ATO Interpretative Decision

ATO ID 2004/183

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the purpose of an injection of capital (that is an event described in paragraph 707-325(4)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) ) into an entity 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 the injection of capital into an entity 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) there was an injection of capital into Entity A, which is not disregarded under subsection 707-325(5) of the ITAA 1997.

Entity A becomes a member of a consolidated group at a particular time (the joining time).

The result of the capital injection is that Entity A's MMV at the joining time is greater than it would have been had the injection not occurred.

Reasons for Decision

At the joining time, the MMV of Entity A is determined for the purpose of calculating an available fraction for a bundle of losses.

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; and

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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)(a) of the ITAA 1997 identifies one of the events as an injection of capital into 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 injection.

If an event described in subsection 707-325(4) of the ITAA 1997 occurs before 9 December 2000, then 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 an injection of capital into an entity, which is not specifically excluded by subsection 707-325(5) of the ITAA 1997, that occurs:

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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 injection 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 an injection of capital into 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 A. The reduction will be calculated under subsection 707-325(3) of the ITAA 1997.

Year 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)
   subsection 707-325(5)
   paragraph 707-325(4)(b)

Related ATO Interpretative Decisions
ATO ID 2004/182

Keywords
Available fraction
Bundle of losses
Consolidation - event
Consolidation - reduction
Injection of capital
Joining entity
Modified market value
Transferred losses

Business Line:  Consolidation Centre of Expertise

Date of publication:  27 February 2004

ISSN: 1445-2782