ATO Interpretative Decision

ATO ID 2006/96

Income tax

Consolidation: life insurance - tax cost setting amount for membership interests where unit trusts cease to be subsidiary members of a consolidated group
FOI status: may be released

The terms 'virtual PST', 'virtual PST asset' and 'virtual PST life insurance policy' were repealed by First Home Saver Accounts (Consequential Amendment) Act 2008, effective 26 June 2008. They were replaced by the terms 'complying superannuation/FSHA asset pool' 'complying superannuation/FSHA asset' and 'complying superannuation/FSHA life insurance policy' respectively. From this date, references to 'virtual PST life insurance policy liabilities' in the following document can also be replaced with the term 'complying superannuation/FSHA liabilities'.

Status of this decision: Decision Current

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

The head company of a consolidated group is treated as a life insurance company. The consolidated group includes two subsidiary members that are unit trusts. The first unit trust is held under the virtual PST of the head company. The underlying assets of this unit trust are segregated to support virtual PST life insurance policy liabilities. The underlying assets of the second unit trust are not segregated and form part of the ordinary assets of the head company. That unit trust can be said to be held under the 'ordinary component' of the head company.

Each unit trust will issue an additional unit to the other component of the head company's life insurance business resulting in each trust ceasing to be a subsidiary member of the consolidated group.

Will the income tax consequences of each unit trust leaving the consolidated group be determined in accordance with the rules under Division 711 of the Income Tax Assessment 1997 (ITAA 1997)?

Decision

Yes. When each unit trust ceases to be a subsidiary member of the consolidated group, the income tax consequences will be determined in accordance with the rules contained in Division 711 of the ITAA 1997.

The tax cost setting amount for the group's membership interests in each unit trust will be worked out in accordance with section 711-15 of the ITAA 1997.

Facts

Head Co is the head company of a consolidated group. Under subsection 713-505 of the ITAA 1997, Head Co is treated as a life insurance company for the purposes of applying the income tax law.

Investment policies are issued to trustees of superannuation funds and to ordinary (non-superannuation) policyholders. The assets supporting these policies are held through two subsidiary member unit trusts:

•: Trust V is held under the virtual PST. Consistent with Division 320 of the ITAA 1997, the underlying assets of this unit trust are segregated to support virtual PST life insurance policy liabilities, and
•: Trust O is held under the 'ordinary component'. The underlying assets of this unit trust are not segregated and form part of the ordinary assets of Head Co's life insurance business.

It is proposed to issue an additional unit from each unit trust to other 'components' of Head Co for market value, namely:

•: One unit will be issued by Trust V to the 'ordinary component' of Head Co;
•: One unit will be issued by Trust O to the virtual PST of Head Co.

Therefore, in accordance with subsection 713-510(2) of the ITAA 1997, Trust V and Trust O will cease to be subsidiary members of the consolidated group.

Reasons for Decision

In accordance with subsection 701-15(1) of the ITAA 1997:

If the entity ceases to be a *subsidiary member of the group, this section has effect for the head company purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.

Under subsection 701-15(2), the stated object of section 701-15 is:

...to preserve the alignment of the *head company's costs for *membership interests in each entity and its assets by recognising, when an entity ceases to be a *subsidiary member of the group, the cost of those interests as an amount equal to the cost of the entity's assets at that time reduced by the amount of its liabilities.

Accordingly, under subsection 701-15(3) of the ITAA 1997:

For each *membership interest that the *head company of the group holds in an entity that ceases to be a *subsidiary member, the interest's *tax cost is set just before the entity ceases to be a subsidiary member at the interest's *tax cost setting amount.

* denotes a term defined in section 995-1 of the ITAA 1997.

An asset's tax cost setting amount is worked out in accordance with section 701-60 of the ITAA 1997.

In accordance with item 2 in the table in section 701-60 of the ITAA 1997, the tax cost setting amounts for the respective membership interests in the unit trusts that leave the consolidated group will be worked out in accordance with either section 711-15 or section 711-55.

There is no multiple exit in terms of section 711-55 of the ITAA 1997. The trusts cease to be subsidiary members of the consolidated group because of the happening of two separate events. One event is the issue of an additional unit by Trust V which causes Trust V to exit the group. The other event is the issue of an additional unit by Trust O which causes Trust O to exit the group. Each event only causes one trust to exit the consolidated group.

Therefore, as section 711-55 of the ITAA 1997 does not apply, the tax cost setting amount for each membership interest in each unit trust will be worked out in accordance with section 711-15.

Date of decision: 30 March 2006

Year of income: Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   Division 320
   subsection 713-510(2)
   section 701-15
   subsection 701-15(1)
   subsection 701-15(2)
   subsection 701-15(3)
   section 701-60
   Division 711
   section 711-15
   section 713-505
   section 711-55

Keywords
Consolidation
Consolidation - assets
Consolidation - exiting
Cost setting rules
Leaving entity
Life insurance company
Virtual pooled superannuation trusts
Complying superannuation funds

Siebel/TDMS Reference Number: 4965171

Business Line: Public Groups and International

Date of publication: 7 April 2006

ISSN: 1445-2782

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