New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (90 of 2002)

Schedule 3   Consolidation: new Subdivision 705-B (tax cost setting amount on group formation)

Income Tax Assessment Act 1997

2   After Subdivision 705-A

Insert:

Subdivision 705-B - Case of group formation

Guide to Subdivision 705-B

705-130 What this Subdivision is about

When a consolidated group comes into existence, the tax cost setting amount for the assets of each entity that becomes a subsidiary member is worked out by modifying the rules in Subdivision 705-A, so that the amount reflects the cost to the group of acquiring the entity.

Table of sections

Application and object

705-135 Application and object of this Subdivision

Modified application of Subdivision 705-A

705-140 Subdivision 705-A has effect with modifications

705-145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members

705-150 Adjustment to result of step 3 in working out allocable cost amount where pre-formation time roll-over from head company to member of wholly-owned group

705-155 Adjustment in working out step 4 of allocable cost amount for successive distributions through interposed entities

705-160 Adjustment to allocation of allocable cost amount to take account of owned losses of certain entities that become subsidiary members

705-165 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members

[This is the end of the Guide.]

Application and object

705-135 Application and object of this Subdivision

Application

(1) This Subdivision has effect for the head company core purposes set out in subsection 701-1(2) if one or more entities become*subsidiary members of a*consolidated group at the time (the formation time ) it comes into existence as a consolidated group.

Note: This is the first exception to Subdivision 705-A: see paragraph 705-15(a).

Object

(2) The object of this Subdivision is to modify the rules in Subdivision 705-A (which basically determine the tax cost setting amount for assets of an entity joining an existing*consolidated group) so that they have effect, and take account of different circumstances that apply, when a consolidated group comes into existence.

Note: The main circumstance is where one of the entities has membership interests in another. In such a case, the order in which the rules in Subdivision 705-A are applied will affect the tax cost setting amounts for the assets of the entities.

Modified application of Subdivision 705-A

705-140 Subdivision 705-A has effect with modifications

(1) Subdivision 705-A has effect in relation to each entity becoming a*subsidiary member of the*consolidated group at the formation time in the same way as that Subdivision has effect in relation to an entity becoming a subsidiary member of a consolidated group in circumstances covered by that Subdivision.

(2) However, that effect of Subdivision 705-A is subject to modifications set out in this Subdivision.

705-145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members

Object

(1) The object of this section is to ensure that where, on becoming*subsidiary members, entities hold assets consisting of*membership interests in other subsidiary members, the*head company's cost of becoming the holder of the assets of all of the entities that become subsidiary members correctly reflects the group's cost of acquiring the entities.

Tax cost setting amounts to be worked out from top down

(2) If, on becoming*subsidiary members, entities hold*membership interests in any other entities that become subsidiary members, the*tax cost setting amounts for the assets of entities holding membership interests must be worked out before the tax cost setting amounts for the assets of the entities in which the membership interests are held.

Note: The tax cost setting amount in respect of assets of any subsidiary member in which the head company, but no other subsidiary member, holds membership interests can be worked out in any order in relation to the calculations for other subsidiary members.

Tax cost setting amount for higher entity's membership interests to be used in working out lower entity's tax cost setting amount

(3) The tax cost setting amount worked out for assets of an entity mentioned in subsection (2) consisting of*membership interests in another such entity is to be used as the amount for those interests under subsection 705-65(1) (step 1 of allocable cost amount) in working out the tax cost setting amount for assets of that other entity.

Note 1: Subsection 705-65(1) adds together amounts worked out in accordance with section 705-65 representing the cost of the membership interests that each member of the group holds in the entity. If any of those membership interests is held by another subsidiary member, subsection (3) above will replace the amount otherwise applicable with the tax cost setting amount that will have been worked out for the interests in accordance with subsection (2) above.

Note 2: The tax cost setting amount worked out for the membership interests has no relevance other than for the purpose mentioned in subsection (3). This is because, under the single entity principle, intra group membership interests are ignored while entities are members of the group. If an entity ceases to be a member, section 701-15 and Division 711 set the tax cost of membership interests in the entity at that time.

Value shifting etc. provisions not to apply to later CGT events involving membership interests

(4) However, despite subsection (3), subsection 705-65(4) (which prevents the later operation of value shifting etc. provisions) still applies to the*membership interests.

Rights and options to acquire membership interests

(5) For the purposes of this section, if, on becoming a*subsidiary member, an entity holds a right or option (including a contingent right or option), created or issued by another entity that becomes a subsidiary member at the same time, to acquire a*membership interest in that other entity, that right or option is treated as if it were a membership interest in that other entity.

705-150 Adjustment to result of step 3 in working out allocable cost amount where pre-formation time roll-over from head company to member of wholly-owned group

Object

(1) The object of this section is to ensure that, in working out the group's*allocable cost amount for certain entities that become*subsidiary members of the group at the formation time, an adjustment is made to take account of roll-overs under Subdivision 126-B or section 160ZZO of theIncome Tax Assessment Act 1936before the formation time.

When section applies

(2) This section applies if:

(a) before the formation time, there was a roll-over under Subdivision 126-B or section 160ZZO of theIncome Tax Assessment Act 1936in relation to a*CGT event (the head company roll-over event ) that happened in relation to an asset (the head company roll-over asset ), where:

(i) an entity (the head company roll-over recipient ) that becomes a*subsidiary member of the group was the recipient company in relation to the roll-over; and

(ii) the originating company in relation to that roll-over was the entity that becomes the*head company of the group; and

(b) between the roll-over and the formation time, no other CGT event happened in relation to the head company roll-over asset:

(i) for which there was another roll-over satisfying the requirements of paragraph (a); or

(ii) for which there was not a roll-over under Subdivision 126-B or section 160ZZO of theIncome Tax Assessment Act 1936; and

(c) the head company roll-over asset is not a*pre-CGT asset at the formation time; and

(d) the sum of the*cost bases of all of the*head company's*CGT assets just before the head company roll-over event exceeded or was less than the sum of the cost bases of all of the head company's CGT assets just after the head company roll-over event (the excess or shortfall being the head company roll-over adjustment amount ).

Adjustment to result of step 3 in allocable cost amount for head company roll-over recipient

(3) For the purpose of working out the group's*allocable cost amount for the head company roll-over recipient, the result of step 3 in the table in section 705-60 is reduced (if the head company roll-over adjustment amount is an excess), or increased (if the head company roll-over adjustment amount is a shortfall), by the amount worked out as follows:

where:

market value of all membership interests in head company roll-over recipient means the*market value, at the formation time, of all*membership interests in the head company roll-over recipient that are held by entities that become*members of the group at that time.

Adjustment to result of step 3 in allocable cost amount for interposed entity

(4) Also, if this section applies, for the purpose of working out the group's*allocable cost amount for any entity (the target entit y ) that:

(a) becomes a*subsidiary member of the group at the formation time; and

(b) is interposed at that time between the*head company and the head company roll-over recipient; and

(c) is the first or only such interposed entity;

the result of step 3 in the table in section 705-60 is reduced (if the head company roll-over adjustment amount is an excess), or increased (if the head company roll-over adjustment amount is a shortfall), by the amount worked out as follows:

where:

market value of all membership interests in head company roll-over recipient has the same meaning as in subsection (3).

market value of head company's indirect membership interests in head company roll-over recipient means so much of the*market value, at the formation time, of the*head company's*membership interests in the target entity as is attributable to membership interests that the entity holds directly, or indirectly through other interposed entities that become*subsidiary members of the group at the formation time, in the head company roll-over recipient.

Note: If under subsection (3) or (4) the amount by which the result of step 3 is to be reduced exceeds that result, the excess is treated as a capital gain of the head company.

705-155 Adjustment in working out step 4 of allocable cost amount for successive distributions through interposed entities

Object

(1) The object of this section is to ensure that, in working out the group's*allocable cost amount for entities that become*subsidiary members of the group at the formation time, there is only one reduction under step 4 in the table in section 705-60 (about pre-formation time distributions out of certain profits) for distributions of the same profits.

When section applies

(2) This section applies if, apart from this section:

(a) in working out the group's*allocable cost amount for an entity that becomes a*subsidiary member of the group at the formation time, there would be a reduction under step 4 in the table in section 705-60 for a distribution (the first distribution ) made by the entity; and

(b) in working out the group's*allocable cost amount for a second entity that becomes a*subsidiary member of the group at that time, there would also be a reduction under that step for any of the first distribution that the second entity successively distributed as mentioned in paragraph 705-95(a).

No step 4 reduction in respect of successive distribution of amount for which there has already been a step 4 reduction

(3) If this section applies, there is no reduction as mentioned in paragraph (2)(b).

705-160 Adjustment to allocation of allocable cost amount to take account of owned losses of certain entities that become subsidiary members

Object

(1) The object of this section is to prevent a distortion under section 705-35 in the allocation of*allocable cost amount to an entity that becomes a*subsidiary member of the group where that entity has*membership interests in another entity that has certain tax losses when it becomes a subsidiary member.

Adjustment to allocation of allocable cost amount

(2) If:

(a) an entity becomes a*subsidiary member of the group at the formation time; and

(b) the entity has*membership interests in a second entity that becomes a subsidiary member of the group at that time; and

(c) in working out the group's*allocable cost amount for the second entity an amount is required to be subtracted (the loss subtraction amount ) under step 5 in the table in section 705-60 (about losses accruing before becoming a subsidiary member of the group);

then, for the purposes of working out under section 705-35 the*tax cost setting amount for the assets of the first entity, the*market value of the first entity's membership interests in the second entity is increased by the first entity's interest in the loss subtraction amount (see subsection (3)).

First entity's interest in loss subtraction amount

(3) The first entity's interest in the loss subtraction amount is worked out using the formula:

705-165 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members

Object

(1) The object of this section is to ensure that where, on becoming*subsidiary members, entities hold*membership interests in other subsidiary members, the pre-CGT status of membership interests held by the*head company, and not the pre-CGT status of membership interests held by other entities, is used to work out the*pre-CGT factor under section 705-125 for assets of the other subsidiary members.

Pre-CGT factor to be worked out from top down

(2) If, on becoming*subsidiary members, entities hold*membership interests in any other entities that become subsidiary members, the*pre-CGT factor for the assets of entities holding membership interests must be worked out before the pre-CGT factor for the assets of the entities in which the membership interests are held.

[The next Division is Division 707.]