ATO Interpretative Decision
ATO ID 2004/182
Income Tax
Consolidation: effect of 'not at arm's length' transactions on modified market valueFOI status: may be released
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History: this ATO ID was amended on 26 March 2004. Material has been relocated within the document in order to improve clarity. This ATO ID has been amended to remove reference to ATO ID 2004/183 which has been withdrawn. A reference to TR 2004/9 has been added which covers the issue in the withdrawn ATO ID.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the purpose of a non-arm's length transaction (that is an event described in paragraph 707-325(4)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)) relevant in determining if a reduction is required to be made to the modified market value (MMV) of the entity under subsection 707-325(2) of the ITAA 1997?
Decision
No. The purpose of a non-arm's length transaction is not relevant in determining if a reduction is required to be made to the MMV of the entity under subsection 707-325(2) of the ITAA 1997.
Facts
After 8 December 2000 (and in the four years before the joining time) Entity B is involved in a non-arm's length transaction.
Entity B becomes a member of a consolidated group at a particular time (the joining time) and as at that time, the MMV is required to be determined for the purpose of calculating the available fraction for a bundle of losses.
As a result of the non-arms' length transaction, Entity B's MMV at the joining time is greater than it would have been had the transaction not taken place.
Reasons for Decision
The basic rule for working out the MMV of an entity that becomes a member of a consolidated group at a particular time is contained in subsection 707-325(1) of the ITAA 1997. It provides that the MMV of an entity at a particular time is the market value of the entity at that time based on certain assumptions (including the assumptions that the entity had no losses of any sort and the balance of its franking account at that time was nil).
Subsection 707-325(2) of the ITAA 1997 provides that if:
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- there are one or more events described in subsection 707-325(4) of the ITAA 1997;
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- that occurred in the four years before the time an entity becomes a member of a consolidated group;
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- and the MMV of the entity calculated under subsection 707-325(1) of the ITAA 1997 exceeds what it would have been if none of those events occurred,
then the MMV worked out under subsection 707-325(1) of the ITAA 1997 is reduced by the amount worked out under subsection 707-325(3) of the ITAA 1997.
Subsection 707-325(4) of the ITAA 1997 contains the events that are referred to in subsection 707-325(2) of the ITAA 1997. Paragraph 707-325(4)(b) of the ITAA 1997 identifies one of the events as a transaction that did not take place at arm's length that involved an entity or an associate of the entity (or the trustee of the entity, if the entity is a trust) at the time of the transaction.
If an event described in subsection 707-325(4) of the ITAA 1997 occurs before 9 December 2000, Section 707-329 of the Income Tax (Transitional Provisions) Act 1997 requires that event be disregarded in calculating the MMV of an entity.
Therefore, if there has been a transaction that did not take place at arm's length that involved an entity:
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- after 8 December 2000 and within four years of that entity joining a consolidated group; and
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- the MMV of the entity is greater than what it would have been had that transaction not occurred,
then a reduction is required to be made (as calculated under subsection 707-325(3) of the ITAA 1997) to the MMV of the entity.
The requirement for a reduction to be made to the MMV of an entity under subsection 707-325(2) of the ITAA 1997 (that is, as a result of an event, being a non-arm's length transaction that involved the entity) is not conditional on any purpose in respect of that event.
As all of the conditions in subsection 707-325(2) of the ITAA 1997 exist, there will need to be a reduction made to the MMV of Entity B. The reduction will be calculated under subsection 707-325(3) of the ITAA 1997.
Date of decision: 13 February 2004Year of income: Income year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 707-325
subsection 707-325(1)
subsection 707-325(2)
subsection 707-325(3)
subsection 707-325(4)
paragraph 707-325(4)(b)
section 707-329
Related Public Rulings (including Determinations)
Taxation Ruling
TR
2004/9
Keywords
Available fraction
Bundle of losses
Consolidation - event
Consolidation - losses
Consolidation - non-arm's length transaction
Consolidation - reduction
Joining entity
Modified market value
Transferred losses
ISSN: 1445-2782