New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 (117 of 2002)

Schedule 4   Consolidation: new Subdivisions 705-C (where a consolidated group is acquired by another) and 705-D (where multiple entities are linked by membership interests)

Income Tax Assessment Act 1997

4   At the end of Division 705

Add:

Subdivision 705-C - Case where a consolidated group is acquired by another

Guide to Subdivision 705-C

705-170 What this Subdivision is about

When a consolidated group is acquired by another consolidated group, modifications are made to the operation of Division 701 (the core rules) and Subdivision 705-A (tax cost setting amount where a single entity joins a consolidated group) basically to ensure that the tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former.

Table of sections

Application and object

705-175 Application and object of this Subdivision

Modified application of Division 701 in relation to acquired group etc.

705-180 Modifications of Division 701

Modified application of Subdivision 705-A in relation to acquiring group

705-185 Subdivision 705-A has effect with modifications

Modifications of Subdivision 705-A for the purposes of this Subdivision

705-190 Modified application of section 705-50

705-195 Modified application of subsection 705-65(6)

705-200 Modified application of section 705-85

705-205 Modified application of section 705-125

[This is the end of the Guide.]

Application and object

705-175 Application and object of this Subdivision

Application

(1) This Subdivision applies if all of the*members of a*consolidated group (the acquired group ) become members of another consolidated group (the acquiring group ) at a particular time (the acquisition time ) as a result of the*acquisition of*membership interests in the*head company of the acquired group.

Object

(2) The object of this Subdivision is:

(a) to modify the rules in Division 701 (the core rules) to complement the treatment of the acquired group as a single entity that applied before the acquisition time; and

(b) to modify Subdivision 705-A (which basically determines the tax cost setting amount for assets of an entity joining a consolidated group) to ensure that the*tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former.

Modified application of Division 701 in relation to acquired group etc.

705-180 Modifications of Division 701

Certain provisions of Division 701 not to apply

(1) If, because an entity ceases to be a*subsidiary member of the acquired group when this Subdivision applies, a provision of Division 701 (other than section 701-25) would otherwise apply, in relation to the acquired group for the head company core purposes set out in subsection 701-1(2) or for the entity core purposes set out in subsection 701-1(3), the provision does not so apply.

Modified application of section 701-5

(2) Section 701-5 (the entry history rule) applies in relation to the acquiring group for the head company core purposes set out in subsection 701-1(2) as if entities that are or have been the*subsidiary members of the acquired group were or had been parts of the*head company of the acquired group.

Modified application of section 701-25

(3) The application of section 701-25 (which ensures tax-neutral consequences for a head company ceasing to hold assets when an entity leaves a group), in relation to the acquired group for the head company core purposes set out in subsection 701-1(2) and for the entity core purposes set out in subsection 701-1(3), is modified as follows:

(a) the reference in subsection (4) of that section to the end of the income year is taken to be a reference to the end of the income year that ends or, if subsection 701-30(3) as modified by subsection (4) of this section applies, of the income year that is taken to end, when the entity ceases to be a*subsidiary member of the acquired group;

(b) the section applies (as modified by paragraph (a) of this subsection) to the entity that is the*head company of the acquired group ceasing to be a*member of that group in the same way as it applies to an entity that is a subsidiary member of that group ceasing to be a subsidiary member.

Modified application of section 701-30

(4) If the acquired group only exists for part of the income year, section 701-30 (about an entity not being a subsidiary member of a group for a whole income year) applies in relation to the acquired group for the head company core purposes in the same way as it applies to work out the taxable income, tax payable on that taxable income and loss of each*sort for an entity for a non-membership period.

Modified application of Subdivision 705-A in relation to acquiring group

705-185 Subdivision 705-A has effect with modifications

(1) Subdivision 705-A has effect in relation to the acquiring group for the head company core purposes set out in subsection 701-1(2) as if:

(a) the only*member of the acquired group that is a joining entity of the acquiring group were the entity that, just before the acquisition time, was the*head company of the acquired group; and

(b) the operation of this Part for the head company core purposes in relation to the head company and the entities that were*subsidiary members of the acquired group continued to have effect for the purposes of Subdivision 705-A.

Note 1: This means that for Subdivision 705-A purposes the subsidiary members of the acquired group are treated as part of the head company of that group, and as a result their assets (other than e.g. internal membership interests) have their tax costs set at the acquisition time.

Note 2: It also means e.g. that for Subdivision 705-A purposes the terminating values of the assets of those subsidiary members are worked out as if the assets were those of the head company at the acquisition time, and hence will be based (if applicable) on the tax cost setting amounts for assets that were set at the time entities became subsidiary members of the acquired group.

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

Note: The modifications of Subdivision 705-A made in this Subdivision constitute the second exception to Subdivision 705-A: see paragraph 705-15(b).

Modifications of Subdivision 705-A for the purposes of this Subdivision

705-190 Modified application of section 705-50

Object

(1) The object of this section is to ensure that there is no reduction in the*tax cost setting amount of*over-depreciated assets that were brought into the acquired group by an entity on becoming a*subsidiary member, where the over-depreciation will already be corrected as a result of distributions made to the acquired group before that time.

Exclusion of pre-joining distributions to members of acquired group

(2) If, before it became a*subsidiary member of the acquired group, an entity that is a subsidiary member of the acquired group at the acquisition time paid a dividend to which paragraph 705-50(2)(b) applies, paragraph 705-50(3)(b) also has effect as if the reference in that paragraph to a taxpayer who was not entitled to a rebate of income tax under section 46 or 46A of theIncome Tax Assessment Act 1936included a reference to:

(a) if the acquired group existed at that time - a*member of that group; or

(b) if not - an entity that later became a member of that group.

705-195 Modified application of subsection 705-65(6)

Object

(1) The object of this section is to ensure that certain rights or options held by*members of the acquiring group that are part of the cost of acquiring the acquired group are taken into account in working out the acquiring group's*allocable cost amount for the acquired group.

Certain rights or options relating to the acquired group to be treated in same way as membership interests under step 1 of allocable cost amount

(2) Subsection 705-65(6) has effect as if it also treated as a*membership interest in the*head company of the acquired group a right or option (including a contingent right or option), created or issued by a*subsidiary member of the acquired group, to acquire a membership interest in the subsidiary member, where that right or option was held at the acquisition time by a*member of the acquiring group.

705-200 Modified application of section 705-85

Object

(1) The object of this section is to ensure that if either of the following are not held by*members of either group:

(a) certain employee share interests in*subsidiary members of the acquired group;

(b) certain rights or options to acquire*membership interests in subsidiary members of the acquired group;

and are therefore part of the cost of acquiring the acquired group, they increase the acquiring group's*allocable cost amount for the acquired group.

Increase for certain membership interests in subsidiary members of acquired group

(2) Subsections 705-85(1) and (2) have effect as if a*membership interest in a*subsidiary member of the acquired group were a membership interest in the*head company of that group.

Increase for certain rights and options to acquire membership interests in subsidiary members of acquired group

(3) Paragraph 705-85(3)(a) has effect as if it also increased the step 2 amount worked out under section 705-70 by the*market value of any right or option (including a contingent right or option), created or issued by a*subsidiary member the acquired group, to acquire a*membership interest in the subsidiary member, where that right or option was held at the acquisition time by a person other than a*member of the acquiring group or acquired group.

705-205 Modified application of section 705-125

Object

(1) The object of this section is to make it clear that, in view of the fact that*pre-CGT factors are worked out for assets of the acquired group on acquisition by the acquiring group, pre-CGT factors formerly worked out for assets of entities when they became*subsidiary members of the acquired group cease to have any relevance.

Pre-CGT factors for assets of members on joining acquired groups no longer relevant

(2) Section 705-125 (which provides for a pre-CGT factor to be worked out for assets of the acquired group) has effect as if a note were added at the end of the section stating that*pre-CGT factors worked out for assets of entities when they became*subsidiary members of the acquired group cease to have any relevance when the acquired group ceases to exist in circumstances in which this Subdivision applies.

Subdivision 705-D - Where multiple entities are linked by membership interests

Guide to Subdivision 705-D

705-210 What this Subdivision is about

When entities that are linked by membership interests join a consolidated group, 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 entities.

Table of sections

Application and object

705-215 Application and object of this Subdivision

Modified application of Subdivision 705-A

705-220 Subdivision 705-A has effect with modifications

705-225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities

705-230 Adjustment in working out step 4 of allocable cost amount for successive distributions through interposed linked entities

705-235 Adjustment to allocation of allocable cost amount to take account of owned losses of certain linked entities

705-240 Modified application of section 705-57

705-245 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

705-215 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:

(a) 2 or more entities (each of which is a linked entity ) become members of a*consolidated group at the same time as a result of an event that happens in relation to one of them; and

(b) the case is not covered by Subdivision 705-C.

Note: This is the third exception to Subdivision 705-A: see paragraph 705-15(c). In order for this Subdivision to have effect, one of the entities would need to hold directly or indirectly, just before the joining time, membership interests in all of the other entities.

Example: Entities A and B are not members of a consolidated group, but members of such a group, together with entity A, jointly hold all the membership interests in entity B. Members of the group then acquire all the membership interests in entity A and as a result of this event both entities, which are linked by the membership interests that one holds in the other, become members of the group.

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 take account of the different circumstances that apply where linked entities join.

Modified application of Subdivision 705-A

705-220 Subdivision 705-A has effect with modifications

(1) Subdivision 705-A has effect in relation to each linked entity becoming a*subsidiary member of the*consolidated group in the same way as that Subdivision operates 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.

705-225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities

Object

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

Tax cost setting amounts to be worked out from top down

(2) The*tax cost setting amounts for the assets of linked entities holding*membership interests must be worked out before the tax cost setting amounts for the assets of the linked entities in which the membership interests are held.

Note: The tax cost setting amount in respect of assets of any linked entity in which members of the group, but no linked entity, hold membership interests can be worked out in any order in relation to the calculations for other linked entities.

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

(3) The*tax cost setting amount worked out for assets of a linked 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 linked 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 linked entity. If any of those membership interests is held by another linked entity, subsection (3) of this section 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) of this section.

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) of this subsection. 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, a linked entity holds a right or option (including a contingent right or option), created or issued by another linked entity, to acquire a*membership interest in that other linked entity, that right or option is treated as if it were a membership interest in that other linked entity.

705-230 Adjustment in working out step 4 of allocable cost amount for successive distributions through interposed linked entities

Object

(1) The object of this section is to ensure that, in working out the group's*allocable cost amount for the linked entities, 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 a linked entity, 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 linked entity, there would also be a reduction under that step for any of the first distribution that the second linked 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).

705-235 Adjustment to allocation of allocable cost amount to take account of owned losses of certain linked entities

Object

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

Adjustment to allocation of allocable cost amount

(2) If:

(a) a linked entity has*membership interests in a second linked entity; and

(b) in working out the group's*allocable cost amount for the second linked 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 linked entity, the*market value of the first linked entity's membership interests in the second linked entity is increased by the first linked entity's interest in the loss subtraction amount (see subsection (3)).

First entity's interest in loss subtraction amount

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

(Market value of first linked entity's membership interests in second linked entity / Market value of all memebership interests in second linked entity) * Loss subtraction amount

705-240 Modified application of section 705-57

Object

(1) The object of this section is to ensure that, in working out*tax cost setting amounts for*trading stock,*depreciating assets or*revenue assets of the linked entities, section 705-57 (about loss of pre-CGT status of certain membership interests) only applies if the*membership interests held directly by the*head company of the group are affected.

Modified application of section 705-57 - basic modification

(2) For the purposes of applying section 705-57 in accordance with this Subdivision, a reference in that section to a*membership interest that a*member of the joined group holds in the joining entity at the joining time is taken to be a reference to a membership interest that the*head company of the*consolidated group holds directly in a linked entity at the time the linked entity becomes a*subsidiary member.

Modified application of section 705-57 - additional modifications where section 705-225 applies

(3) Also, if a linked entity (the first linked entity ) holds a*membership interest (the subject membership interest ) in another linked entity (the second linked entity ), section 705-57 (as modified in accordance with subsection (2)) is to be applied in relation to the subject membership interest as follows.

(4) First work out whether there would be a reduction under that section in the*tax cost setting amount for the subject membership interest that is used as mentioned in subsection 705-225(3) (the subsection 705-225(3) tax cost setting amount ) if:

(a) the subject membership interest, if it is not a revenue etc. asset of the first linked entity, were taken to be such an asset; and

(b) paragraphs 705-57(2)(c) and (d) and subsection 705-57(7) did not apply to the subject membership interest.

(5) Next, if there would be such a reduction (whose amount is the notional section 705-57 reduction amount ):

(a) apply section 705-57 to reduce the*tax cost setting amount for any revenue etc. asset of the second linked entity; and

(b) if the second linked entity holds a*membership interest in another linked entity - apply section 705-57 in relation to that interest in accordance with subsection (3) of this section;

and for those purposes:

(c) the subject membership interest is taken to be a membership interest that the*head company of the group holds directly in the second linked entity; and

(d) the requirements of paragraphs 705-57(2)(a) and (b) are taken to be satisfied in relation to the subject membership interest; and

(e) the subject membership interest is taken to have a*cost base and*reduced cost base equal to the subsection 705-225(3) tax cost setting amount; and

(f) the subject membership interest is taken to have a loss of pre-CGT status adjustment amount equal to the notional section 705-57 reduction amount.

Note: If the head company actually held any membership interests in the second linked entity, or if other linked entities held membership interests in the second linked entity to which this subsection also applied, those membership interests would also be taken into account in working out the reduction under paragraph (a) and in applying paragraph (b).

705-245 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 linked entities hold*membership interests in other linked entities, the pre-CGT status of membership interests held by the*head company, and not the pre-CGT status of membership interests held by other linked entities, is used to work out the*pre-CGT factor under section 705-125 for assets of the other linked entities.

Pre-CGT factor to be worked out from top down

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

[The next Division is Division 707.]