:
(a) the conditions in paragraphs (5)(a), (b), (d) and (e) are met; and
(b) the Commissioner has made a determination under subsection 139CD(8) of the Income Tax Assessment Act 1936 in relation to the share.
703‑40 Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries
(1) This section operates to ensure that an entity (the test entity) is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because there is a trust that is not a *fixed trust interposed between the test entity and the *head company of the group.
(2) This Part (except Division 719) operates as if the test entity were a *wholly‑owned subsidiary of the *head company if the test entity would have been a wholly‑owned subsidiary of the head company had the interposed trust been a *fixed trust and all its objects been beneficiaries.
(1) This section describes, for the purposes of item 2, column 4 of the table in subsection 703‑15(2), a set of requirements that must be met for an entity (the test entity) to be a *subsidiary member of a *consolidated group or a *consolidatable group at a particular time (the test time).
(2) At the test time, each of the interposed entities must either:
(a) be a *subsidiary member of the group; or
(b) hold *membership interests in:
(i) the test entity; or
(ii) a subsidiary member of the group interposed between the *head company of the group and the test entity;
only as a nominee of one or more entities each of which is a *member of the group.
Choice to consolidate a consolidatable group
703‑50 Choice to consolidate a consolidatable group
(1) A company may make a choice in the *approved form given to the Commissioner within the period described in subsection (3) that a *consolidatable group is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the *head company of the group on the day specified.
Choice is irrevocable
(2) The choice cannot be revoked, and the specification of the day cannot be amended, after the choice is made under subsection (1).
Period for giving choice to Commissioner
(3) The period for giving the choice to the Commissioner:
(a) starts at the start of the day specified in the choice; and
(b) ends at the end of:
(i) the day on which the company gives the Commissioner its *income tax return for the income year during which the day specified in the choice occurs; or
(ii) the last day in the period within which the company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return.
Choice has no effect after consolidated group ceases to exist
(4) The choice does not have effect after the *consolidated group that came into existence because of the choice ceases to exist. To avoid doubt, this subsection does not prevent the choice from:
(a) being made by the company at a time when it is not a head company; or
(b) having effect in relation to a time before the consolidated group ceased to exist, even if that time is before the choice is made.
Choice does not have effect if it contains wrong information
(5) The choice does not have effect (and is taken not to have had effect) if the Commissioner is satisfied that the choice contains information that is incorrect in a material particular.
Commissioner may give effect to choice despite wrong information
(6) Subsection (5) does not prevent the choice from having effect (and being taken to have had effect) if the Commissioner gives the company written notice that the choice has effect despite the incorrect information.
Note: Subsection (6) does not let the Commissioner make the choice effective if it did not have effect because it was not made in accordance with subsection (1). This could have happened if:
(a) the choice was not in the approved form (for example because it did not include information the Commissioner required (whether in the form or otherwise)); or
(b) the choice was not given to the Commissioner within the period described in subsection (3); or
(c) the company was not the head company of a consolidatable group on the day specified in the choice.
Choice does not have effect if company is a member of a MEC group
(7) The choice does not have effect (and is taken not to have had effect) if, on the day specified, the company was a member of a *MEC group.
Consolidated group created when MEC group ceases to exist
703‑55 Creating consolidated groups from certain MEC groups
(1) A *consolidated group comes into existence at the time a *MEC group ceases to exist if:
(a) the MEC group included only one *eligible tier‑1 company just before the time; and
(b) the MEC group ceases to exist only because the company ceases to be an eligible tier‑1 company; and
(c) the company is a *head company as defined in section 703‑15 at the time.
(2) To avoid doubt, the *consolidated group consists at the time of:
(a) the company (as the *head company of the consolidated group); and
(b) every entity (if any) that was a *subsidiary member of the *MEC group just before that time (as a subsidiary member of the consolidated group).
Notice of events affecting consolidated group
703‑60 Notice of events affecting consolidated group
(1) Within 28 days of an event described in an item of the table, the entity described in column 3 of the item must give the Commissioner notice in the *approved form of the event.
|
Notice of events |
||
|
Column 1 Item |
Column 2 If this event happens: |
Column 3 Notice must be given by: |
|
1 |
An entity becomes a *member of a *consolidated group |
The *head company of the consolidated group |
|
2 |
An entity ceases to be a *subsidiary member of a *consolidated group |
The *head company of the group, or the person who was its public officer just before it ceased to exist if the former subsidiary member ceases to be a *member of the group because the head company ceases to exist |
|
3 |
A *consolidated group ceases to exist |
The company that was the *head company of the group, or the person who was its public officer just before it ceased to exist if it ceases to be the head company of the group because it ceases to exist |
(2) Despite subsection (1), if:
(a) an event described in subsection (1) happens in relation to a *consolidated group that comes into existence on the day specified in a choice under section 703‑50; and
(b) the event happens more than 28 days before the choice is made;
the *head company of the consolidated group must give the Commissioner notice in the *approved form of the event at the same time as the choice is made.
(3) Despite subsection (1), if:
(a) an event described in subsection (1) happens in relation to a *consolidated group that comes into existence at a time under subsection 703‑55(1) because a *MEC group ceased to exist at that time; and
(b) the *MEC group came into existence under paragraph 719‑5(1)(a) because a notice of choice under section 719‑50 is given after that time; and
(c) the event happens more than 28 days before the notice of choice is given;
the *head company of the consolidated group must give the Commissioner notice in the *approved form of the event at the same time as the notice of choice is given.
Effects of choice to continue group after shelf company becomes new head company
Sections 703‑70 to 703‑80 set out the effects if a company (the interposed company) chooses under subsection 124‑380(5) that a *consolidated group is to continue in existence at and after the time referred to in that subsection as the completion time.
Note: The choice is one of the conditions for a compulsory roll‑over under Subdivision 124‑G on an exchange of shares in the head company of a consolidated group for shares in the interposed company.
(1) The *consolidated group is taken not to have ceased to exist under subsection 703‑5(2) because the company referred to in subsection 124‑380(5) as the original company ceases to be the *head company of the group.
(2) To avoid doubt, the interposed company is taken to have become the *head company of the *consolidated group at the completion time, and the original company is taken to have ceased to be the head company at that time.
Note: A further result is that the original company is taken to have become a subsidiary member of the group at that time. Section 703‑80 deals with the original company’s tax position for the income year that includes the completion time.
(3) A provision of this Part that applies on an entity becoming a *subsidiary member of a *consolidated group does not apply to an entity being taken to have become such a member as a result of this section, unless the provision is expressed to apply despite this subsection.
Note: An example of the effect of this subsection is that there is no resetting under section 701‑10 of the tax cost of assets of the original company that become assets of the interposed company because of subsection 701‑1(1) (the single entity rule).
(4) To avoid doubt, subsection (3) does not affect the application of subsection 701‑1(1) (the single entity rule).
(1) Everything that happened in relation to the original company before the completion time:
(a) is taken to have happened in relation to the interposed company instead of in relation to the original company; and
(b) is taken to have happened in relation to the interposed company instead of what would (apart from this section) be taken to have happened in relation to the interposed company before that time;
just as if, at all times before the completion time:
(c) the interposed company had been the original company; and
(d) the original company had been the interposed company.
Note: This section treats the original company and the interposed company as having in effect exchanged identities throughout the period before the completion time, but without affecting any of the original company’s other attributes.
(2) To avoid doubt, subsection (1) also covers everything that, immediately before the completion time, was taken, because of:
(a) section 701‑1 (Single entity rule); or
(b) section 701‑5 (Entry history rule); or
(c) one or more previous applications of this section; or
(d) section 719‑90 (about the effects of a change of head company of a MEC group);
to have happened in relation to the original company.
(3) Subsections (1) and (2) have effect:
(a) for the head company core purposes in relation to an income year ending after the completion time; and
(b) for the entity core purposes in relation to an income year ending after the completion time; and
(c) for the purposes of determining the respective balances of the *franking accounts of the original company and the interposed company at and after the completion time.
(4) Subsections (1) and (2) have effect subject to:
(a) section 701‑40 (Exit history rule); and
(b) a provision of this Act to which section 701‑40 is subject because of section 701‑85 (about exceptions to the core rules in Division 701).
Note: An example of provisions covered by paragraph (b) of this subsection is Subdivision 717‑E (about transferring to a company leaving a consolidated group various surpluses under the CFC and FIF rules in Parts X and XI of the Income Tax Assessment Act 1936).
703‑80 Effects on the original company’s tax position
In applying section 701‑30 to the original company for the income year that includes the completion time, disregard a non‑membership period that starts before the completion time.
Note 1: Section 701‑30 is about working out an entity’s tax position for a period when it is not a subsidiary member of any consolidated group. Its application can also affect the entity’s tax position in later income years.
Note 2: Under section 703‑75 the interposed company inherits the original company’s tax position for the part of the income year that ends before the completion time, with the consequence that the original company’s taxable income, income tax payable, and losses of any sort, for that part are each nil.
Because of section 703‑75 and this section, the only tax payable by the original company for the income year arises because of the application of section 701‑30 to non‑membership periods in the income year after the completion time.
705‑1 What this Division is about
When an entity becomes a subsidiary member of a consolidated group, the tax cost of its assets is set at a tax cost setting amount that is worked out in accordance with this Division.
Table of Subdivisions
705‑A Basic case: a single entity joining an existing consolidated group
705‑B Case of group formation
705‑C Case where a consolidated group is acquired by another
705‑D Where multiple entities are linked by membership interests
705‑E Adjustments for errors etc.
Subdivision 705‑A—Basic case: a single entity joining an existing consolidated group
705‑5 What this Subdivision is about
When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity.
Table of sections
Application and object
705‑10 Application and object of this Subdivision
705‑15 Cases where this Subdivision does not have effect
Tax cost setting amount for assets that joining entity brings into joined group
705‑20 Tax cost setting amount worked out under this Subdivision
705‑25 Tax cost setting amount for retained cost base assets
705‑30 What is the joining entity’s terminating value for an asset?
705‑35 Tax cost setting amount for reset cost base assets
705‑40 Tax cost setting amount for reset cost base assets held on revenue account
705‑45 Reduction in tax cost setting amount for accelerated depreciation assets
705‑47 Reduction in tax cost setting amount for some privatised assets
705‑50 Reduction in tax cost setting amount for over‑depreciated assets
705‑55 Order of application of sections 705‑40, 705‑45, 705‑47 and 705‑50
705‑56 Modification for tax cost setting in relation to finance leases
705‑57 Adjustment to tax cost setting amount where loss of pre‑CGT status of membership interests in joining entity
705‑58 Assets and liabilities not set off against each other
705‑59 Exception: treatment of linked assets and liabilities
How to work out the allocable cost amount
705‑60 What is the joined group’s allocable cost amount for the joining entity?
705‑65 Cost of membership interests in the joining entity—step 1 in working out allocable cost amount
705‑70 Liabilities of the joining entity—step 2 in working out allocable cost amount
705‑75 Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount
705‑80 Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount
705‑85 Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount
705‑90 Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount
705‑93 If pre‑joining time roll‑over from foreign resident company—step 3A in working out allocable cost amount
705‑95 Pre‑joining time distributions out of certain profits—step 4 in working out allocable cost amount
705‑100 Losses accruing to joined group before joining time—step 5 in working out allocable cost amount
705‑105 Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount
705‑110 If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount
705‑115 If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount
How to work out a pre‑CGT factor for assets of joining entity
705‑125 Pre‑CGT factor for assets of joining entity
705‑10 Application and object of this Subdivision
Application
(1) This Subdivision has effect, subject to section 705‑15, for the head company core purposes set out in subsection 701‑1(2) if an entity (the joining entity) becomes a *subsidiary member of a *consolidated group (the joined group) at a particular time (the joining time).
Object
(2) The object of this Subdivision is to recognise the *head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity. That amount consists of the cost of the group’s *membership interests in the joining entity, increased by the joining entity’s liabilities and adjusted to take account of the joining entity’s retained profits, distributions of profits, deductions and losses.
(3) The reason for recognising the *head company’s cost in this way is to align the costs of assets with the costs of *membership interests, and to allow for the preservation of this alignment until the entity ceases to be a *subsidiary member, in order to:
(a) prevent double taxation of gains and duplication of losses; and
(b) remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically.
Note: Under Division 711, the alignment is preserved by recognising the head company’s cost of membership interests in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.
705‑15 Cases where this Subdivision does not have effect
This Subdivision does not have effect if any of the following exceptions applies:
(a) the first exception is where the joining entity becomes a *member of the joined group because it is a member of that group at the time it comes into existence as a *consolidated group;
Note: See Subdivision 705‑B for rules about the treatment of assets if entities become members in circumstances covered by this exception.
(b) the second exception is where all of the members of another consolidated group become members of the joined group as a result of the *acquisition of *membership interests in the *head company of the joining group;
Note: See Subdivision 705‑C for rules about the treatment of assets if entities become members in circumstances covered by this exception.
(c) the third exception is where:
(i) the joining entity and one or more other entities become members of the joined group at the same time as a result of an event that happens in relation to one of them; and
(ii) the case is not covered by the second exception;
Note: See Subdivision 705‑D for rules about the treatment of assets if entities become members in circumstances covered by this exception.
Tax cost setting amount for assets that joining entity brings into joined group
705‑20 Tax cost setting amount worked out under this Subdivision
If this Subdivision has effect, for the purposes of item 1 in the table in section 701‑60 (Tax cost setting amount) the *tax cost setting amount for an asset whose *tax cost is set at the time the joining entity becomes a *subsidiary member of the joined group is worked out under this Subdivision.
705‑25 Tax cost setting amount for retained cost base assets
(1) This section states what the *tax cost setting amount is for a *retained cost base asset.
Australian currency
(2) If the *retained cost base asset is covered by paragraph (a) or (b) of the definition of that expression and is not covered by another subsection of this section, its *tax cost setting amount is equal to the amount of the Australian currency concerned.
Qualifying securities
(3) If the *retained cost base asset is a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936), the *tax cost setting amount for the qualifying security is instead equal to the joining entity’s *terminating value for the asset.
Entitlements to pre‑paid services etc.
(4) If the *retained cost base asset is covered by paragraph (c) of the definition of that expression, its *tax cost setting amount is equal to the amount of the deductions to which the *head company is entitled under section 701‑5 (the entry history rule) in respect of the expenditure that gave rise to the entitlement.
Note: If the total amount to be treated as tax cost setting amounts for retained cost base assets exceeds the joined group’s allocable cost amount for the joining entity, the head company makes a capital gain equal to the excess: see CGT event L3.
Retained cost base asset
(5) A retained cost base asset is:
(a) Australian currency, other than *trading stock or *collectables of the joining entity; or
(b) a right to receive a specified amount of such Australian currency, other than a right that is a marketable security within the meaning of section 70B of the Income Tax Assessment Act 1936; or
Example: A debt or a bank deposit.
(c) a right to have something done under an *arrangement under which:
(i) expenditure has been incurred in return for the doing of the thing; and
(ii) the thing is required or permitted to be done, or to cease being done, after the expenditure is incurred.
Note 1: There are some additional retained cost base assets for a joining entity that is a life insurance company: see Subdivision 713‑L. The tax cost setting amount for those assets is worked out under that Subdivision.
Note 2: The joining entity’s right to receive lease payments under a finance lease is treated as a retained cost base asset in some circumstances (see paragraph 705‑56(3)(b)).
705‑30 What is the joining entity’s terminating value for an asset?
Trading stock
(1) If an asset of the joining entity is *trading stock, the joining entity’s terminating value for the asset is:
(a) if the asset was on hand at the start of the income year in which the joining time occurs (including because of the operation of Division 701)—its *value at that time; or
(b) if paragraph (a) does not apply and the asset is *livestock that was acquired by natural increase—the *cost of the asset; or
(c) in any other case—the amount of the outgoing incurred by the joining entity in connection with the acquisition of the asset;
increased by the amount of any outgoing forming part of the cost of the asset that is incurred by the joining entity during its current holding of the asset.
Qualifying securities
(2) If an asset of the joining entity is a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936) that is not *trading stock, the joining entity’s terminating value for the asset is equal to the amount of consideration that the joining entity would need to receive, if it were to dispose of the asset just before the joining time, without an amount being assessable income of, or deductible to, the joining entity under section 159GS of the Income Tax Assessment Act 1936.
Depreciating assets
(3) If an asset of the joining entity is a *depreciating asset to which Division 40 applies, the joining entity’s terminating value for the asset is equal to the asset’s *adjustable value just before the joining time.
Other CGT assets
(4) If an asset of the joining entity is a *CGT asset that is not covered by any of the above subsections, the joining entity’s terminating value for the asset is equal to the asset’s *cost base just before the joining time.
Other assets
(5) The joining entity’s terminating value for any other asset that it holds is the amount that would be the asset’s *cost base just before the joining time if it were an asset covered by subsection (4).
705‑35 Tax cost setting amount for reset cost base assets
(1) For each asset of the joining entity (a reset cost base asset) that is not a *retained cost base asset or an asset (an excluded asset) covered by subsection (2), the asset’s *tax cost setting amount is worked out by:
(a) first working out the joined group’s *allocable cost amount for the joining entity in accordance with section 705‑60; and
(b) then reducing that amount by the total of the *tax cost setting amounts in accordance with section 705‑25 for each retained cost base asset (but not below zero); and
(c) finally, allocating the result to each of the joining entity’s reset cost base assets (other than excluded assets) in proportion to their *market values.
Note 1: For an asset consisting of an entitlement to receive an amount that will be included in assessable income, the market value of the asset would take into account the tax payable on the amount.
Note 1A: If a set of linked assets and liabilities includes one or more reset cost base assets, section 705‑59 may affect how this section applies. In particular, that section may exclude the application of paragraph 705‑35(1)(b) to retained cost base assets in the set; this in turn may affect the application of CGT event L3.
Note 2: If there are no reset cost base assets, the result is instead treated as a capital loss of the head company: see CGT event L4.
Excluded assets
(2) An asset is covered by this subsection if, under any of the steps in the table in section 705‑60, the joined group’s *allocable cost amount for the joining entity is reduced by an amount in respect of the asset.
Note: An example is an entitlement to a deduction, for which there is a reduction under step 2 in the table.
Goodwill resulting from ownership and control of the joining entity
(3) If, just after the joining time, the *head company has, because of its ownership and control of the joining entity, a goodwill asset associated with assets or businesses of the joined group:
(a) for the head company core purposes, the asset’s *tax cost is set at the joining time at its *tax cost setting amount; and
(b) for the purpose of doing so:
(i) the asset is taken to be an asset of the joining entity that becomes an asset of the head company because subsection 701‑1(1) (the single entity rule) applies; and
(ii) it is taken to have a *market value just before the joining time of an amount equal to its market value just after the joining time.
705‑40 Tax cost setting amount for reset cost base assets held on revenue account
(1) The *tax cost setting amount for a reset cost base asset that is *trading stock, a *depreciating asset or a *revenue asset must not exceed the greater of:
(a) the asset’s *market value; and
(b) the joining entity’s *terminating value for the asset.
(2) If subsection (1) reduces the asset’s *tax cost setting amount, the amount of the reduction is allocated among the other reset cost base assets (including other *trading stock, *depreciating assets and *revenue assets) other than excluded assets, so as to increase their tax cost setting amounts, in accordance with the principles set out in subsection (3).
Note: If any of the amount of the reduction cannot be allocated, it is instead treated as a capital loss of the head company: see CGT event L8.
(3) These are the principles:
(a) the allocation is to be in proportion to the *market values of the assets;
(b) the amount allocated to an item of *trading stock, to a *depreciating asset or to a *revenue asset must not cause its *tax cost setting amount to contravene subsection (1);
(c) any of the amount that cannot be allocated is to be reallocated, to the maximum extent possible, among the remaining reset cost base assets (other than excluded assets) by applying this subsection a further one or more times.
705‑45 Reduction in tax cost setting amount for accelerated depreciation assets
If:
(a) an asset of the joining entity is a *depreciating asset to which Division 40 applies; and
(aa) just before the entity became a subsidiary member, subsection 40‑10(3) or 40‑12(3) of the Income Tax (Transitional Provisions) Act 1997 applied for the purposes of the joining entity working out the asset’s decline in value under Division 40; and
Note: The effect of those subsections was to preserve an entitlement to accelerated depreciation.
(b) the asset’s *tax cost setting amount would be greater than the joining entity’s *terminating value for the asset; and
(c) the *head company chooses to apply this section to the asset;
the asset’s tax cost setting amount is reduced so that it equals the terminating value.
Note 1: A consequence of the choice is that accelerated depreciation will apply to the asset: see section 701‑80.
Note 2: Unlike the position with a reduction in tax cost setting amount under section 705‑40, the amount of the reduction is not re‑allocated among other assets.
705‑47 Reduction in tax cost setting amount for some privatised assets
Object
(1) The object of this section is to limit appropriately the amount the *head company of the joined group can deduct for a *depreciating asset it starts to *hold because the joining entity becomes a *subsidiary member of the group, by reference to the direct or indirect effect of the following provisions on the amount the joining entity could deduct for the asset:
(a) former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for tax‑exempt entities that become taxable);
(b) former Subdivision 57‑I, and Subdivision 57‑J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and capital allowance deductions);
(c) Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001).
Reduction of tax cost setting amount
(2) The *tax cost setting amount for a *depreciating asset is reduced to the joining entity’s *terminating value for the asset if:
(a) at a time before the joining entity became a *subsidiary member of the joined group, the asset was *held by an entity (whether the joining entity or another entity) that, at that time, was:
(i) an *exempt Australian government agency; or
(ii) another entity whose *ordinary income and *statutory income were exempt from income tax; and
(b) any of the following provisions directly or indirectly affected the amount the joining entity could deduct for the asset:
(i) former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for tax‑exempt entities that become taxable);
(ii) former Subdivision 57‑I, and Subdivision 57‑J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and *capital allowance deductions);
(iii) Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001); and
(c) apart from this section, the tax cost setting amount for the asset would exceed the joining entity’s terminating value for the asset.
Note 1: Unlike the position with a reduction in tax cost setting amount under section 705‑40, the amount of the reduction is not re‑allocated among other assets.
Note 2: Former section 61A of, or former Subdivision 57‑I or Subdivision 57‑J in Schedule 2D to, the Income Tax Assessment Act 1936 or Division 58 of this Act may, for example, have indirectly affected the amount the joining entity could deduct for the asset because:
(a) that section, Subdivision or Division affected the amount that could be deducted by an entity that held the asset before the joining entity and that effect extended to the joining entity because of a previous application of this subsection, roll‑over relief or section 701‑40 (the exit history rule); or
(b) this subsection affected the amount the joining entity could deduct for the asset (either directly or because of section 701‑40).
Note 3: Subsection (2) has effect even if, just before the joining time, the joining entity was:
(a) an exempt Australian government agency; or
(b) another entity whose ordinary income and statutory income were exempt from income tax.
This is because section 715‑900 causes Division 58 to apply as if, just before the joining time, the joining entity’s ordinary income or statutory income had become assessable income to some extent.
Exception to reduction of tax cost setting amount
(3) Subsection (2) does not apply if:
(a) just before the joining time, the joining entity was neither an *exempt Australian government agency nor another entity whose *ordinary income and *statutory income were exempt from income tax; and
(b) a condition in subsection (4) or (5) is met in relation to the period (the pre‑joining taxable period) between the last time for which the condition in paragraph (2)(a) is met and the joining time.
(4) One condition for subsection (2) not to apply is that an amount was included in an entity’s assessable income, or an entity could deduct an amount, because of a *balancing adjustment event that occurred for the asset during the pre‑joining taxable period.
(5) Another condition for subsection (2) not to apply is that:
(a) for at least some of the pre‑joining taxable period, the asset was *held by the *head company of a *consolidated group (the earlier group) for the period (the earlier group period):
(i) starting when (and because) an entity that had previously held the asset became a *subsidiary member of the earlier group or when the asset started to be held by that company because of an asset sale situation described in subsection 58‑5(4) involving a *member of the earlier group as the purchaser mentioned in that subsection; and
(ii) ending when (and because) an entity ceased to be a subsidiary member of the earlier group or when the earlier group ceased to exist; and
(b) the company that was the head company of the earlier group just before the end of the earlier group period was not:
(i) an *associate of the head company of the joined group just before the joining time; or
(ii) the same company as the head company of the joined group; and
(c) the earlier group period was at least 24 months.
705‑50 Reduction in tax cost setting amount for over‑depreciated assets
Object
(1) The object of this section is to limit deferral of tax on profits that were not subject to tax because of *over‑depreciation of assets and were distributed to recipients untaxed because of their entitlement to the intercorporate dividend rebate.
Reduction by amount of tax deferral resulting from over‑depreciation
(2) If:
(a) the *tax cost setting amount for an asset that is *over‑depreciated at the joining time would be more than the joining entity’s *terminating value for the asset; and
(aa) subsection (5) does not apply to the asset; and
(b) before the joining time, the joining entity paid one or more unfranked or partly franked dividends to recipients entitled to a rebate of income tax under section 46A or former section 46 of the Income Tax Assessment Act 1936 on the dividends; and
(c) there is a tax deferral amount in relation to the dividends under subsection (3);
the tax cost setting amount for the asset is reduced by the lesser of the tax deferral amount and the *over‑depreciation, but not so that it becomes less than the joining entity’s terminating value for the asset.
Tax deferral amount
(3) For the purposes of paragraph (2)(c), there is a tax deferral amount in relation to the dividends if:
(a) to some extent (whose amount is the qualifying profits amount) the dividends, so far as they were not franked dividends or distributions included in the step 4 amount mentioned in step 4 in the table in section 705‑60, were paid out of profits satisfying the following requirements:
(i) the profits were not subject to income tax because of deductions for the asset’s decline in value;
(ii) the decline in value represented the *over‑depreciation of the asset;
(iii) the deductions for the decline in value do not form part of a *tax loss covered by the step 5 amount mentioned in step 5 in the table in section 705‑60; and
(b) to some extent the qualifying profits amount of the dividends was not distributed by the recipients of the dividends before the joining time directly, or indirectly through one or more interposed entities, to a taxpayer who was not entitled to a rebate of income tax under section 46A or former section 46 of the Income Tax Assessment Act 1936 on them.
The tax deferral amount is equal to the qualifying profits amount, to the extent that it was not distributed as mentioned in paragraph (b).
(3A) A way in which the extent to which dividends were paid out of profits that were not subject to income tax may be worked out is by:
(a) assuming that dividends were paid out of profits of income years in order from the most recent to the earliest; and
(b) assuming that, for any income year for which dividends were paid out of profits in accordance with paragraph (a), they were, to the extent they were not *franked distributions, paid out of profits of that income year that were not subject to income tax before they were paid out of such profits that were subject to income tax.
Where asset transferred with roll‑over relief
(4) If:
(a) an asset was transferred to the joining entity by another entity; and
(b) a roll‑over under Subdivision 126‑B applied to the transfer; and
(c) the other entity paid one or more dividends that, if paid by the joining entity, would have satisfied the requirements of paragraphs (2)(b) and (c) in relation to the asset;
the joining entity is taken for the purposes of subsection (2) to have paid the dividends.
Assets that, under transitional provisions, effectively were not subject to subsection (1) when previously brought into a group
(5) If:
(a) before the joining time, the joining entity ceased to be a *subsidiary member of a *consolidated group (the original group), whether or not the current group; and
(b) an asset was continuously held by the joining entity from when it ceased to be a member of the original group until the joining time; and
(c) when the entity ceased to be a subsidiary member of the original group, the *head company of that group made a choice under the Income Tax (Transitional Provisions) Act 1997 to increase by an amount (the transitional increase amount) the head company’s *terminating value for the asset that was to be used in applying step 1 of the table in section 711‑20 of this Act; and
(d) the asset is *over‑depreciated at the joining time;
the *tax cost setting amount for the asset, in respect of the joining entity becoming a subsidiary member of the current group, is reduced by the lesser of the transitional increase amount and the *over‑depreciation.
When an asset is over‑depreciated
(6) An asset is over‑depreciated at a particular time if, at that time:
(a) the asset is a *depreciating asset to which Division 40 applies; and
(b) the asset’s *market value exceeds its *adjustable value; and
(c) the asset’s *cost exceeds its adjustable value.
The over‑depreciation of the asset then is the lesser of the 2 excesses (or either of them if they are the same).
Note: Unlike the position with a reduction in tax cost setting amount under section 705‑40, the amount of a reduction under this section is not re‑allocated among other assets.
705‑55 Order of application of sections 705‑40, 705‑45, 705‑47 and 705‑50
If more than one of sections 705‑40, 705‑45 and 705‑50 apply:
(a) the *head company may choose the order in which the sections are to apply; and
(b) if it does not, the order is as follows:
(i) first, section 705‑40;
(ii) second, section 705‑45;
(iii) third, section 705‑47;
(iv) fourth, section 705‑50.
705‑56 Modification for tax cost setting in relation to finance leases
(1) This section applies if, just before the joining time:
(a) the joining entity is the lessor or lessee under a lease of a *depreciating asset (the underlying asset) to which Division 40 applies; and
(b) the joining entity classifies the lease, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, as a finance lease.
Joining entity is lessor
(2) If the joining entity is the lessor under the lease and *holds the underlying asset just before the joining time, subsection (5) applies, in relation to the joining entity, to the asset that is the joining entity’s right to receive lease payments.
Note: In this situation, the underlying asset will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 701‑10).
(3) If the joining entity is the lessor under the lease and does not *hold the underlying asset just before the joining time:
(a) subsection (5) applies to the underlying asset in relation to the joining entity; and
(b) for the purposes of this Division:
(i) the joining entity’s right to receive lease payments is taken to be a *retained cost base asset; and
(ii) the *tax cost setting amount of that retained cost base asset is taken to be equal to its *market value just before the joining time.
Note: In this situation, the asset that is the joining entity’s right to receive lease payments will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 701‑10).
Joining entity is lessee
(4) If the joining entity is the lessee under the lease and does not *hold the underlying asset just before the joining time:
(a) subsection (5) applies to the underlying asset in relation to the joining entity; and
(b) the liability that is the lessee’s obligation to make lease payments is not taken into account under subsection 705‑70(1).
Note: If the joining entity is the lessee under the lease and holds the underlying asset just before the joining time:
(a) the underlying asset will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 701‑10); and
(b) the liability that is the lessee’s obligation to make lease payments is taken into account under subsection 705‑70(1).
Tax cost of certain assets set at nil
(5) If this subsection applies to an asset, in relation to the joining entity:
(a) the asset is not taken into account under paragraph 705‑35(1)(b) or (c); and
(b) the asset’s *tax cost setting amount is taken to be nil.
Object
(1) The object of this section is to ensure that provisions that cause *membership interests in the joining entity to stop being *pre‑CGT assets, with a resultant increase in their *cost base and *reduced cost base, do not increase *tax cost setting amounts for *trading stock, *depreciating assets or *revenue assets of the joining entity, where those amounts are above the joining entity’s *terminating values for the assets.
When section applies
(2) This section applies if:
(a) a *membership interest that a *member of the joined group holds in the joining entity at the joining time had previously stopped being a *pre‑CGT asset in the circumstances covered by any of subsections (3) to (5); and
(b) the *cost base or *reduced cost base of the membership interest just after it stopped being a pre‑CGT asset exceeded (the excess being the loss of pre‑CGT status adjustment amount) its cost base or reduced cost base just before it stopped being a pre‑CGT asset; and
(c) an asset (a revenue etc. asset) that is *trading stock, a *depreciating asset or a *revenue asset becomes that of the *head company of the joined group because subsection 701‑1(1) (the single entity rule) applies when the joining entity becomes a *subsidiary member of the group; and
(d) the revenue etc. asset’s *tax cost setting amount (after any application of section 705‑40, 705‑45, 705‑47 or 705‑50) exceeds the joining entity’s *terminating value for the asset.
Loss of pre‑CGT status because Division 149 etc. applied while interest held by member
(3) The first circumstance for the purpose of paragraph (2)(a) is where Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the *membership interest to stop being a *pre‑CGT asset while the *member held the membership interest.
Loss of pre‑CGT status because Division 149 etc. applied before current holding by member
(4) The second circumstance for the purpose of paragraph (2)(a) is where:
(a) either:
(i) the *member *acquired the *membership interest directly from another entity; or
(ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions; and
(b) Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the membership interest to stop being a *pre‑CGT asset while the other entity held the membership interest or while the member held the membership interest on the previous occasion; and
(c) if subparagraph (a)(i) applies—at the time of the acquisition, the member *controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and
(d) if subparagraph (a)(ii) applies—the same entity:
(i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other party; or
(ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or
(iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;
or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.
Loss of pre‑CGT status because of acquisition from another entity
(5) The third circumstance for the purpose of paragraph (2)(a) is where:
(a) either:
(i) the *member acquired the *membership interest after 16 May 2002 directly from another entity; or
(ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions, all of which took place after 16 May 2002; and
(b) the membership interest stopped being a *pre‑CGT asset because of the acquisition from the other entity or from the member while the member held the membership interest on a previous occasion; and
(c) if subparagraph (a)(i) applies—at the time of the acquisition, the member *controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and
(d) if subparagraph (a)(ii) applies—the same entity:
(i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other parties; or
(ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or
(iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;
or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.
Reduction in revenue etc. asset’s tax cost setting amount
(6) The revenue etc. asset’s *tax cost setting amount (after any application of section 705‑40, 705‑45, 705‑47 or 705‑50) is instead the amount that would apply if, in working out the step 1 amount in the table in section 705‑60, the *cost base and *reduced cost base of the *membership interest were reduced by the sum of the loss of pre‑CGT status adjustment amounts for the membership interest and all other membership interests that have loss of pre‑CGT status adjustment amounts.
Limit on reduction
(7) However, the reduction only takes place to the extent that it does not result in the asset’s *tax cost setting amount being less than the joining entity’s *terminating value for the asset.
Note: The reduction under this section is converted into a capital loss available over a period of 5 income years starting with the income year in which the joining time occurs: see CGT event L1.
705‑58 Assets and liabilities not set off against each other
(1) This Part applies separately to each asset and liability even if *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, require them to be set off against each other.
(2) This section has effect subject to section 705‑59.
705‑59 Exception: treatment of linked assets and liabilities
(1) This section applies to each set of *linked assets and liabilities that the joining entity has immediately before the joining time.
(2) One or more assets, and one or more liabilities, that an entity has constitute a set of linked assets and liabilities of the entity if, and only if, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board:
(a) the total of the one or more assets is to be set off against the total of the one or more liabilities in preparing statements of the entity’s financial position; and
(b) the net amount after the set‑off is to be recognised in those statements.
(3) If the set consists only of one reset cost base asset for the purposes of section 705‑35, and one or more liabilities:
(a) first, work out the total (the available amount) that, apart from this section and the accounting requirement referred to in subsection (2) of this section, would be taken into account under subsection 705‑70(1) (about step 2 in working out the allocable cost amount) for the one or more liabilities; and
(b) next, work out the consequences under this table.
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Treatment of linked assets and liabilities: single reset cost base asset case |
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Item |
If the asset’s *market value at the joining time: |
This is the result for the asset: |
This is the result for the one or more liabilities: |
|
1 |
is less than or equal to the available amount |
its *tax cost setting amount is that market value (and the asset is not taken into account under paragraph 705‑35(1)(c)) |
only the difference (if any) is taken into account under subsection 705‑70(1) for the one or more liabilities |
|
2 |
is greater than the available amount |
its *tax cost setting amount is: (a) the available amount; plus (b) the amount worked out for the asset under section 705‑35 on the basis that the asset’s *market value is reduced by the available amount |
the one or more liabilities are not taken into account under subsection 705‑70(1) |
Note: Paragraph 705‑35(1)(c) allocates the allocable cost amount (as reduced by the tax cost setting amounts of retained cost base assets) among the joining entity’s reset cost base assets.
(4) If the set consists only of one or more *retained cost base assets and one or more liabilities, this section does not affect their treatment.
Note: This is because the tax cost setting amount for a retained cost base asset is worked out without regard to the allocable cost amount.
(5) In any other case:
(a) first, work out the available amount under paragraph (3)(a); and
(b) next, work out the consequences under this table.
|
Treatment of linked assets and liabilities: all other cases |
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|
Item |
In this case: |
This is the result for the one or more assets in the set: |
This is the result for the one or more liabilities in the set: |
|
1 |
there is no *retained cost base asset in the set, and the total of the respective *market values (at the joining time) of the assets in the set is less than or equal to the available amount |
the *tax cost setting amount of each of the assets is that asset’s market value at the joining time (and none of them is taken into account under paragraph 705‑35(1)(c)) |
only the difference (if any) is taken into account under subsection 705‑70(1) |
|
2 |
there is no *retained cost base asset in the set, and the total of the respective *market values (at the joining time) of the assets in the set is greater than the available amount |
the *tax cost setting amount of each of the assets is the sum of: (a) a share of the available amount that is proportionate to that asset’s market value at the joining time; and (b) the amount worked out for the asset under section 705‑35 on the basis that the asset’s market value at the joining time is reduced by the share referred to in paragraph (a) |
none is taken into account under subsection 705‑70(1) |
|
3 |
there are one or more *retained cost base assets in the set, and the total of their respective *tax cost setting amounts is greater than or equal to the available amount |
this section does not affect the treatment of the one or more assets in the set |
this section does not affect the treatment of the one or more liabilities in the set |
|
4 |
there are one or more *retained cost base assets in the set, and the total (the retained cost base total) of their respective *tax cost setting amounts is less than the available amount |
the one or more retained cost base assets are not taken into account under paragraph 705‑35(1)(b); the *tax cost setting amount of each remaining asset in the set is worked out by applying item 1 or 2, as appropriate, of this table on the basis that: (a) the available amount is reduced by the retained cost base total; and (b) the one or more retained cost base assets are otherwise ignored |
the available amount is reduced by the retained cost base total |
Note 1: Paragraph 705‑35(1)(b) reduces the allocable cost amount by the tax cost setting amounts of retained cost base assets. Item 4 of the table in this subsection excludes the application of paragraph 705‑35(1)(b) to retained cost base assets in the set; this in turn may affect the application of CGT event L3.
Note 2: Paragraph 705‑35(1)(c) then allocates the reduced allocable cost amount among the joining entity’s reset cost base assets.
(6) In applying subsections (3), (4) and (5) of this section, disregard an asset covered by subsection 705‑35(2) (assets that do not have a tax cost setting amount).
(7) This section does not affect the application of sections 705‑40, 705‑45, 705‑47 and 705‑50 (which adjust the tax cost setting amount for a reset cost base asset).
How to work out the allocable cost amount
705‑60 What is the joined group’s allocable cost amount for the joining entity?
Work out the joined group’s allocable cost amount for the joining entity in this way:
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Working out the joined group’s allocable cost amount for the joining entity |
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Step |
What the step requires |
Purpose of the step |
|
1 |
Start with the step 1 amount worked out under section 705‑65, which is about the cost of *membership interests in the joining entity held by *members of the joined group |
To ensure that the allocable cost amount includes the cost of *acquiring the membership interests |
|
2 |
Add to the result of step 1 the step 2 amount worked out under section 705‑70, which is about the value of the joining entity’s liabilities |
To ensure that the joining entity’s liabilities at the joining time, which are part of the joined group’s cost of acquiring the joining entity, are reflected in the allocable cost amount |
|
3 |
Add to the result of step 2 the step 3 amount worked out under: (a) section 705‑90, which is about undistributed, taxed profits accruing to the joined group before the joining time; or (b) if the joining entity is a trust (and not a *corporate tax entity)—section 713‑25, which is about undistributed, realised profits accruing to the joined group before the joining time that could be distributed tax free |
To increase the allocable cost amount: (a) to reflect the undistributed, taxed profits and so prevent double taxation; or (b) if the joining entity is a trust—to reflect the undistributed, realised profits that could be distributed tax free |
|
3A |
For each step 3A amount (if any) under section 705‑93 (which is about pre‑joining time intra‑group roll‑overs from foreign resident companies): (a) if the step 3A amount is an increase amount under that section—add to the result of step 3 (as affected by any previous application of this step) the step 3A amount; or (b) if the step 3A amount is a reduction amount under that section—subtract from the result of step 3 (as affected by any previous application of this step) the step 3A amount |
To adjust for certain intra‑group roll‑overs from foreign companies before the joining time |
|
4 |
Subtract from the result of step 3A the step 4 amount worked out under section 705‑95, which is about pre‑joining time distributions out of certain profits |
To prevent the allocable cost amount reflecting return of part of the amount paid to *acquire the *membership interests in the joining entity |
|
5 |
Subtract from the result of step 4 the step 5 amount worked out under section 705‑100, which is about certain losses accruing to the joined group before the joining time |
To prevent: (a) a double benefit arising from the losses; and (b) losses that cannot be transferred to the *head company, or are cancelled by the head company, under Subdivision 707‑A being reinstated in an unrealised form or reducing unrealised gains. |
|
6 |
Subtract from the result of step 5 the step 6 amount worked out under section 705‑110, which is about losses that the joining entity transferred to the *head company under Subdivision 707‑A |
To stop the joined group getting benefits both through higher *tax cost setting amounts for the joining entity’s assets and through losses transferred to the head company |
|
7 |
Subtract from the result of step 6 the step 7 amount worked out under section 705‑115, which is about certain deductions to which the *head company is entitled |
To stop the joined group getting benefits both through the *tax cost of the joining entity’s assets being set and through certain tax deductions of the joining entity being inherited by the head company |
|
8 |
If the remaining amount is positive, it is the joined group’s allocable cost amount. Otherwise the joined group’s allocable cost amount is nil. |
|
Note: The head company may be taken to have made a capital gain, depending on the amount remaining after applying step 3A: see CGT event L2.
(1) For the purposes of step 1 in the table in section 705‑60, the step 1 amount is the sum of the following amounts for each *membership interest that *members of the joined group hold in the joining entity at the joining time:
Note: If the joining entity is a trust, the step 1 amount may be increased by section 713‑20 for settled capital that could be distributed tax free in respect of discretionary interests in the trust.
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Working out the step 1 amount |
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Item |
If the market value of the membership interest is... |
The amount is... |
|
1 |
equal to or greater than its *cost base |
its cost base |
|
2 |
less than its *cost base but greater than its *reduced cost base |
its *market value |
|
3 |
less than or equal to its *reduced cost base |
its reduced cost base |
Note: Under section 716‑855, if membership interests are pre‑CGT assets that have been subject to certain roll‑overs, the cost base and reduced cost base are worked out in the same way as if they were post‑CGT assets.
No indexation of cost base of pre‑CGT membership interests
(2) If the *membership interest is a *pre‑CGT asset, in working out its *cost base for the purposes of subsection (1) no element is indexed.
Adjustment if value shifting or loss transfer provision could apply
(3) If, on the assumption that a *CGT event had happened just before the joining time in relation to the *membership interest, the *cost base or the *reduced cost base of the membership interest would have been changed by a provision of this Act, then the cost base or reduced cost base of the membership interest that is to be used in subsection (1) of this section is instead:
(a) the cost base as it would have been so changed; or
(b) the reduced cost base, as it would have been so changed, but ignoring the amount of any reduction resulting from the application of former subsection 160ZK(5) of the Income Tax Assessment Act 1936.
Note: For example, a change in the cost base or reduced cost base may be required under provisions that apply where a loss transfer or value shift involving the joining entity has occurred.
(3AA) If, on the assumption that:
(a) the *members of the joined group had, just before the joining time, *disposed of their *membership interest in the joining entity; and
(b) the consideration received by the members for the disposal were equal to the *market value of the membership interest at that time;
they would have made a *capital loss that section 727‑615 would have reduced (because of an indirect value shift), then the *reduced cost base of the membership interest that is to be used in subsection (1) of this section is reduced by the amount of that reduction.
Reduction if section 165‑115ZD could apply
(3A) If, on the assumption that:
(a) the *members of the joined group had, just before the joining time, *disposed of their *membership interest in the joining entity; and
(b) the consideration received by the members for the disposal were equal to the *market value of the membership interest at that time;
the *reduced cost base of the membership interest would have been reduced as a result of the operation of section 165‑115ZD of this Act or the Income Tax (Transitional Provisions) Act 1997, then the reduced cost base of the membership interest that is to be used in subsection (1) of this section is reduced by the amount of that reduction.
Certain provisions not to apply after joining time
(4) Also, if a provision mentioned in subsection (3), (3AA) or (3A) would, because of events that happened before the joining time, apply to a *CGT event or a *realisation event that happens after the joining time in relation to the *members’ *membership interests in the joining entity, the provision does not so apply.
Reduction in cost base under subsection 110‑55(7) to be added back
(5) If, in working out the *reduced cost base of the *membership interest for the purposes of subsection (1), a reduction has taken place under subsection 110‑55(7) (about certain distributions of pre‑acquisition profits), the reduced cost base is increased by the amount of that reduction.
Reduction in reduced cost base under subsection 165‑115ZA(3) to be added back
(5A) If:
(a) in working out the *reduced cost base of the *membership interest for the purposes of subsection (1), a reduction has taken place under subsection 165‑115ZA(3) (about alterations in ownership or control of loss companies); and
(b) the reduction is to some extent attributable to so much of an amount that was taken into account both in working out the amount of the reduction and in working out:
(i) the step 5 amount under section 705‑100; or
(ii) the step 6 amount under section 705‑110;
the reduced cost base is, to the extent mentioned in paragraph (b), increased by:
(c) if subparagraph (b)(i) applies—the amount of that reduction; or
(d) if subparagraph (b)(ii) applies—the amount of that reduction multiplied by the *general company tax rate.
(5B) For the purposes of working out the *cost base or *reduced cost base of a *membership interest under subsection (1), if:
(a) either or both of the following things happen after the joining time:
(i) money is paid, or becomes required to be paid, in respect of *acquiring the membership interest;
(ii) property is given, or becomes required to be given, in respect of acquiring the membership interest; and
(b) because the thing happened after the joining time, it was not taken into account in working out the first element of the cost base or reduced cost base of the membership interest;
Note: This would be the case if the money was only to be paid etc. if a contingency happened after the joining time.
the thing is nevertheless so taken into account, and taken always to have been so taken into account.
Rights and options to acquire membership interests
(6) For the purposes of this section, if at the joining time a *member of the joined group holds a right or option (including a contingent right or option), created or issued by the joining entity, to acquire a *membership interest in the joining entity, that right or option is treated as if it were a membership interest in the joining entity.
705‑70 Liabilities of the joining entity—step 2 in working out allocable cost amount
(1) For the purposes of step 2 in the table in section 705‑60, the step 2 amount is worked out by adding up the amounts of each thing (an accounting liability) that, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability of the joining entity at the joining time that can or must be recognised in the entity’s statement of financial position.
Note: Certain liabilities of a life insurance company are worked out under Subdivision 713‑L: see section 713‑520.
Where liability valued differently for joined group
(1A) However, if, in accordance with those *accounting standards or statements, the amount of an accounting liability of the joining entity would be different when it became an accounting liability of the joined group, the different amount is treated as the amount of the liability.
Note: Liabilities that the joining entity owes to members of the joined group would not be excluded under subsection (1) or (1A) even though the standards or statements require that they be eliminated in consolidated accounts of a parent entity and its subsidiaries.
Exclusion where transfer of accounting liability
(2) An amount is not to be added for an accounting liability that arises because of the joining entity’s ownership of an asset if, on *disposal of the asset, the accounting liability will transfer to the new owner.
Example: A liability to rehabilitate a mine site, where, under legislation or a licence, the liability will be transferred to the new owner on disposal of the mine.
Note: Adjustments reducing or increasing the amount under this section are made by sections 705‑75 to 705‑85.
Reduction for future deduction
(1) If some or all of an accounting liability will result in a deduction to the *head company, the amount to be added for the accounting liability under subsection 705‑70(1) is reduced by the following amount:
where:
double‑counting adjustment means the amount of any reduction that has already occurred in the accounting liability under subsection 705‑70(1) to take account of the future availability of the deduction.
Reduction for intra‑group liabilities
(2) If the amount of an accounting liability of the joining entity that is owed to a *member of the joined group is more than the amount applicable under the following table, the amount to be added for the accounting liability under subsection 705‑70(1) instead equals the amount applicable under the table.
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Amount applicable |
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|
Item |
If the market value of the member’s asset constituted by the accounting liability is... |
The amount applicable is... |
|
1 |
equal to or greater than the asset’s *cost base |
the asset’s cost base |
|
2 |
less than the asset’s *cost base but greater than its *reduced cost base |
the asset’s *market value |
|
3 |
less than or equal to the asset’s *reduced cost base |
the asset’s reduced cost base |
Application of subsections 705‑65(2), (3), (3AA) and (3A)
(3) Subsections 705‑65(2), (3), (3AA) and (3A) apply in relation to references in subsection (2) of this section to an asset’s *cost base or *reduced cost base in a corresponding way to that in which they apply in relation to references in the table in subsection 705‑65(1) to a *membership interest’s cost base or reduced cost base.
Application of subsection 705‑65(4)
(4) Subsection 705‑65(4) applies in relation to assets mentioned in subsection (2) of this section in a corresponding way to that in which it applies in relation to members’ *membership interests.
Reduction in reduced cost base under subsection 165‑115ZA(3) to be added back
(5) If:
(a) in working out the *reduced cost base of a *member’s asset for the purposes of subsection (2), a reduction has taken place under subsection 165‑115ZA(3) (about alterations in ownership or control of loss companies); and
(b) the reduction is to some extent attributable to so much of an amount that was taken into account both in working out the amount of the reduction and in working out:
(i) the step 5 amount under section 705‑100; or
(ii) the step 6 amount under section 705‑110;
the reduced cost base is, to the extent mentioned in paragraph (b), increased by:
(c) if subparagraph (b)(i) applies—the amount of that reduction; or
(d) if subparagraph (b)(ii) applies—the amount of that reduction multiplied by the *general company tax rate.
Adjustment for unrealised gains and losses
(1) If:
(a) for income tax purposes, an accounting liability, or a change in the amount of an accounting liability, (other than one owed to a *member of the joined group) is taken into account at a later time than is the case in accordance with *accounting standards or statements of accounting concepts made by the Australian Accounting Standards Board; and
Example: Accrued employee leave entitlements or foreign exchange gains and losses.
(b) assuming that, for income tax purposes the accounting liability or change were taken into account at the same time as is the case in accordance with those standards or statements, the joined group’s allocable cost amount would be different;
Note: The difference would arise because subsection 705‑70(1) includes income tax liabilities and steps 3 and 5 of the table in section 705‑60 are affected by the time at which changes in liabilities are taken into account for income tax purposes.
then the amount to be added under subsection 705‑70(1) for the accounting liability is:
(c) if the difference is an increase—increased by the amount of the increase; and
(d) if the difference is a decrease—decreased by the amount of the decrease.
Use of reliable estimate
(2) In working out for the purposes of subsection (1) an amount at a particular time or in respect of a particular period, use the most reliable basis for estimation that is available.
Example: The amount of a change in liability for employee leave entitlements over a period.
Increase in step 2 amount for employee share interests
(1) If any *membership interest (an employee share interest) in the joining entity needed to be disregarded under section 703‑35 in order for the joining entity to be a *wholly‑owned subsidiary of the *head company at the joining time, the step 2 amount worked out under section 705‑70 is increased by the sum of the *market values of those interests, reduced in each case by the reduction amount (if any) worked out under subsection (2) of this section.
Reduction amount
(2) There is a reduction amount if the