Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES  

PART 3-90 - CONSOLIDATED GROUPS  

Division 701 - Core rules  

Exceptions  

SECTION 701-70   Adjustments to taxable income where identities of parties to arrangement merge on joining group  

Section applies to certain arrangements

701-70(1)    
This section applies for the head company core purposes and the entity core purposes if, just before the time (the joining time ) when the entity becomes a ^* subsidiary member of the group, an ^* arrangement is in force under which:

(a) expenditure is to be, or has been, incurred in return for the doing of some thing; and

(b) the persons incurring the expenditure and *deriving the corresponding amount (each of which is a combining entity ) are the entity and either:

(i) another entity that became a subsidiary member at the same time; or

(ii) the ^* head company.

Note 1:

If expenditure incurred under an arrangement consists of a payment of loan interest or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the loan principal, or other amount of a similar kind, under the arrangement.

Note 2:

If expenditure incurred under an arrangement consists of a payment of rent, a lease payment or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the thing rented or leased, or other thing of a similar kind, under the arrangement.

Note 3:

If expenditure incurred under an arrangement consists of a payment of an insurance premium or a payment of a similar kind, the expenditure would be incurred in return for the provision or continued provision of insurance against the risk concerned, or of a thing of a similar kind, under the arrangement.

Object

701-70(2)    
The object of this section is to align the income tax position of the combining entities at the joining time, because after that time they lose their separate tax identities under the single entity rule in subsection 701-1(1) and this would preserve any imbalance.

Adjustment for disproportionate deductibility

701-70(3)    
If the total of a combining entity ' s deductions that are allowable for:

(a) the following income year (the joining adjustment year ):

(i) if the combining entity is the *head company and the joining time occurs at the start of an income year - the income year before that income year;

(ii) if the combining entity is the head company and subparagraph (i) does not apply - the income year in which the joining time occurs;

(iii) in any other case - the income year that ends, or, if section 701-30 applies, the income year that is taken by subsection (3) of that section to end, at the joining time; and

(b) all earlier income years;

is not equal to the amount worked out under subsection (4), then:

(c) if the total is less - the entity is entitled to deduct the difference for the joining adjustment year; and

(d) if it is more - the entity ' s assessable income for the joining adjustment year includes the difference.

Pre-joining time proportion of total arrangement deductions

701-70(4)    
The amount is worked out using the formula:

Pre-joining time services proportion

×

Total arrangement deductions

where:

pre-joining time services proportion
means the proportion of all things to be done under the arrangement in return for the incurring of the expenditure represented by those things that were done before the joining time.

total arrangement deductions
means the total of the deductions that, ignoring this Part (other than subsection (7) of this section), would be allowable for expenditure incurred by the combining entity under the arrangement for all income years.

Adjustment for disproportionate assessability

701-70(5)    

If the total of the amounts included in a combining entity ' s assessable income in respect of amounts *derived under the arrangement for the joining adjustment year and all earlier income years is not equal to the amount worked out under subsection (6):

(a) if the total is less - the entity ' s assessable income for the joining adjustment year includes the difference; and

(b) if it is more - the entity is entitled to deduct the difference for the joining adjustment year.

Pre-joining time proportion of total arrangement assessable income

701-70(6)    

The amount is worked out using the formula:

Pre-joining time services proportion

×

Total arrangement assessable income

where:

pre-joining time services proportion
has the same meaning as in subsection (4).

total arrangement assessable income
means the total of the amounts that, ignoring this Part (other than subsection (7) of this section), would be included in the combining entity ' s assessable income for amounts *derived by it under the arrangement for all income years.

Modified application of section if combining entities previously members of same group

701-70(7)    
If the combining entities were ^* members of the same ^* consolidated group (whether or not the group to which this section applies) on one or more previous occasions, this section applies in relation to the entities as if:

(a) the only things to be done under the arrangement in return for the incurring of the expenditure were those things to be done after the entities ceased to be members of the same group on the previous occasion or the last of the previous occasions; and

(b) the only deductions allowable to an entity for expenditure incurred by it under the arrangement, and the only amounts included in an entity ' s assessable income in respect of amounts *derived under the arrangement, were:

(i) if the entity was the ^* head company of the consolidated group of which the combining entities were members on the previous occasion or last of the previous occasions - those for the income year, in which the previous occasion or the last of the previous occasions occurred, that are attributable to the period after that occasion and those for all later income years; and

(ii) in any other case - those for the income year that started, or, if section 701-30 applies, the income year that is taken by subsection (3) of that section to have started, when the entity ceased to be a ^* subsidiary member of the group on the previous occasion or the last of the previous occasions and those for all later income years.