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

Schedule 1   Consolidation

Part 5   Low-value and software development pools

Income Tax Assessment Act 1997

11   Before Subdivision 716-Z

Insert:

Subdivision 716-G - Low-value and software development pools

Table of sections

Assets in joining entity's low-value pool

716-330 Head company's deductions for decline in value of assets in joining entity's low-value pool

Entity leaving group with asset allocated to head company's low-value pool

716-335 Entity leaving group with asset allocated to head company's low-value pool

Depreciating assets arising from expenditure in joining entity's software development pool

716-340 Depreciating assets arising from expenditure in joining entity's software development pool

Software development pools if entity leaves consolidated group

716-345 Head company taken not to have incurred expenditure

Assets in joining entity's low-value pool

716-330 Head company's deductions for decline in value of assets in joining entity's low-value pool

(1) This section modifies the operation of sections 40-430, 40-435, 40-440, 40-445, 701-10 and 701-60 and Division 705 for the head company core purposes mentioned in section 701-1 if:

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

(b) there are one or more *depreciating assets (the previous pool assets ) that:

(i) were allocated to the joining entity's low-value pool; and

(ii) become assets of the *head company of the group at the joining time because section 701-1 applies to the joining entity; and

(c) none of the previous pool assets was an asset to which Division 58 applied to affect the joining entity's deductions relating to the asset.

Note 1: Sections 40-430, 40-435 and 40-440 are relevant to allocating depreciating assets to a low-value pool and to working out the decline in value of assets allocated to a low-value pool. Section 40-445 affects the closing pool balance, and may give rise to assessable income, if a balancing adjustment event happens to such an asset.

Note 2: Section 701-10 provides that, for each asset the joining entity has at the joining time, the asset's tax cost is set at the joining time at the asset's tax cost setting amount, which is defined by section 701-60 as the amount worked out under Division 705.

Note 3: Division 58 is about capital allowances for depreciating assets previously owned by an exempt entity.

Objects

(2) The main objects of this section are:

(a) to clarify how sections 40-430, 40-435 and 40-440 operate in relation to the previous pool assets; and

(b) to reduce compliance costs by providing that the *tax cost is set for all the previous pool assets in one operation, rather than individually for each such asset.

Time of allocation of assets to head company's low-value pool

(3) Sections 40-430, 40-435, 40-440 and 40-445 operate as if the *head company of the *consolidated group allocated the previous pool assets to a low-value pool for the income year that includes the joining time. Section 701-5 has effect subject to this subsection.

Note 1: Under section 40-435, the head company must make a reasonable estimate of the taxable use percentage for each asset.

Note 2: This subsection affects the percentages and amounts to be taken into account for working out under section 40-440 the decline in value of assets in the pool and the closing pool balance.

Allocating other low-cost assets to head company's low-value pool

(4) Subsection 40-430(1) operates as if the previous pool assets were *low-cost assets.

Note: This has the effect that the head company must allocate to the low-value pool each low-cost asset it starts to hold in the income year that includes the joining time or a later income year, whether or not the head company starts to hold the asset because of section 701-1.

If joining time was in first day of joining entity's income year

(5) If the joining time was in the first day of the joining entity's income year, section 40-440 operates as if:

(a) all the previous pool assets were *low-value assets; and

(b) the sum of the previous pool assets' *opening adjustable values for the income year that includes the joining time equalled the *tax cost setting amount for the hypothetical asset worked out on the basis described in subsections (7), (8) and (9) of this section.

If joining time was not in first day of joining entity's income year

(6) If the joining time was not in the first day of the joining entity's income year, section 40-440 operates as if:

(a) all the previous pool assets were *low-cost assets; and

(b) the sum of the previous pool assets' *costs equalled the total of:

(i) the *tax cost setting amount for the hypothetical asset worked out on the basis described in subsections (7), (8) and (9) of this section; and

(ii) the expenditure (if any) that was incurred after the joining time (but in the income year that includes that time) and included in the second element of the costs (ignoring this paragraph) of the previous pool assets.

Tax cost is set for assets collectively not individually

(7) Sections 701-10 and 701-60 and Division 705 operate as if all the previous pool assets formed a single *depreciating asset (the hypothetical asset ), and were not separate assets.

Modified operation of Division 705 for hypothetical asset

(8) Sections 705-40 and 705-57 operate as if the joining entity's *terminating value for the hypothetical asset were the amount worked out using the table:

Note: Sections 705-40 and 705-57 are about reduction of an asset's tax cost setting amount to an amount that may be affected by the joining entity's terminating value for the asset.

(9) Division 705 operates in relation to the hypothetical asset as if section 705-50 had not been enacted.

Note: Section 705-50 is about reduction of an asset's tax cost setting amount for over-depreciation of the asset.

Entity leaving group with asset allocated to head company's low-value pool

716-335 Entity leaving group with asset allocated to head company's low-value pool

(1) This section sets out rules affecting the *head company of a *consolidated group and an entity (the leaving entity ) that ceases to be a *subsidiary member of the group at a time (the leaving time ) in an income year (the leaving year ), if:

(a) a *depreciating asset becomes an asset of the leaving entity at the leaving time because section 701-1 (Single entity rule) ceases to apply to the leaving entity; and

(b) the asset was in the head company's low-value pool.

Note: Section 701-40 (Exit history rule) treats the asset as having been allocated to the leaving entity's low-value pool, with the taxable use percentage estimated by the head company, for the income year for which the head company allocated the asset to the head company's low-value pool.

Objects

(2) The main objects of this section are:

(a) to ensure that the decline in value of assets in the *head company's low-value pool and the decline in value of assets in the leaving entity's low-value pool are worked out so that:

(i) for the leaving year, the *depreciating asset is taken into account in working out the decline in value of assets in the head company's low-value pool only; and

(ii) for later income years, the depreciating asset is taken into account in working out the decline in value of assets in the leaving entity's low-value pool only; and

(b) to specify the *adjustable value of the depreciating asset just before and at the leaving time.

Reduced decline in value for leaving entity for leaving year

(3) The decline in value worked out for the leaving year under subsection 40-440(1) for assets in the leaving entity's low-value pool is reduced by such amount as is reasonable to prevent duplication of deductions for the leaving year in respect of the *depreciating asset by the *head company and the leaving entity.

Reduced closing pool balance for head company's pool for leaving year

(4) The *closing pool balance of the *head company's low-value pool for the leaving year is reduced by so much of the balance as reasonably relates to the *depreciating asset.

Cost of head company's membership interests in leaving entity etc.

(5) Sections 701-15, 701-40 and 701-60 and Division 711 have effect as if the *adjustable value of the *depreciating asset for the *head company just before and at the leaving time were such amount as is reasonable, having regard to:

(a) the reduction described in subsection (4) of this section; and

(b) the taxable use percentage estimated for the depreciating asset by the head company under section 40-435.

Note 1: Section 701-15 provides that, for each membership interest the head company holds in the leaving entity, the interest's tax cost is set just before the leaving time at the interest's tax cost setting amount, which is defined by section 701-60 as the amount worked out under certain sections of Division 711.

Note 2: Division 711 sets the interest's tax cost setting amount by reference to the head company's terminating value of the asset, which is to be worked out under section 711-30 by reference to the adjustable value of the asset for the head company just before the leaving time.

Note 3: Section 701-40 has the effect that the adjustable value of the asset for the leaving entity at the leaving time is the same as the adjustable value of the asset for the head company then.

Depreciating assets arising from expenditure in joining entity's software development pool

716-340 Depreciating assets arising from expenditure in joining entity's software development pool

(1) This section modifies the basis on which Subdivision 40-B and sections 40-455, 701-10, 701-55 and 701-60 and Division 705 operate if:

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

(b) the joining entity had incurred before the joining time expenditure that it allocated to a software development pool; and

(c) some or all of the expenditure is reasonably related to *in-house software that:

(i) is a *depreciating asset; and

(ii) became an asset of the *head company of the consolidated group at the joining time because section 701-1 (Single entity rule) applied to the joining entity.

Note 1: Subdivision 40-B allows deductions for the decline in value of a depreciating asset, but only if expenditure on the asset has not been allocated to a software development pool. Section 40-455 provides for deduction of expenditure allocated to such a pool. Section 701-5 (Entry history rule) treats the head company as having incurred the expenditure that was allocated to the pool.

Note 2: Section 701-10 provides that, for each asset the joining entity has at the joining time, the asset's tax cost is set at the joining time at the asset's tax cost setting amount, which is defined by section 701-60 as the amount worked out under Division 705, which in turn depends on the adjustable value of the asset worked out under section 40-85.

Note 3: Section 701-55 affects matters relevant to working out the head company's deductions for the decline in value of depreciating assets that became assets of the head company at the joining time because section 701-1 (Single entity rule) applied to the joining entity.

Note 4: This section operates whether or not the joining entity's deductions under section 40-455 for the period before the joining time for expenditure allocated to the pool total 100% of the expenditure allocated to the pool.

Object

(2) The main object of this section is to ensure that:

(a) the *head company's deductions for the *in-house software:

(i) are not worked out under section 40-455 on the basis of section 701-5 (Entry history rule) treating the expenditure relating to the software as being the head company's expenditure; and

(ii) are instead worked out under Subdivision 40-B, using the *prime cost method with the *effective life given by subsection 40-95(7) and taking account of the *tax cost setting amount for the software; and

(b) the tax cost setting amount is worked out in a way that takes account of deductions for the period before the joining time for the expenditure reasonably related to the in-house software.

Joining entity taken not to have incurred certain expenditure

(3) Subdivision 40-B and section 40-455 operate for the head company core purposes mentioned in section 701-1 (Single entity rule) as if the expenditure reasonably related to the *in-house software had not been incurred by the joining entity.

Note 1: This has the effects that:

(a) subsection 40-50(2) does not apply because of section 701-5 (Entry history rule) to deny the head company deductions under Subdivision 40-B for the decline in value of the software; and

(b) the head company cannot deduct the expenditure under section 40-455 as it operates because of section 701-5.

Note 2: This does not prevent the head company from deducting under section 40-455 expenditure that is not reasonably related to the in-house software and that the head company is treated by section 701-5 as having incurred and allocated to a software development pool because the joining entity did.

Prime cost method of working out decline in value of software

(4) Subsection 701-55(2) operates as if the *prime cost method of working out the decline in value of the *in-house software applied just before the joining time.

Note: This affects the method of working out the decline in value of the software for the head company of the consolidated group.

Effective life of software

(5) Subdivision 40-B operates as if the *effective life of the *in-house software were the period specified for in-house software in subsection 40-95(7). Subsection 701-55(2) is subject to this subsection.

Cost of in-house software

(6) Sections 701-10 and 701-60 and Division 705 (and section 40-85, so far as it affects that Division) operate as if the *cost of the *in-house software were the total amount of the joining entity's expenditure that reasonably related to the software and was allocated to a software development pool.

Earlier decline in value of the in-house software

(7) Sections 701-10 and 701-60 and Division 705 (and section 40-85, so far as it affects that Division) operate as if the decline in value, and deductions for the decline in value, of the *in-house software for a period before the joining time were the amount worked out under subsection (8).

(8) Work out the amount by:

(a) working out, for each software development pool to which expenditure relating to the *in-house software was allocated, the amount of the joining entity's deductions under section 40-455 that reasonably relates to the software; and

(b) adding up each of those amounts if there are 2 or more such pools.

Note: Subsections (6), (7) and (8) can affect the working out of the tax cost setting amount for the in-house software in these ways:

(a) one way is by affecting the adjustable value of the software, which may be worked out under section 40-85 by reference to the decline in value of the software, and which is relevant to section 705-50 (which reduces the tax cost setting amount for over-depreciated assets);

(b) another way is by affecting the joining entity's terminating value for the software, which section 705-30 defines as being the adjustable value of the software just before the joining time, and which is relevant to sections 705-40, 705-50 and 705-57 (which may reduce the tax cost setting amount for the software);

(c) another way is by affecting section 705-50, whose operation depends on the decline in value, and deductions for the decline in value, of the software (among other things).

Software development pools if entity leaves consolidated group

716-345 Head company taken not to have incurred expenditure

(1) This section has effect if:

(a) an entity (the leaving entity ) ceases to be a *subsidiary member of a *consolidated group at a time in an income year (the leaving year ); and

(b) under section 701-40 (Exit history rule), expenditure is taken to have been allocated by the leaving entity to a software development pool.

Note: Section 701-40 treats expenditure incurred by the head company of the consolidated group and allocated by that company to a software development pool as having been incurred by the leaving entity and allocated by it to a software development pool.

(2) Work out deductions of the *head company of the *consolidated group for income years after the leaving year as if the head company had not incurred the expenditure.

(3) The leaving entity cannot deduct an amount for the leaving year for the expenditure it is taken to have allocated to the software development pool.