ATO Interpretative Decision
ATO ID 2004/387 (Withdrawn)
Income Tax
Consolidation - modified market value and a loan on commercial termsFOI status: may be released
-
This decision has been replaced by Taxation Ruling TR 2004/9: Income tax: consolidation: what is meant by 'injection of capital' in section 707-325 of the Income Tax Assessment Act 1997?This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
Status of this decision: Decision Withdrawn 17 September 2004
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a debt funding arrangement, where an entity has borrowed funds on commercial terms, an injection of capital into the entity for the purposes of paragraph 707-325(4)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. A debt funding arrangement, where the entity borrows funds on commercial terms, is not an injection of capital into the entity for the purposes of paragraph 707-325(4)(a) of the ITAA 1997.
Facts
Entity C becomes a member of a consolidated group at a particular time (the joining time).
At the joining time, the modified market value (MMV) of entity C is determined for the purpose of calculating an available fraction for a bundle of losses.
After 8 December 2000 (and in the four years before the joining time), entity C, dealing on an arm's length basis with another party, borrowed funds at a commercial rate of interest.
Reasons for Decision
The basic rule for working out the MMV of an entity that becomes a member of a consolidated group at a particular time is contained in subsection 707-325(1) of the ITAA 1997. It provides that the MMV of the entity at a particular time is the market value of the entity at that time based on certain assumptions (including the assumptions that the entity had no losses of any sort and the balance of its franking account at that time was nil).
Subsection 707-325(2) of the ITAA 1997 provides that if:
- •
- there are one or more events, described in subsection 707-325(4) of the ITAA 1997;
- •
- that occurred in the four years before the time the entity becomes a member of the consolidated group; and
- •
- the MMV of the entity worked out under subsection 707-325(1) of the ITAA 1997 exceeds what it would have been if none of those events occurred,
then the MMV worked out under subsection 707-325(1) of the ITAA 1997 is reduced by the amount worked out under subsection 707-325(3) of the ITAA 1997.
Subsection 707-325(4) of the ITAA 1997 contains the events that are referred to in subsection 707-325(2) of the ITAA 1997. Paragraph 707-325(4)(a) of the ITAA 1997 identifies one of the events as an injection of capital into the entity or an associate of the entity (or the trustee of the entity, if the entity is a trust) at the time of the injection.
Under section 707-329 of the Income Tax (Transitional Provisions) Act 1997, events that occurred before 9 December 2000 are disregarded in calculating the MMV of an entity. Also, subsection 707-325(5) of the ITAA 1997 disregards certain injections of capital. These relate to a share issue by a listed public company through a dividend reinvestment scheme or an acquisition of a share in a company involving an employee share acquisition scheme.
The Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No.1) 2002 (Act Number 68 of 2002), stated at paragraph 8.97:
Capital is generally understood as the wealth of an entity, whether in money or property. The use of the word injection conveys that the capital or wealth has been introduced from outside the entity (or group) in the sense that it has not been obtained from the entity's (or group's) own resources.
As the loan to entity C involved both parties dealing with each other at arm's length and the funds were provided at a commercial rate of interest, there is not considered to be any increase in the wealth of entity C at the time when the loan funds are received. The increase in assets in entity C from the loan funds are matched by it having a corresponding liability to the lender. The loan does not constitute an event of an injection of capital into entity C for the purposes of paragraph 707-325(4)(a) of the ITAA 1997.
There is no reduction required to the MMV of entity C in respect of the loan.
Date of decision: 20 April 2004Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 707-325
subsection 707-325(1)
subsection 707-325(2)
subsection 707-325(3)
subsection 707-325(4)
paragraph 707-325(4)(a)
subsection 707-325(5)
ATO ID 2004/388
ATO ID 2004/389
Other References:
Explanatory Memorandum to the New Business Tax System (Consolidation) Bill No.1 (2002) paragraph 8.97
Keywords
Available fraction
Bundle of losses
Consolidation - event
Consolidation - reduction
Injection of capital
Joining entity
Modified market value
Transferred losses
ISSN: 1445-2782
| Date: | Version: | |
| 20 April 2004 | Original statement | |
| You are here → | 17 September 2004 | Archived |