Consolidation Reference Manual
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.
C2 Assets
C2-4 Worked examples - cost setting on entry
Entry step B (allocate to retained cost base assets)
C2-4-410 Tax cost setting amount for retained cost base assets - entitlement to pre-paid services
Description
This example shows the calculation of a head company's cost setting amount for an asset created by a prepayment for services, based on the undeducted portion of the prepayment.
Commentary
If a retained cost base asset is an entitlement to a pre-paid service or other entitlement arising from a pre-paid amount, a head company's tax cost for the asset is equal to its entitlement to deductions in relation to the pre-paid amount arising out of the head company's inheritance of the joining entity's entitlements.
Example
Facts
ACo is wholly acquired by HeadCo (the head company of a consolidated group) on 1 July 2002 for $420,000. The financial position of ACo on joining the group is shown in table 1.
| Land & Buildings
(MV $120,000) |
$100,000 | Capital | $400,000 |
| Pre-paid services | $300,000 | ||
| Cash at bank | $20,000 | Mortgage on Land & Buildings | $20,000 |
| $420,000 | $420,000 | ||
| Note: MV = market value | |||
On 1 July 2000, ACo pre-pays $500,000 for financial services, based on a five-year service agreement. The allowable deduction is spread over the eligible service period - that is, $100,000 per year. (At the date of consolidation $300,000 of the prepayment has not been claimed and allowed as a deduction.)
Calculation
The tax cost setting amount for the retained cost base assets will be Cash $20,000 and Pre-paid Services $300,000, totalling $320,000.
The remainder of ACo's allocable cost amount (ACA), after deducting the sum of the tax cost setting amounts for retained cost base assets, will be $120,000. This will be allocated to the only reset cost base asset, Land & Buildings - i.e. ACA step 1 ($420,000) + ACA step 2 ($20,000) less retained cost base assets ($320,000) = $120,000
[F1]
.
References
Income Tax Assessment Act 1997 , subsection 705-25(4) ; as amended by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1
Explanatory Memorandum to New Business Tax System (Consolidation) Bill (No 1) 2002, paragraph 5.26
History
Revision History
Section C2-4-410 first published (excluding drafts) 2 December 2002.
Further revisions are described below.
| Date | Amendment | Reason |
|---|---|---|
| 26.6.07 | Note on proposed changes to clarify both the valuation of liabilities and the accounting principles to be used, p. 2. | Reflect announcement on 8 May 2007 by Assistant Treasurer in media release no. 50. |
| 635311 | Removal of note on proposed changes to clarify both the valuation of liabilities and the accounting principles to be used. | Legislative amendment. |
Current at 6 May 2011
The $300,00 of the prepayment that has been inherited by the head company at the time ACo joined the group is not an 'acquired deduction' for the purposes of step 7 of the ACA calculation. This is because the expenditure forms the cost base of the asset, being the entitlement to pre-paid services, and is excluded by subsection 705-115(2).