ATO Interpretative Decision
ATO ID 2011/51
Income TaxConsolidation: application of subsection 701-55(2) of the ITAA 1997 where no method to work out the decline in value applied before the joining time
FOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Does subsection 701-55(2) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to enable the head company of a consolidated group to deduct an amount for the decline in value of a depreciating asset under Division 40 of the ITAA 1997 where:
- the joining entity did not work out the decline in value of the depreciating asset from when it first used the asset as it had paid a nominal amount to acquire the asset,
- the asset received a tax cost setting amount at the joining time,
- the head company held and used the asset from the joining time in the course of carrying on its business, and
- had the joining entity claimed a deduction under Division 40, the entity could have chosen either the diminishing value or prime cost method to work out the decline in value?
Yes. Subsection 701-55(2) of the ITAA 1997 applies such that the head company can deduct an amount for the decline in value of the asset under Division 40 of the ITAA 1997 for the period after the joining time.
Head Co acquired all the shares in Join Co on 1 September 2010. At that time, Join Co became a subsidiary member of the consolidated group.
The assets of Join Co include copyright in film (Film Copyright) which was acquired after 1 July 2004 for nominal consideration. The Film Copyright consists of rights held under the Copyright Act 1968 as owner of copyright in cinematograph film as opposed to any interest in the cinematograph film itself.
The Minister of the Arts has not issued a certificate that the film is a qualifying Australian film and Screen Australia has not issued a certificate for the producer offset concerning the film. Accordingly, the concessional provisions in Division 10B and 10BA of the Income Tax Assessment Act 1936 and section 376-55 of the ITAA 1997 do not apply.
The Film Copyright is a depreciating asset as it is an item of intellectual property for the purposes of paragraph 40-30(2)(c) of the ITAA 1997. Join Co did not work out the decline in value of the asset as there was a nominal cost for the purposes of Subdivision 40-C of the ITAA 1997.
At the joining time the Film Copyright was recognised by Head Co as a depreciating asset and had its tax cost set at the asset's tax cost setting amount.
The Film Copyright is used in the business conducted by Join Co both prior to and after the joining time.
Reasons for Decision
All legislative references are to the ITAA 1997.
Due to the operation of the single entity rule in section 701-1, the assets of a subsidiary member are taken, for the purpose of working out the head company's income tax liability, to be held by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group. Therefore, after the joining time, the head company becomes entitled to any deductions available for the decline in value of the depreciating assets owned by the subsidiary member.
Deductions for the decline in value of depreciating assets are worked out under Division 40. However, paragraphs 701-55(2)(a) to (e) provide a number of modifying rules to be made in applying Division 40 to a depreciating asset owned by an entity that joins a consolidated group. These rules facilitate how Division 40 applies to the depreciating asset after the joining time.
It is considered that the paragraphs that follow the introductory words of subsection 701-55(2) are assumptions and consequences rather than pre-conditions for the subsection to apply. Paragraph 701-55(2)(b) and subsequent paragraphs can only apply where a method for working out the decline in value applied just before the joining time. In this case, Join Co had not chosen one of the two available methods (diminishing value method or prime cost method) which can apply to Film Copyright acquired on or after 1 July 2004. Nor can it be said that a particular method applied to the Film Copyright prior to the joining time. The capital allowance provisions in Division 40 do not prescribe a method in the absence of a choice by a taxpayer.
Therefore only paragraph 701-55(2)(a) is relevant in determining how Division 40 applies to the Film Copyright. Paragraphs 701-55(2)(b) - (e) will not apply to modify the application of Division 40 to the Film Copyright as no method of decline in value was chosen by Join Co just before the joining time. Instead, Division 40 will apply on its own terms from the joining time to set the method of decline in value and effective life for the Film Copyright.
The Film Copyright will be taken to be acquired by Head Co at the joining time for a payment equal to the Film Copyright's tax cost setting amount under paragraph 701-55(2)(a). As Head Co, pursuant to the single entity rule, uses the Film Copyright, there will be a 'start time' under subsection 40-60(2) allowing it to deduct an amount for the decline in value of the asset. Deductions are allowable to Head Co in the income year in which the start time occurs and later income years whilst it continues to hold the Film Copyright. Head Co will be free to choose the method of decline in value and effective life of the Film Copyright pursuant to Division 40.Date of decision: 27 May 2011
Year of income: Year ended 30 June 2011
Income Tax Assessment Act 1997
Consolidation - assets
Consolidation - joining
Cost of a depreciating asset
Decline in value
Deduction for depreciating assets
Diminishing value method
Hold a depreciating asset