ATO Interpretative Decision

ATO ID 2012/42

Income Tax

Issue

Where:

•

an entity joins a consolidated group with a financial arrangement (an asset),

•

under the entry history rule in section 701-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the head company of the consolidated group inherits amounts (inherited TBA amounts) to be included in assessable income (or allowed as a deduction) in respect of the transitional balancing adjustment (TBA) made under sub-item 104(13) of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (TOFA Act), and

•

the TBA is attributable to the financial arrangement,

are the inherited TBA amounts taken into account in working out the balancing adjustment for the head company under section 230-445 of the ITAA 1997 on cessation of the financial arrangement?

Decision

No. The inherited TBA amounts are not taken into account in working out the balancing adjustment under section 230-445 of the ITAA 1997. Under subsection 701-55(5A) of the ITAA 1997 the financial arrangement is deemed to have been acquired by the head company of the consolidated group at the joining time for the purposes of applying Division 230 of the ITAA 1997.

Facts

A Co (which is not a member of a consolidated group) acquired a financial arrangement (an asset) for $400,000 on 1 July 2009.

The taxation of financial arrangements (TOFA) rules in Division 230 of the ITAA 1997 applied to A Co from 1 July 2010.

A Co made an election, under sub-item 104(2) of Schedule 1 to the TOFA Act, to apply Division 230 of the ITAA 1997 to its existing financial arrangements. As a result a TBA of $20,000 (to be included in assessable income) was worked out. The TBA is attributable to the financial arrangement.

In accordance with sub-item 104(17) of Schedule 1 to the TOFA Act the TBA is to be spread evenly over 4 income years.

A Co included $5,000 in its assessable income in income year ended 30 June 2011 being the first portion of the TBA.

On 1 July 2011 A Co joined a consolidated group whose head company is H Co. The tax cost setting amount for the financial arrangement asset was $440,000. The 'Division 230 starting value' at the joining time was also $440,000.

H Co inherited the final three portions of the TBA under the entry history rule in section 701-5 of the ITAA 1997.

H Co included the following amounts in its assessable income for income year ended 30 June 2012 in respect of the financial arrangement:

(a)

$20,000 gain under the fair value method in Division 230 of the ITAA 1997; and

(b)

$5,000 being the second portion of the TBA.

A Co remains in the consolidated group during the remaining term of the financial arrangement.

The financial arrangement ceases on 30 June 2013. The financial benefits received by H Co on cessation are $480,000.

Reasons for Decision

All legislative references are to the ITAA 1997.

Division 230 is about the tax treatment of gains and losses from financial arrangements. Where an entity joins a consolidated group with an asset to which Division 230 will apply, subsection 701-55(5A) has application. Under subsection 701-55(5A), Division 230 applies to the financial arrangement asset as if the asset were acquired at the joining time for a payment equal to either:

(a)

the asset's tax cost setting amount, or

(b)

the asset's 'Division 230 starting value' at the joining time (where certain elective tax-timing methods will apply to the asset).

Subdivision 230-G provides that a balancing adjustment is made under the Subdivision if certain events happen including the cessation of a financial arrangement. The balancing adjustment is worked out under the method statement in subsection 230-445(1).

Under the single entity rule in subsection 701-1(1), H Co will be taken to be the holder of the financial arrangement from the joining time onwards because A Co is treated as being part of H Co whilst it is a subsidiary member of H Co's consolidated group.

H Co will need to consider the following steps in the method statement in working out the Subdivision 230-G balancing adjustment on cessation of the financial arrangement on 30 June 2013:

Step 1(a) - financial benefits received.

Step 2(a) - financial benefits provided (which is the deemed payment under subsection 701-55(5A) in this case).

Step 2(b) - amounts included in H Co's assessable income as gains from the financial arrangement because of circumstances that have occurred before the cessation.

Step 2(d) - amounts included in H Co's assessable income after cessation because of a TBA to the extent to which those amounts are attributable to the financial arrangement.

As H Co is taken to have acquired the financial arrangement on 1 July 2011 for the purposes of Division 230, it will not have any TBA amounts attributable to that financial arrangement when applying provisions in Division 230 including the balancing adjustment in Subdivision 230-G. This is because the deemed acquisition in subsection 701-55(5A) severs the connection between the TBA amounts and the financial arrangement that is taken to have been acquired by H Co at the joining time. Only gains (or losses) made after the joining time are relevant for purposes of calculating the balancing adjustment for the head company in these circumstances.

Therefore it is necessary to exclude the inherited TBA amounts at both step 2(b) and step 2(d) of the method statement.

H Co will have a Subdivision 230-G balancing adjustment of $20,000 to be included in its assessable income for income year ended 30 June 2013 calculated as follows:

$480,000 financial benefits received (Step 1(a))

less

$440,000 financial benefits provided (Step 2(a))

less

$20,000 gain included in assessable income under the fair value method (step 2(b))

Although the deemed acquisition in subsection 701-55(5A) severs the connection between the TBA amounts and the financial arrangement that is taken to have been acquired by H Co at the joining time, the remaining TBA amounts still need to be included in H Co's assessable income. The creation of the TBA amount and the obligation to spread it over four years is something that happened to A Co. As a consequence of the entry history rule in section 701-5, H Co is required to include the remaining TBA amounts in its assessable income.

Under Division 230, H Co includes $40,000 in its assessable income comprising the $20,000 gain made in income year ending 30 June 2012 and the $20,000 Subdivision 230-G balancing adjustment.

The inherited TBA amounts of $15,000, that are to be included in H Co's assessable income, relate to gains made on the financial arrangement by A Co prior to the joining time. It is the 4 year spreading rule that causes H Co to be assessable on those TBA amounts.

Year of income:  Year ending 30 June 2012

Legislative References:
Income Tax Assessment Act 1997
   Division 230
   Subdivision 230-G
   section 230-445
   subsection 230-445(1)
   subsection 701-1(1)
   section 701-5
   subsection 701-55(5A)

Related ATO Interpretative Decisions
ATOID 2012/41

Keywords
Acquisition of assets
Balancing adjustment
Cessation
Consolidation
Consolidated group
Consolidation - assets
Consolidation - joining
Division 230 taxation of financial arrangements
Financial arrangement
Head company
Inherited history rules
Joining entity
Joining time
Method statement
Single entity rule
Subsidiary member of a consolidated group
Tax cost is set
Tax cost setting amount
Transitional election

Siebel/TDMS Reference Number:  1-3SAV4N9

Business Line:  Consolidation Centre of Expertise

Date of publication:  11 May 2012

ISSN: 1445-2782