Consolidation Reference Manual
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.
C2 Assets
C2-4 Worked examples - cost setting on entry
Pre-CGT assets on entry
C2-4-810 Pre-CGT factor for assets of a joining entity
Note
These pre-CGT factor rules apply to an entity that joined a consolidated group before 10 February 2010 unless the head company makes a choice for the new pre-CGT proportion rules to apply. For details of the new pre-CGT proportion rules that apply from 10 February 2010 see
→
'Pre-CGT status of membership interests in a joining entity - pre-CGT proportion rules',
C2-4-813
.
Description
This example shows how the pre-CGT status of the membership interests acquired by the group before 20 September 1985 is preserved by attaching a pre-CGT factor to each asset (other than current assets) of the joining entity. This only applies where an entity joins a consolidated group before 10 February 2010.
Commentary
The pre-CGT status of membership interests in a joining entity is an attribute of the assets of the group being joined (as opposed to being an attribute of the assets of the joining entity).
To preserve that status a pre-CGT factor is attached at the joining time to each of the joining entity's assets (other than current assets). This allows a proportion of the membership interests in a leaving entity to be treated as pre-CGT assets by reference to the pre-CGT factors attached to the assets that leave with it. (Note that the asset with the pre-CGT factor attached does not need to have belonged to the leaving entity when it joined, nor do any of the leaving entity's membership interests need to have been pre-CGT interests at that time.) → 'Pre-CGT membership interests in a leaving entity (with pre-CGT factor attached to assets)', C2-5-710
The pre-CGT factor that applies to each asset (other than current assets) is calculated as follows:
In terms of membership interests in the joining entity, the pre-CGT assets of the members are the interests (such as shares) or rights those members have held continuously since 19 September 1985.
→ Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, paragraph 2.47
Where pre-CGT status is removed from assets under existing law, the cost bases of the affected assets are reset at their market values as at the time of the trigger event.
Further, a pre-CGT factor only attaches to assets that existed at the joining time, and if an asset is disposed of after the joining time (other than by the sale of an entity), its pre-CGT factor is lost to the group and the factor does not attach to any replacement asset.
Example 1
Facts
ACo acquired 60% of the shares in BCo before 20 September 1985. On consolidation the financial positions are as shown in tables 1 and 2.
| Shares (100 in BCo) | $100 | Equity | $100 |
| Land (MV $500) | $50 | Equity | $100 |
| Asset 2 (MV $100) | $50 | $100 | $100 |
| Notes: MV: = market value | |||
| Asset 2 is not a current asset. | |||
Calculation
Pre-CGT factor for all assets (other than current assets)
Step 1
Work out the market value of the pre-CGT membership interests in the joining entity:
(Land, $500 + Asset 2, $100) x 60% = $360
Step 2
Work out the market value of all the joining entity's assets (other than current assets) at the joining time:
Land ($500) + Asset 2 ($100) = $600
Step 3
Work out the pre-CGT factor:
$360 (step 1) / $600 (step 2) = 0.6
Therefore, the pre-CGT factor to be attached to all of the joining entity's (BCo) assets other than current assets (Land and Asset 2 in this example) is 0.6.
Example 2
Facts
HCo acquired 60% of ACo in July 1985 for a consideration of $600. ACo's financial position at this time was as shown in table 3.
| Cash | $1,000 | Equity | $1,000 |
On 30 June 2003 the remaining equity of ACo is acquired by HCo for $680 (40% of $1,700 - see step 1 below) with the financial position as shown in table 4.
| Cash | $200 | Equity | $1,000 |
| Land (MV $2,000) | $1,300 | Liabilities | $500 |
| $1,500 | $1,500 | ||
| Note: MV = market value | |||
Calculation
Pre-CGT factor for all assets (other than current assets)
Step 1
Work out the market value of the pre-CGT membership interests in ACo:
The market value of all the membership interests in ACo at the joining time is $1,700 (Cash of $200 plus market value of Land, $2,000, less Liabilities of $500). Therefore, the market value of the pre-CGT membership interests is $1,020 (60% of $1,700).
($200 + $2,000 - $500) x 60% = $1,020
Step 2
Work out the market value of all the joining entity's assets (other than current assets) at the joining time:
The market value of all the assets (for which a pre-CGT factor is to be worked out) that ACo holds at the joining time (Land) is $2,000.
Step 3
Work out the pre-CGT factor:
$1,020 (step 1) / $2,000 (step 2) = 0.51
Therefore, the pre-CGT factor to be attached to all of the joining entity's (ACo) assets other than current assets (Land in this example) is 0.51.
References
Income Tax Assessment Act 1997 , section 705-125 ; as inserted by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1 , and amended by Tax Laws Amendment (2010 Measures No. 1) Act 2010 (No. 56 of 2010), Schedule 5, Part 3
Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, paragraphs 5.108-113
Explanatory Memorandum to Tax Laws Amendment (2010 Measures No. 1) Bill 2010, paragraphs 5.111 to 5.142
History
Revision History
Section C2-4-810 first published (excluding drafts) 2 December 2002.
Further revisions are described below:
| Date | Amendment | Reason | |||
|---|---|---|---|---|---|
| 30.6.09 | Minor changes including removal of note at step 5 to reflect new rules for treatment of foreign losses. | Legislative amendment | |||
| 6.5.11 | Changes to Commentary to reflect changes to the method of working out the proportion of the pre-CGT membership interests in a joining entity. | Legislative amendments. | 15.7.11 | Additional information added to Note on p1. | Clarification |
Current at 15 July 2011