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Edited version of private advice
Authorisation Number: 1012653484192
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This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.
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Ruling
Subject: Cost Base
Question 1
Where Company B subscribed for shares in its wholly owned subsidiary Company S, is the excess amount included in the cost base of the existing shares as a fourth element pursuant to subsections 110-25(5) and 112-30(1A)?
Answer
Yes.
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
Background
1. Company S is a wholly-owned subsidiary of Company B.
2. Company B funded Company S's business activities by way of a series of subscriptions for shares in Company S.
3. The purpose of the subscriptions for shares was to allow Company S to continue its operating activities.
4. Company B and Company S did not deal at arm's length in connection with the subscription for shares by Company B.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 110-25(5)
Income Tax Assessment Act 1997 Subsection 112-30(1A)
Reasons for decision
Summary
Where Company B subscribed for shares in its wholly owned subsidiary Company S, the excess amount is included in the cost base of the existing shares as a fourth element pursuant to subsections 110-25(5) and 112-30(1A).
Detailed reasoning
Cost base
The determination of the cost base of a CGT asset is to be found in Subdivision 110-A.
Subsection 110-25(1) states that:
The cost base of a *CGT asset consists of 5 elements.
First Element
Subsection 110-25(2) provides that:
The first element is the total of:
(a) the money you paid, or are required to pay, in respect of *acquiring it; and
(b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).
Fourth Element
Subsection 110-25(5) provides that:
The fourth element is capital expenditure you incurred:
(a) the purpose or the expected effect of which is to increase or preserve the asset's value; or
(b) that relates to installing or moving the asset.
However, the cost base rules in Subdivision 110-A can be modified in certain situations.
Modification of the cost base rules
Division 112 outlines the situations that may modify the rules about the cost base and reduced cost base in Subdivision 110-A. For example, section 112-20 deals with the market value substitution rule, whilst section 112-30 deals with the apportionment rules.
Section 112-20 - Market value substitution rule
Subsection 112-20(1) provides that:
“The first element of your *cost base and *reduced cost base of a *CGT asset you *acquire from another entity is, its *market value (at the time of acquisition) if:
(a) you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from:
(i) *CGT event D1 happening; or
(ii) another entity doing something that did not constitute a CGT event happening; or
(b) some or all of the expenditure you incurred to acquire it cannot be valued; or
(c) you did not deal at *arm's length with the other entity in connection with the acquisition.
The expenditure can include giving property: see section 103-5.
Company B did not deal at arm's length with Company S in connection with the subscriptions for shares (paragraph 112-20(1)(c)). Consequently, the first element of Company B's cost base and reduced cost base in respect of the shares in Company S is its market value per subsection 112-20(1).
Apportionment rules
First Element
Subsection 112-30(1) of the ITAA 1997 provides that:
“If you *acquire a *CGT asset because of a transaction and only part of the expenditure you incurred under the transaction relates to the acquisition of the asset, the first element of your *cost base and *reduced cost base of the asset is that part of the expenditure that is reasonably attributable to the acquisition of the asset.”
In this instance, only part of Company B's expenditure in respect of each subscription is related to the acquisition of shares in Company S. It follows that the first element of Company B's cost base and reduced cost base in the shares in Company S is that part of its expenditure which is ‘reasonably attributable' to the acquisition of the shares in Company S.
Other Four Elements
Subsection 112-30(1A) of the ITAA 1997 states that:
“If you incur expenditure and only part of it relates to another element of the *cost base or *reduced cost base of a *CGT asset, that element includes that part of the expenditure that is reasonably attributable to that element.”
As a reminder, subsection 110-25(5) broadly provides that the fourth element is capital expenditure you incurred for the purpose or the expected effect of which is to increase or preserve the asset's value. Applied to the facts, the purpose or intention of Company B in paying the excess amount was to increase or preserve the value attributable to the Company S shares it owned at the time of payment.
Accordingly, the excess amount is considered to be ‘reasonably attributable' to the fourth element of the cost base or the reduced cost base of the existing shares (through the operation of subsections 110-25(5) and 112-30(1A)).
Conclusion
Based on the aforementioned analysis, it is concluded that where Company B subscribed for shares in its wholly owned subsidiary Company S, the excess amount could be included in the cost base of the existing shares as a fourth element pursuant to subsections 110-25(5) and 112-30(1A).
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