Edited version of private advice

Authorisation Number: 1012613586991

Ruling

Subject: Division 45 and tax consolidation

Question 1

Does section 45-15 of the Income Tax Assessment Act 1997 (ITAA 1997) deem a disposal and acquisition by a former subsidiary of certain depreciating assets for their market value at the time that the beneficial ownership of all the membership interests in the former subsidiary are acquired by another entity that is not in the same wholly-owned group (and not just before that time)?

Answer

Not valid.

Question 2

Does section 45-15 of the ITAA 1997 apply to deem a disposal and acquisition by C Limited of certain depreciating assets for their market value where:

• All of the membership interests in C Limited are acquired by E Limited, a subsidiary member of the D Limited tax consolidated group; and

• The time that the beneficial ownership of the membership interests in C Limited were acquired by the D Limited tax consolidated group is the same as the transfer time that applies in subparagraph 703-33(1)(a)(i) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 April 2011 to 31 March 2012

1 April 2012 to 31 March 2013

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

A Limited (A Co) and B Limited (B Co) entered into an agreement for the 100% acquisition of C Limited (C Co).

C Co is an Australian tax resident company which carries on a leasing business. C Co was wholly owned by A Co prior to the acquisition.

A Co and B Co dealt with each other at arm's length in relation to the acquisition of C Co, and they were not associates of one another at any time during the period when the agreement for the acquisition of C Co was entered into, to the time at which the shares in C Co were transferred. C Co was leasing assets to third parties.

B Co established two Australian resident companies to effect the acquisition of C Co. The two companies were D Limited (D Co) and a wholly owned subsidiary of D Co, E Limited (E Co).

D Co and E Co formed an Australian income tax consolidated group, prior to the C Co formation, D Co and E Co did not carry on a business.

B Co assigned to E Co its rights to acquire the shares in C Co on acquisition C Co joined the D Co Australian income tax consolidated group.

C Co was not a member of an Australian income tax consolidated group for the purposes of Part 3-90 of the ITAA 1997 prior to the acquisition by E Co.

C Co's leases were entered into on or after 22 February 1999.

C Co had previously claimed decline in value in relation to the leased assets in prior income tax returns.

The tax written down value of the lease assets held by C Co at the time of acquisition by E Co was less than the market value of those lease assets at the time of acquisition for the purposes of Division 40 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 45-5.

Income Tax Assessment Act 1997 Section 45-15.

Income Tax Assessment Act 1997 Section 701-10.

Income Tax Assessment Act 1997 Division 705.

Reasons for decision

All legislative references refer to the Income Tax Assessment Act 1997 unless otherwise specified.

Question 1

Summary

Not valid.

Detailed reasoning

Subsection 359-20(2) in Schedule 1 of the Taxation Administration Act 1953 states:

'A *private ruling must identify the entity to whom it applies and specify the relevant *scheme and the relevant provision to which it relates.'

Question 1 does not specify an entity which section 45-15 and the scheme applies to, therefore Question 1 is not valid.

However, due to the similarity of Questions 1 and 2, the response to Question 2 below has addressed the issue in Question 1.

Question 2

Summary

Section 45-15 of the ITAA 1997 deems a disposal and acquisition by C Limited of certain depreciating assets for their market value where:

• All of the membership interests in C Limited are acquired by E Limited, a subsidiary member of the D Limited tax consolidated group; and

• The time that the beneficial ownership of the membership interests in C Limited were acquired by the D Limited tax consolidated group is the same as the transfer time that applies in subparagraph 703-33(1)(a)(i) of the ITAA 1997?

Detailed reasoning

Division 45

Section 45-15 states:

'(1) A company (the former subsidiary) is treated as if it had disposed of *plant, received its *market value for that disposal and immediately reacquired it for the same amount if:

(a) the former subsidiary has deducted or can deduct an amount for the decline in value of the plant; and

(b) the former subsidiary was a *100% subsidiary of another company in a *wholly-owned group at a time when it *held the plant; and

(c) for most of the time when the former subsidiary held the plant, the plant was leased to another entity; and

(d) the main *business of the former subsidiary was to lease assets; and

(e) all or part of the lease period occurred on or after 22 February 1999; and

(f) on or after that day, the direct or indirect beneficial ownership of more than 50% of the *shares in the former subsidiary is acquired by an entity or entities none of which is a member of the wholly-owned group; and

(g) the plant's *written down value at the time of that acquisition is less than its market value at that time.

(2) However, the former subsidiary is not treated as if it had disposed of *plant and reacquired it if the main business of each of the entities that acquired the direct or indirect beneficial ownership of *shares in the former subsidiary is the same as the main business of the *wholly-owned group of which the former subsidiary was a member.

(3) The disposal and reacquisition of the *plant:

(a) is taken to have occurred when that direct or indirect beneficial ownership was acquired; and

(b) is taken not to have affected any lease of the plant.'

If subsection 45-15(1) applies, the subsidiary is taken to have disposed of the asset and reacquired it at the acquisition time for the asset's market value, and the excess of the market value over the written down value of the asset is assessable income of the subsidiary (see section 45-5).

The disposal and the reacquisition of the leased asset is taken to have happened at the time when the beneficial ownership is acquired by the acquiring entity (paragraphs 45-15(3)(a) and 45-15(1)(f)).

C Co primarily carried on a business of leasing assets to third parties.

A Co and B Co dealt with each other at arm's length in relation to the acquisition of C Co, and they were not associates of one another at any time during the period when the agreement for the acquisition of C Co was entered into, to the time at which the shares in C Co were transferred.

C Co's leases were entered into on or after 22 February 1999. C Co had previously claimed decline in value in relation to the leased assets in prior income tax returns. On acquisition the written down value of the leased assets were less than its market value.

Therefore subsection 45-15(1) applies to C Co.

Division 45 and the tax consolidation regime

The objectives of Division 45 and the tax cost setting rules in Part 3-90 are different.

The objective of Division 45, being an integrity provision, is to prevent tax being avoided through the disposal of a leased plant where amounts have been deducted for decline in value of the plant irrespective of whether it is the sale of the plant or the sale of the entity that holds the plant (see objectives of Division 45 in section 45-1).

On the other hand, the objective of the entry tax cost setting rules in section 701-10 (and Division 705) is to recognise the cost to the head company of acquiring the underlying assets of a joining entity and to prevent duplication of gains and losses (see subsection 701-10(3) and objects in section 700-10).

Under the exit cost setting rules in Division 711, the tax cost of the membership interests of a leaving entity reflects the tax cost of its net assets. This ensures that the gain or loss on the sale of an asset, if disposed of separately is the same as when the membership interests in the entity that holds the asset is disposed of.

When do the two provisions apply?

Both provisions apply at the time when the beneficial ownership changes (section 45-15 and Division 705). This suggests that both provisions apply simultaneously.

In Australian Pipeline Limited as Responsible Entity for the Australian Pipeline Trust v Commissioner of Taxation [2013] FCA 1372 at paragraph 84, Justice Robertson reasons that when things happen simultaneously in tax consolidation there must be a logical sequence of events that would otherwise occur simultaneously.

In Handbury Holdings Pty Ltd v FC of T [2009] FCAFC 141 and Handbury Holdings Pty Ltd v Commissioner of Taxation [2008] FCA 1787, in the context of 'at leaving time' found 'at' to be not very precise and could be interpreted as 'just before leaving time' in relation to Division 711.

Even though paragraph 45-15(3)(a) states that Division 45 applies when the beneficial ownership is acquired, if the objective of Division 45 which is to recoup any over claimed decline in value claims, is to be achieved, Division 45 must apply to C Co just before the change in the beneficial ownership or just before joining time.

Similarly, if the objectives of the cost setting rules are to be achieved, section 701-10 must apply to D Co, in relation to the joining of C Co, just after the joining time.

TR 2004/13, at paragraphs 32 and 33, explains when assets are recognised for tax cost setting purposes:

'32. Assets are recognised at the joining time for tax cost setting purposes as if the single entity rule was not in effect at that time to cause the assets of the joining entity to become the assets of the head company. This is made clear by subsection 701-10(2) which provides:

Assets to which section applies

This section applies in relation to each asset that would be an asset of the entity at the time it becomes a *subsidiary member of the group, assuming that subsection 701-1(1) (the single entity rule) did not apply.

[Subsection 701-10(2) of the ITAA 1997 was amended by Tax Laws Amendment (2004 Measures No. 2) Act 2004 which received Royal Assent on 25 June 2004.]

33. Assets that are recognised for the income tax purposes of the head company become assets of the head company while they are in the consolidated group. Such assets include trading stock, revenue assets, traditional and qualifying securities, depreciating assets, CGT assets and knowledge and information assets. The mechanism provided in the legislation is that things of economic value that would be recognised in commerce and business as assets of the joining entity have their tax cost set under section 701-10. The income tax effect of setting the costs of assets is set out in section 701-55 of the ITAA 1997.'

The single entity rule applies for any period an entity is a subsidiary member of a consolidated group; that is after C Co becomes a subsidiary member of the D Co tax consolidated group. Therefore, the need to switch off the single entity rule suggests that the cost setting rules apply just after the joining time.

Therefore subsection 45-15(1) will apply to C Co where all of the membership interests in C Co are acquired by E Co (a subsidiary member of the D Co tax consolidated group) and the time that the beneficial ownership of the membership interests in C Co were acquired by the D Co tax consolidated group is the same as the transfer time that applies in subparagraph 703-33(1)(a)(i).

ATO ID 2006/338

Australian Taxation Office Interpretative Decision (ATO ID) 2006/338 considers a scenario where a consolidated group is acquiring a subsidiary member of another consolidated group, and the subsidiary member legally owns a leased asset that is subject to Division 45. In that scenario, a subsidiary exits one consolidated group and immediately joins another. In this ruling C Co does not exit a tax consolidated group prior to joining the D Co tax consolidated group. Hence, C Co cannot rely on ATO ID 2006/338 given the transaction does not reflect the facts in ATO ID 2006/338.

Main business exemption

Subsection 45-15(2) provides an exemption from Division 45 where main business of each of the entities that acquired the direct or indirect beneficial ownership of shares in the former subsidiary is the same as the main business of the wholly-owned group of which the former subsidiary was a member. 

The test in subsection 45-15(2) is related to paragraph 45-15(1)(f) as to whether the direct or indirect beneficial ownership of more than 50% of the shares in the former subsidiary is acquired by an entity or entities none of which is a member of the paragraph 45-15(1)(b) wholly owned group. The shares that are acquired are those in the subsidiary and not of the parent, so the purchaser acquires the direct beneficial ownership of shares. An acquisition of the indirect beneficial ownership of shares in the subsidiary would occur where the purchaser entity acquired shares in the parent of the subsidiary.

As the test in subsection 45-15(2) is applied to either direct or indirect beneficial ownership, and there is only an acquisition of 100% of the direct ownership of shares and there is no indirect acquisition of shares in the former subsidiary, subsection 45-15(2) can only apply to the entity that acquires the direct beneficial ownership.

Subsection 45-15(2) requires that the main business of each entity that acquired a direct beneficial ownership of shares in the former subsidiary be the same as the main business of the wholly owned group of which the former subsidiary was a member. The main business of the purchaser E Co must therefore be the same as the main business of the wholly owned (but not consolidated) group being A Co for the test to be satisfied. 

As E Co is already part of a tax consolidated group, the main business of the purchaser for subsection 45-15(2) purposes would be that of the D Co rather than it having a separate business.

It has been advised that neither D Co nor E Co carried on a business prior to the C Co transaction. Therefore subsection 45-15(2) is not satisfied.

As subsection 45-15(2) is not satisfied, section 45-15 applies to C Co.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).