Consolidation Reference Manual

C2 Assets

C2-5 Worked examples - cost setting on exit

Pre-CGT assets on exit

C2-5-715 Calculating pre-CGT membership interests in a multiple exit case (with pre-CGT factor attached to assets)

Note:

Description

This example shows how to calculate the number of membership interests in multiple exit entities held by

•

members of the old group, or

•

other multiple exit entities,

that are taken to have been acquired before 20 September 1985 for CGT purposes.

Commentary

When two or more entities (multiple exit entities) leave a consolidated group, the number of membership interests that are deemed to be pre-CGT assets are worked out on a 'bottom up' basis.

In the following example, subsections 711-65(3) to (6) of the Income Tax Assessment Act 1997 (ITAA 1997) are first applied to work out the number of pre-CGT membership interests that BCo holds in CCo (the first entity). These pre-CGT assets of BCo will be assigned a pre-CGT factor of one for the purpose of working out the number of pre-CGT membership interests that ACo holds in BCo. → section 711-70, ITAA 1997

Where more than one entity holds membership interests in the first entity, the head company can choose which of the membership interests in the first entity will be pre-CGT assets, up to the maximum allowed under the formula in section 711-70 of the ITAA 1997.

Example

Facts

On 1 July 2002, ACo forms a consolidated group with BCo and CCo as its subsidiaries. Total shareholding in both BCo and CCo is 100 shares each. The group structure at formation time, including the cost of membership interests, is shown in figure 1.

Note: In this example CCo is the first entity.

On 30 June 2003, ACo sells 20% of its holding in BCo. The financial positions of ACo, BCo and CCo at this time are shown in tables 1, 2 and 3.

MV = market value

Calculation

1. Work out the number of pre-CGT membership interests BCo holds in CCo

(a) using subsection 711-65(5) of the ITAA 1997 (as it stood at 30 June 2003)

Step 1

Multiply the market values of CCo's non-current assets by their pre-CGT factors. → 'Pre-CGT status of membership interests where subsidiary has membership interests in another member - formation', C2-4-820

Land: $150 * 0.8752941 = $131.29


Asset 1: $20 * 0.8752941 = $17.51


Step 2

Add the results of step 1 to give a result of $148.80.

Step 3

Work out the market value of all assets that the head company holds in the leaving entity:

Land ($150) + Asset 1 ($20) + Cash ($90) = $260


Step 4

$148.80 (step 2) / $260 (step 3) = 0.572307692


Therefore, the pre-CGT proportion of CCo leaving the group is 0.57.

(b) Calculate number of pre-CGT membership interests - subsection 711-65(4) of the ITAA 1997 (as it stood at 30 June 2003)

100 shares * 0.572307692 = 57.2307692 shares


(c) Round down to nearest whole number of pre-CGT membership interests - subsection 711-65(3)of the ITAA 1997 (if applicable)

= 57


Therefore, of the 100 shares in CCo (a multiple exit entity), 57 are treated as pre-CGT.

2. Work out the number of pre-CGT membership interests ACo holds in BCo

(a) Calculate leaving entity's pre-CGT proportion - subsection 711-65(5) of the ITAA 1997 (as it stood at 30 June 2003)

Step 1

Multiply the market value of the pre-CGT assets by the assigned factor of 1:

Pre-CGT shares in CCo: 57 shares * $2.60 (MV) x 1 = $148.20


Note: A pre-CGT factor of one is assigned to the asset (membership interests in CCo that were determined to be pre-CGT assets). The balance of the asset (post-CGT shares in CCo) is not included. → paragraphs 711-70(4)(b) and (c), ITAA 1997 (as those paragraphs stood at 30 June 2003)

Step 2

Add the results of step 1 to give a result of $148.20

Step 3

Work out the market value of all assets that the head company holds in the leaving entity:

Shares in CCo = $260

Step 4

$148.20 (step 2) / $260 (step 3) = 0.57


Therefore the pre-CGT proportion of membership interests in BCo on leaving the group is 0.57

Calculate number of pre-CGT membership interests - using subsection 711-65(4) of the ITAA 1997 (as it stood at 30 June 2003)

100 shares * 0.57 = 57 shares


(c) Round down to nearest whole number of pre-CGT membership interests - subsection 711-65(3) of the ITAA 1997 (if applicable)

= 57


Therefore, of the 100 shares in BCo (a multiple exit entity), 57 are treated as pre-CGT.

References

Income Tax Assessment Act 1997 , sections 711-65 and 711-70 ; as inserted by New Business Tax System (Consolidation) Act (No. 1) 2002 (No.68 of 2002), Schedule 1 , and amended by Tax Laws Amendment (2010 Measures No. 1) Act 2010 (No. 56 of 2010), Schedule 5, Part 3

Explanatory Memorandum to New Business Tax System (Consolidation) Bill 2002 (No. 1), paragraph 5.153

Explanatory Memorandum to Tax Laws Amendment (2010 Measures No. 1) Bill 2010, paragraphs 5.111 to 5.142

History

Revision history

Section C2-5-715 first published 28 May 2003.

Further revisions are described below.

Current at 6 May 2011