Tax Laws Amendment (2004 Measures No. 6) Act 2005 (23 of 2005)

Schedule 1   Consolidation

Part 4   Expenditure relating to mining or quarrying

Income Tax (Transitional Provisions) Act 1997

9   Section 703-30 (link note)

Repeal the link note, substitute:

Division 705 - Tax cost setting amount for assets where entities become members of consolidated groups

Table of Subdivisions

705-E Expenditure relating to exploration, mining or quarrying

Subdivision 705-E - Expenditure relating to exploration, mining or quarrying

Table of sections

705-300 Application and object of this Subdivision

705-305 Rules affecting depreciating assets

705-310 Adjustable value of head company's notional assets

705-300 Application and object of this Subdivision

(1) If an entity (the joining entity ) to which section 40-75 of this Act applied becomes a subsidiary member of a consolidated group at a time (the joining time ), this Subdivision applies in relation to:

(a) depreciating assets that:

(i) caused section 40-75 of this Act to apply to the joining entity; and

(ii) became assets of the head company of the group at the joining time because of section 701-1 (Single entity rule) of the Income Tax Assessment Act 1997 operating in relation to the joining entity; and

(b) notional assets that sections 40-35, 40-37, 40-40 and 40-43 of this Act treat an entity as holding because of expenditure relating to such depreciating assets;

to affect the operation of Division 40, section 701-55 and Division 705 of that Act.

(2) The main object of this Subdivision is to ensure that entities are allowed only an appropriate amount of deductions in connection with such depreciating assets and such expenditure.

705-305 Rules affecting depreciating assets

(1) The main object of this section is to ensure that a depreciating asset's tax cost is set, and other matters relevant to working out the deductions of the head company of the consolidated group for the decline in value of the asset are dealt with, so as to:

(a) ensure that the head company does not get excessive deductions on account of expenditure (by any entity) relating to the asset; and

(b) reflect the deductions of an entity for a period ending before the joining time for expenditure relating to the asset; and

(c) ensure that the effective life of the asset for the head company reflects the rate or rates at which the joining entity was able to deduct expenditure relating to the asset (whether or not the expenditure formed part of the cost of the asset).

Prime cost method of working out decline in value of asset

(2) If the joining entity could not deduct an amount under Subdivision 40-B of the Income Tax Assessment Act 1997 for the income year that includes the joining time for the decline in value of a depreciating asset, subsection 701-55(2) of that Act has effect as if the prime cost method for working out the decline in value of the asset applied just before the joining time.

Note: This may affect both the method of working out the decline in value of the asset and the asset's effective life.

Adjustable value of asset

(3) Division 705 of the Income Tax Assessment Act 1997 has effect as if the adjustable value of a depreciating asset just before and at the joining time were increased by the amount described in subsection (4), if section 40-35, 40-37, 40-40 or 40-43 treated the joining entity as holding a notional asset.

Note: This affects not only the adjustable value of the depreciating asset but also the joining entity's terminating value for the asset (which section 705-30 of that Act defines as being equal to the asset's adjustable value just before the joining time).

(4) The amount of the increase is so much of the adjustable value of the notional asset just before the joining time as reasonably relates to the depreciating asset.

Cost of asset

(5) Division 705 of the Income Tax Assessment Act 1997 has effect as if the cost of a depreciating asset were increased by expenditure incurred that did not form part of the asset's cost worked out under Division 40 of that Act but would have if it had been incurred just before the joining time under a contract entered into after 30 June 2001.

Earlier deductions for decline in value of asset

(6) Division 705 of the Income Tax Assessment Act 1997 has effect as if deductions relating to expenditure described in subsection (5) were deductions for the decline in value of the depreciating asset.

Example: Such deductions include:

(a) deductions under former Subdivision 330-A, 330-C or 330-H of the Income Tax Assessment Act 1997, or a corresponding previous law, for the expenditure; and

(b) deductions under Division 40 of that Act for the decline in value of a notional asset that section 40-35, 40-37, 40-40 or 40-43 of this Act treated an entity as holding because of the expenditure.

Effective life of asset

(7) If a depreciating asset's tax cost setting amount does not exceed the joining entity's terminating value for the asset, Division 40 of the Income Tax Assessment Act 1997 has effect as if the effective life of the asset were such period as is reasonable, having regard to the following:

(a) the remainder of the effective life of the asset, worked out just before the joining time;

(b) the remainder of the effective life, worked out just before the joining time, of each notional asset (which section 40-35, 40-37, 40-40 or 40-43 of this Act treats an entity as holding wholly or partly because of expenditure relating to the depreciating asset);

(c) any other relevant matters.

Subsection 701-55(2) of that Act has effect subject to this subsection.

Note 1: The effective life of the depreciating asset was set on 1 July 2001 by subsection 40-75(4) of this Act, but may have been reset since under Subdivision 40-B of the Income Tax Assessment Act 1997.

Note 2: The effective life of a notional asset is specified by whichever one of sections 40-35, 40-37, 40-40 and 40-43 of this Act is relevant to the notional asset.

Choosing to reduce tax cost setting amount of asset

(8) If:

(a) a depreciating asset's tax cost setting amount would be greater than the joining entity's terminating value for the asset; and

(b) the head company of the consolidated group chooses to apply this subsection to the asset;

the asset's tax cost setting amount is reduced so that it equals the terminating value.

Note 1: A consequence of the choice is that subsection (7) applies to the asset.

Note 2: The amount of the reduction is not re-allocated among other assets.

(9) Section 705-55 of the Income Tax Assessment Act 1997 has effect as if subsection (8) of this section were included in section 705-45 of that Act.

Note: This affects the order of reductions in the asset's tax cost setting amount under subsection (8) of this section and sections 705-40 and 705-50 of the Income Tax Assessment Act 1997.

705-310 Adjustable value of head company's notional assets

Application

(1) If:

(a) section 40-35, 40-37, 40-40 or 40-43 of this Act treats the head company of the consolidated group as holding a notional asset at the joining time because expenditure is taken under section 701-5 (Entry history rule) of the Income Tax Assessment Act 1997 to be expenditure of the head company; and

(b) section 40-35, 40-37, 40-40 or 40-43 of this Act treated the joining entity as holding a notional asset just before the joining time because of the expenditure;

this section affects the adjustable value of the head company's notional asset.

Object

(2) The object of this section is to ensure, by reducing the adjustable value of a notional asset of the head company, that the head company cannot get both:

(a) a deduction for the notional asset reflecting the amount of the expenditure relating to depreciating assets; and

(b) a deduction for that amount because of the decline in value of those depreciating assets.

Reduction at joining time for expenditure on depreciating assets

(3) The opening adjustable value of the head company's notional asset for the income year that includes the joining time is so much of the adjustable value of the joining entity's notional asset just before the joining time as does not reasonably relate to any depreciating asset.

Note: This offsets the increases in adjustable value of the head company's depreciating assets under subsection 705-305(3).