ATO Interpretative Decision
ATO ID 2003/650
Income Tax
Consolidation: chosen transitional entity - CGT event L1FOI status: may be released
Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Issue
Can a head company make a capital loss under section 104-500 (CGT event L1) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of an entity that joins a consolidated group and the head company chooses that the entity be a chosen transitional entity?
Decision
No. CGT event L1 can only happen to a head company of a consolidated group where a joining entity has the tax cost setting amount of its assets calculated under Division 705 of ITAA 1997.
Facts
A Company has a wholly owned subsidiary, B Company. A Company acquired the shares in B Company before 20 September 1985.
A Company has had a change in majority underlying interests causing these shares to be treated as being acquired after 19 September 1985 by Division 149 of the ITAA 1997.
A Company and B Company consolidate.
A Company chooses for B Company to be a chosen transitional entity.
Reasons for Decision
For CGT event L1 to occur, a reduction in the tax cost setting amount of assets of an entity that becomes a subsidiary member of a consolidated group under section 705-57 of the ITAA 1997 (or its application under Subdivisions 705-B to 705-E, of ITAA 1997) must have occurred.
A reduction in the tax cost setting amount under section 705-57 of the ITAA 1997 occurs when Division 705 of the ITAA 1997 applies to reset the tax costs of the assets of the joining entity.
A chosen transitional entity's assets maintain their original tax costs and are not reset. Division 705 of the ITAA 1997 does not apply to the assets of such an entity. In this case, B Company is a chosen transitional entity, and its assets will maintain their original tax costs.
As Division 705 of the ITAA 1997 can not apply to a chosen transitional entity, it is not possible to have had a reduction under section 705-57 of the ITAA 1997 in respect of the assets of such an entity. Therefore CGT event L1 is not capable of applying to the head company in respect of a chosen transitional entity.
Division 705 of the ITAA 1997 will not apply to Company B and there will be no reduction in the tax cost setting amount of its assets. As a consequence, CGT event L1 will not apply to A Company in respect of B Company, a chosen transitional entity.
Date of decision: 18 July 2003Year of income: Year ended 30 June 2003 Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
Division 149
Division 705
Subdivision 705-B
Subdivision 705-C
Subdivision 705-D
Subdivision 705-E
section 104-500
section 705-57
Keywords
Chosen transitional entity
Consolidation
Consolidation - capital gains tax
Head company
Tax cost setting amount
ISSN: 1445-2782