ATO Interpretative Decision
ATO ID 2003/741
Income Tax
Consolidation - trading stockFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does section 701A-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) apply to a head company in respect of an asset that was an item of trading stock in the hands of the creator and which is transferred to a subsidiary member of the group who holds it as a depreciating asset before the group consolidates?
Decision
No. This section only applies to internally created assets which at the time of creation were depreciating assets. Trading stock is specifically excluded from being a depreciating asset under paragraph 40-30(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
Head Company X forms a consolidated group with its wholly owned subsidiaries, Company B and Company C.
Company B creates and owns an item of trading stock. The asset was transferred to Company C before the group consolidated.
Company C holds it as a depreciating asset at the time the group consolidates.
Reasons for Decision
Subsection 701A-10(1) of the IT(TP)A 1997 only applies to assets that were depreciating assets in the hands of the creator. This is because paragraph 701A-10(1)(a) of the IT(TP)A 1997 refers to 'a depreciating asset'. Subsequent references within the section to 'the asset' obtain their meaning from the first occurring use of the term 'asset' in paragraph 701A-10(1)(a) of the IT(TP)A 1997 being a 'depreciating asset'.
Therefore, paragraph 701A-10(1)(d) of the IT(TP)A 1997 only refers to expenditure incurred in constructing or creating a depreciating asset.
Paragraph 40-30(1)(b) of the ITAA 1997 specifically excludes trading stock from the definition of a depreciating asset. Subsection 40-30(2) of the ITAA 1997 reiterates the exclusion of trading stock from the definition of a depreciating asset. Consequently, trading stock cannot be a depreciating asset and is not considered under section 701A-10 of the IT(TP)A 1997.
In this instance, Company B's internally created asset was not a depreciating asset at the time of creation because of the operation of paragraph 40-30(1)(b) of the ITAA 1997. Accordingly, the conditions in paragraph 701A-10(1)(d) of the IT(TP)A 1997 are not met. Therefore, section 701A-10 of the IT(TP)A 1997 will not apply to the head company.
Date of decision: 11 June 2003Year of income: Year ending 30 June 2003 Year ending 30 June 2004
Legislative References:
Income Tax (Transitional Provisions) Act 1997
section 701A-10
subsection 701A-10(1)
paragraph 701A-10(1)(a)
paragraph 701A-10(1)(d)
section 40-340
paragraph 40-30(1)(b)
subsection 40-30(2) Related ATO Interpretative Decisions
ATO ID 2003/741
Keywords
Adjustable value of a depreciating asset
Adjusted market value of the consolidated group
Consolidation
Consolidation - assets
Consolidation - joining
ISSN: 1445-2782
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