Edited version of your written advice

Authorisation Number: 1051260514593

Date of advice: 15 August 2017

Ruling

Subject: Application of Division 57 of Schedule 2D to the ITAA 1936

Question 1

For the purposes of Division 57 of Schedule 2D to the Income Tax Assessment Act 1936 (ITAA 1936), is XYZ Pty Ltd a “transition taxpayer” under section 57-5 for the specified year of income?

Answer

Yes

Question 2

Does Subdivision 57-G of Schedule 2D to the ITAA 1936 apply to long service leave payments and annual leave payments made by XYZ Pty Ltd to its employees for the specified year of income and following income years?

Answer

Yes

Question 3

Does Subdivision 57-G of Schedule 2D to the ITAA 1936 apply to long service leave payments and annual leave payments made to employees of ABC Pty Ltd or any other subsidiary member of the ABC tax consolidated group, apart from XYZ Pty Ltd, for the specified year of income and following income years?

Answer

No

Question 4

For the purposes of section 57-60 of Schedule 2D to the ITAA 1936, is the “(pre-transition time service) leave amount” of XYZ Pty Ltd worked out at the “transition time” the sum of the amounts specified in paragraphs 57-60(5)(a) and (b)?

Answer

Yes

Question 5

For the purposes of section 57-60 of Schedule 2D to the ITAA 1936, is any deduction disallowed to ABC determined under subsections 57-60(2) and (3) based on payments made by XYZ Pty Ltd to relevant employees of XYZ Pty Ltd?

Answer

Yes

This ruling applies for the following periods:

A specified period

The scheme commences on:

A specified date

Background

● ABC is the head company of the ABC income tax consolidated group (the ABC consolidated group).

● DEF Pty Ltd is a subsidiary member of the ABC consolidated group.

Acquisition of XYZ Pty Ltd

● On a specified date, DEF Pty Ltd acquired 100% of the issued shares of XYZ Pty Ltd.

● Prior to the specified date, XYZ Pty Ltd was a tax exempt entity. On the same specified date, XYZ Pty Ltd became a member of the ABC consolidated group.

● At the specified date, XYZ Pty Ltd had employees with accrued leave balance obligations.

● At a time after the specified date, XYZ Pty Ltd made an election in accordance with subsection 57-60(6) in Schedule 2D to the ITAA 1936 that paragraph 57-60(5)(b) applies to determine its “(pre-transition time service) leave amount”.

Relevant legislative provisions

Income Tax Assessment Act 1936; Division 1AB

Income Tax Assessment Act 1936; Section 24AO

Income Tax Assessment Act 1936; Subsection 51(1)

Income Tax Assessment Act 1936, Division 57 of Schedule 2D

Income Tax Assessment Act 1936; Subdivision 57-A of Schedule 2D

Income Tax Assessment Act 1936; Section 57-5 of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-5(a) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-5(b) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-5(c) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-5(d) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-5(e) of Schedule 2D

Income Tax Assessment Act 1936; Subdivision 57-B of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-10(1) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-10(2) of Schedule 2D

Income Tax Assessment Act 1936; Subdivision 57-G of Schedule 2D

Income Tax Assessment Act 1936; Section 57-60 of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-60(1) of Schedule 2D

Income Tax Assessment Act 1936; subsection 57-60(2) of Schedule 2D

Income Tax Assessment Act 1936; subsection 57-60(3) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-60(4) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-60(5) of Schedule 2D

Income Tax Assessment Act 1936; Paragraph 57-60(5)(a) of Schedule 2D

Income Tax Assessment Act 1936; Paragraph 57-60(5)(b) of Schedule 2D

Income Tax Assessment Act 1936; Subsection 57-60(6) of Schedule 2D

Income Tax Assessment Act 1997; Section 8-1

Income Tax Assessment Act 1997; Division 58

Income Tax Assessment Act 1997; Part 3-90

Income Tax Assessment Act 1997; Section 104-10

Income Tax Assessment Act 1997; Division 700

Income Tax Assessment Act 1997; Section 701-1

Income Tax Assessment Act 1997; Subsection 700-1(1)

Income Tax Assessment Act 1997; Section 701-5

Income Tax Assessment Act 1997; Subdivision 715-V

Income Tax Assessment Act 1997; Section 715-900

Income Tax Assessment Act 1997; Subsection 715-900(1)

Income Tax Assessment Act 1997; Subsection 715-900(2)

Reasons for decision

All references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated.

Question 1

Summary

For the purposes of Division 57 of Schedule 2D to the Income Tax Assessment Act 1936 (ITAA 1936) XYZ Pty Ltd is a “transition taxpayer” in accordance with section 57-5. The “transition time” in accordance with subsection 57-5(d) is the specified date when XYZ Pty Ltd is acquired by DEF Pty Ltd and at the same time joins the ABC consolidated group. The “transition time” occurred in the specified year of income which is the “transition year” under subsection 57-5(e). The “transition time” is the time when XYZ Pty Ltd’s income becomes to any extent assessable income, which occurs when XYZ Pty Ltd is acquired by DEF Pty Ltd and becomes a member of the ABC consolidated group. Just before joining the ABC consolidated group, XYZ Pty Ltd was a State / Territory Body (STB) within the meaning of section 24AO of the ITAA 1936, meaning all of the income of XYZ Pty Ltd was previously exempt from income tax (subsection 57-5(a)).

Section 715-900 of the Income Tax Assessment Act 1997 (ITAA 1997) was specifically enacted to ensure that where an entity ceases to be tax exempt at the same time as it becomes a subsidiary member of (or joins) a consolidated group, the provisions in Division 57 of Schedule 2D to the Act and Division 58 of the ITAA 1997 may apply to it. It does so by providing that the “transition time” is taken to be just before the joining time, thereby ensuring Division 57 and Division 58 may apply. Division 57 of Schedule 2D to the ITAA 1936 and Division 58 of the ITAA 1997 have effect as if the transition taxpayer’s ordinary income or statutory income had become to some extent assessable income just before the joining time.

Detailed reasoning

Division 57 of Schedule 2D to the ITAA 1936 is about the income tax treatment of a taxpayer whose income ceases to be wholly exempt. Broadly, income, outgoings, gains and losses are attributed to the periods before and after the loss of full exemption.

Subdivision 57-A of Schedule 2D to the ITAA 1936 provides (at section 57-5) that if:

a) at a particular time, all of the income of a taxpayer is exempt from income tax, and

b) immediately after that time, the taxpayer’s income becomes to any extent assessable income;

then:

c) the taxpayer is a transition taxpayer; and

d) the time when the taxpayer’s income becomes to any extent assessable is the transition time; and

e) the year of income in which the transition time occurs is the transition year for the taxpayer.

Subdivision 57-B of Schedule 2D to the ITAA 1936 provides (at subsection 57-10(1)) that if:

(a) at the transition time, the transition taxpayer performs particular functions or carries on particular activities; and

(b) during any period before the transition taxpayer first began to perform the functions or carry on the activities, an exempt government entity performed those same functions or carried on those same activities; and

(c) at the end of the period, responsibility for performing the functions or carrying on the activities was transferred, either directly or through one or more other exempt government entities, to the transition taxpayer;

this Division applies as if, during that period, anything done by or to the exempt government entity in performing those functions or carrying on those activities had instead been done by or to the transition taxpayer.

Subsection 57-10(2) then provides that:

An exempt government entity is:

(a) the Commonwealth, a State or a Territory; or

(b) an STB, within the meaning of Division 1AB of Part III, that is exempt from tax under that Division.

Division 1AB of the ITAA 1936 provides that certain State/Territory bodies (STB) are exempt from income tax. Specifically, Section 24AO of the Act provides that a body is an STB if it is a company limited solely by shares; and all the shares in it are beneficially owned by one or more government entities. XYZ Pty Ltd was an STB within the meaning of section 24AO. Therefore, all of its income was exempt from income tax.

On a specified date, DEF Pty Ltd acquired 100% of the issued shares in XYZ Pty Ltd. At that time, XYZ Pty Ltd joined the ABC consolidated group. Part 3-90 of the ITAA 1997 allows a consolidated group to be treated as a single entity for income tax purposes. Therefore, upon joining the ABC consolidated group, XYZ Pty Ltd’s income will become assessable meeting the conditions under subsection 57-5(b) (above).

On this basis, XYZ Pty Ltd satisfies all of the requirements of subdivisions 57-A and 57-B of Schedule 2D of the ITAA 1936.

Notwithstanding the above, subdivision 715-V of the ITAA 1997 has effect where an entity ceases to be exempt from income tax on becoming a subsidiary member of a consolidated group. Specifically, Subsection 715-900(1) states that this section has effect if:

(a) an entity becomes a subsidiary member of a consolidated group at a time (the joining time); and

(b) the entity's ordinary income and statutory income were not (to any extent) assessable income just before the joining time.

Subsection 715-900(2) then provides that:

Division 57 in Schedule 2D to the Income Tax Assessment Act 1936 and Division 58 of this Act have effect as if the entity's ordinary income or statutory income had become to some extent assessable income just before the joining time.

XYZ Pty Ltd became a subsidiary member of the ABC consolidated group on the specified date that is at the joining time. XYZ Pty Ltd’s ordinary and statutory income was not to any extent assessable prior to that joining time. It follows that Division 57 of Schedule 2D to the ITAA 1936 and Division 58 of the ITAA 1997 will have effect as if XYZ Pty Ltd’s ordinary income or statutory income had become to some extent assessable income just before the joining time in accordance with subsection 715-900 of the ITAA 1997.

The Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004 (Cth) gives further background to the intent of section 715-900. At paragraphs 2.219 to 2.224 the Explanatory Memorandum provides detail around the operation of section 715-900 when the privatised asset provisions are triggered (being Division 57 of Schedule 2D to the ITAA 1936 and Division 58 of the ITAA 1997). It provides that:

2.219 When an entity, ceases to be a tax exempt entity because it joins a consolidated group (and therefore has its activities subject to tax as a result of being treated as part of the head company of the consolidated group under the single entity rule), then it is necessary to ensure that Division 58 and Division 57 of Schedule 2D to the ITAA 1936 apply. To ensure that those Divisions operate in these circumstances section 715-900 provides that the transition time (being the time that the entity ceases to be tax exempt) is taken to have occurred immediately before the joining time.

2.220 Section 715-900 ensures that entities which are subject to the privatised asset provisions as a result of a simultaneous transition and joining time are treated in the same manner as entities that join a consolidated group in circumstances where there has been a delay between the transition and joining times.

2.223 …parts of Division 57 of Schedule 2D to the ITAA 1936 remain operative and do things other than limit the cost of depreciating assets. Therefore, section 715-900 triggers these provisions…

2.224 Broadly, Division 57 ensures that gains and losses, expenditure and receipts that relate to the period after the transition are appropriately taxed. For example, they determine what income is derived by the transition taxpayer at or after the transition time for services rendered by it, for goods provided by it or for any other things done by it before the transition time is treated as having been derived before the transition time.

In effect, Section 715-900 was specifically enacted to ensure that where an entity ceases to be tax exempt at the same time as it becomes a subsidiary member of (or joins) a consolidated group, the provisions in Division 57 of Schedule 2D to the ITAA 1936 and Division 58 of the ITAA 1997 may apply to it. It does so by providing that the “transition time” is taken to have occurred just before the joining time, thereby ensuring Division 57 and Division 58 of the ITAA 1997 may apply.

On this basis, for the purposes of Division 57 of Schedule 2D to the ITAA 1936, XYZ Pty Ltd is a “transition taxpayer” for the specified year of income. XYZ Pty Ltd’s “transition time” under subsection 57-5(d) is a specified date which occurs in a specified year, that is, the “transition year” under subsection 57-5(e). The “transition time” is taken to have occurred (for the purposes of Division 57 and Division 58 of the ITAA 1997) as if XYZ Pty Ltd’s ordinary or statutory income had become to some extent assessable income just before the joining time which is also the specified date in accordance with section 715-900 of the ITAA 1997.

Note

XYZ Pty Ltd will continue to be the entity that is the “transition taxpayer” for the purposes of Division 57 in relevant future income years.

Question 2

Summary

Yes. Subdivision 57-G of Schedule 2D to the ITAA 1936 applies to long service leave payments and annual leave payments to a person who was an employee of XYZ Pty Ltd (the “transition taxpayer”) at any time before or after the “transition time” in accordance with section 57-60. This is because XYZ Pty Ltd is the “transition taxpayer” for the purposes of Division 57 of Schedule 2D to the ITAA 1936, in accordance with Subdivisions 57-A and 57-B (as above).

Specifically section 57-60 denies certain deductions that would otherwise be allowable to XYZ Pty Ltd (the transition taxpayer) in respect of long service leave payments or annual leave payments to a person who was an employee of XYZ Pty Ltd (the transition taxpayer) at any time before or after the transition time. The “transition time” is the specified date (as above).

Detailed reasoning

Subsection 57-60(1) provides:

This section applies to a deduction otherwise allowable to the transition taxpayer for a year of income under subsection 51(1) of this Act or section 8-1 (about general deductions) of the Income Tax Assessment Act 1997 in respect of long service leave payments or annual leave payments to a person who was an employee of the transition taxpayer at any time before or after the transition time.

Section 57-60 is broadly about the denial of certain deductions in respect of long service leave payments or annual leave payments to a person who was an employee of the transition taxpayer (XYZ Pty Ltd) at any time before or after the transition time.

As established in Question 1, when DEF Pty Ltd acquired 100% of the issued shares in XYZ Pty Ltd, XYZ Pty Ltd ceased to be an STB and at the same time joined the ABC consolidated group. For the purposes of Division 57, XYZ Pty Ltd is the “transition taxpayer” (see Question 1 Summary above). Accordingly, the application of section 57-60 in respect of long service leave payments or annual leave payments to XYZ Pty Ltd’s employees needs to be considered.

As XYZ Pty Ltd joined the ABC consolidated group upon ceasing to be an STB; it is necessary to consider the interaction between Subdivision 57-G and the consolidation rules. Consolidated groups are subject to the provisions contained in Division 700 of the ITAA 1997. This includes the single entity rule in section 701-1:

Single entity rule (SER):

1) If an entity is a ^*subsidiary member of a ^*consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the ^*head company of the group, rather than separate entities, during that period.

Head company core purposes:

2) The purposes covered by this subsection (the head company core purposes) are:

a) Working out the amount of the head company’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

b) Working out the amount of the head company’s loss (if any) of a particular sort for any such income year.

In effect, the SER applies such that the actions, transactions, assets and liabilities of a subsidiary member are treated to be as those of the head company. This is further supported by paragraphs 7 and 8 of Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997:

7. For income tax purposes the SER deems subsidiary members to be parts of the Head Company rather than separate entities during the period that they are members of the consolidated group.

8. As a consequence, the SER has the effect that:

a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra group assets) while the subsidiary remains a member of the consolidated group;

c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and

d) dealings that are solely between members of the same consolidated group (intra- group dealings) will not result in ordinary or statutory income or a deduction to the group’s head company.

Further, section 701-5 of the ITAA 1997 contains the entry history rule, which provides:

Entry history rule:

For the head company core purposes in relation to the period after the entity becomes a subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the head company.

In effect, the application of the entry history rule is that upon an entity joining a consolidated group; things that entity did before becoming a subsidiary may give rise to tax consequences for the head company; despite the entity losing its separate identity.

On face value, the effect of applying both the SER and entry history rule to the facts (where Subdivision 57-G also applies) is that ABC (as head company of the consolidated group) is treated as having the liability for long service leave payments and annual leave payments in relation to XYZ Pty Ltd’ employees at any time before or after the transition time.

TR 2004/11, at paragraphs 26-28, supports that when interpreting the SER, the purpose of the particular transaction and perspective of the relevant taxpayer should be considered:

26. With the single entity rule Parliament has expressed its intended policy outcome…by equating a consolidated group with a single entity. A necessary feature of this drafting approach is the omission of statutory mechanisms for effecting the policy for each provision of the income tax law…the fundamental object is to ascertain the legislative intent by reference to the language of the instrument as a whole: Cooper Brookes (Wollongong) v FCT (1981) 35 ALR 151 at 169-170 per Mason and Wilson JJ.

27. Accordingly, relying on these established approaches to statutory interpretation…interactions with other provisions in the Income Tax Assessment Acts need to be taken into account in applying the SER….

28. Rather, when considering transactions or dealings the correct use of the rule is to indicate when, and for what purposes, transactions or parts of transactions are to be regarded or disregarded in determining the income tax position of the head company of the consolidated group…the way the rule applies will depend on the purpose for which a transaction is being considered and the perspective of the relevant taxpayer.

Further, in Channel Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (2015) FCAFC 57, Pagone J found that:

119. The statutory direction in s 701-1(1) is not that a subsidiary of a consolidated group is to be treated as non-existent, or that it ceases to be a taxpayer or that it does not…incur losses or outgoings. Division 701 does not alter the points of derivation or incurrence (or other such relevant fiscal events) which arise by force of the 1997 Act or of the 1936 Act or by general principle.

In applying the principles in TR 2004/11 and the findings of Pagone J, Division 701 of the ITAA 1997 will not alter the application of Subdivision 57-G with regard to ABC Pty Ltd and in particular its subsidiary member (and transition taxpayer) XYZ Pty Ltd, including the attribution of relevant outgoings to the periods before and after XYZ Pty Ltd ceased to be an STB. Rather, upon considering the interaction of the single entity and entry history rules with Division 57 in this context, TR 2004/11 indicates it is necessary to consider the purpose and perspective of the relevant taxpayer. Payments for long service leave or annual leave to XYZ Pty Ltd’s employees pre transition time can be taken to have been made by XYZ Pty Ltd at that time due to the combined operation of the SER and entry history rule with Subdivision 715-V of the ITAA 1997 and Division 57.

Examples of where a subsidiary member of a consolidated group is recognised to effect the policy for a specific income tax provision include section 104-10 of the ITAA 1997; where CGT event A1 is taken to have happened to the head company of a group where a contract is made to sell shares in a subsidiary to an entity outside the group, despite the application of the single entity rule meaning the shares are otherwise not recognised. In applying this principle to the facts on hand, XYZ Pty Ltd can be recognised as a subsidiary entity and as the transition taxpayer for the purposes of Subdivision 57-G regardless of the single entity and entry history rules.

As a result of applying this approach, Subdivision 57-G applies to XYZ Pty Ltd to deny deductions for long service leave payments or annual leave payments to XYZ Pty Ltd’s employees at any time before or after the transition time, up to relevant thresholds (discussed in Question 3 below), notwithstanding that ABC (as head company of the consolidated group) is treated as having the relevant liability. ABC is not taken to be a transition taxpayer; rather XYZ Pty Ltd is isolated as the transition taxpayer to affect the intent and purpose of these provisions, notwithstanding the broad application of the single entity and entry history rules in the specified year.

Note

XYZ Pty Ltd will continue to be the entity that is the “transition taxpayer” for the purposes of Division 57 in relevant future income years.

Question 3

Summary

No, Subdivision 57-G of Schedule 2D to the ITAA 1936 does not apply to long service leave payments or annual leave payments to employees of ABC or any other subsidiary member of the ABC consolidated group, apart from XYZ Pty Ltd. This is because XYZ Pty Ltd is the “transition taxpayer” for the purposes of Division 57 and the provision applies only with regard to the “transition time” of the “transition taxpayer” which is XYZ Pty Ltd. XYZ Pty Ltd is isolated as the entity that is the “transition taxpayer” and, for practical purposes, recognised as an isolated entity for the purposes of applying Subdivision 57-G.

Detailed reasoning

As above

Question 4

Summary

Yes, for the purposes of section 57-60 of Schedule 2D to the ITAA 1936, the “(pre-transition time service) leave amount” of XYZ Pty Ltd worked out at the “transition time” is the sum of the amounts specified in paragraphs 57-60(5)(a) and 57- 60(5)(b). This is because the relevant election/s have been made in accordance with subsection 57-60(6), meaning that the (pre-transition time service) leave amount will be calculated in accordance with paragraphs 57-60(5)(a) and (b).

Detailed reasoning

This section applies to a deduction otherwise allowable to the transition taxpayer for a year of income under subsection 51(1) of this Act or section 8-1 (about general deductions) of the Income Tax Assessment Act 1997 in respect of long service leave payments or annual leave payments to a person who was an employee of the transition taxpayer at any time before or after the transition time.

Further, subsection 57-60(2) applies such that the deduction is only allowable if the sum of all deductions exceeds the leave threshold amount. Subsection 57-60(3) then applies to limit any allowable deduction as follows:

If the sum is greater than the leave threshold amount, so much of the deduction as is worked out using the following formula is not allowable:

Accordingly, in order to determine a deduction under this section for ABC Pty Ltd (as head company of the ABC consolidated group) in relation to any pre transition time accrued leave entitlements of XYZ Pty Ltd, the leave threshold amount must be determined for a year of income.

Subsection 57-60(4) provides the leave threshold amount for a year of income is:

a) if the year of income is the transition year - the (pre-transition time service) leave amount (see subsection (5)) of the transition taxpayer; or

b) in any other case - that amount as reduced by the total amount of deductions to which this section applies that, because of subsection (2) or (3), have not been allowable to the transition taxpayer for all previous years of income.

a) the amount that would be payable by the transition taxpayer in respect of annual leave and long service leave if, at the transition time, all employees of the transition taxpayer began to take all leave of that kind that they were eligible to take; and

b) if the transition taxpayer elects, in accordance with subsection (6), that this paragraph applies - the amount that, according to actuarial principles, would need to be set aside at the transition time to meet all obligations of the transition taxpayer that might reasonably be expected to arise after that time to make annual leave payments and long service leave payments (other than in respect of leave taken into account under paragraph (a)) for periods of service of employees occurring before the transition time; and

c) if paragraph (b) does not apply - the present value, at the transition time, of all annual leave payments and long service leave payments (other than in respect of leave taken into account under paragraph (a)) that the transition taxpayer would become liable to make after that time in respect of periods of service of employees occurring before that time if all such leave became eligible to be taken.

XYZ Pty Ltd made an election in accordance with subsection 57-60(6) that paragraph 57-60(5)(b) applies on a certain date. Accordingly, XYZ Pty Ltd will work out its (pre-transition time service) leave amount in accordance with paragraphs 57-60(a) and (b).

Question 5

Summary

Yes, for the purposes of section 57-60 of Schedule 2D of the ITAA 1936, any deduction disallowed to ABC Pty Ltd is determined under subsections 57-60(2) and (3) based on payments made by XYZ Pty Ltd to relevant employees of XYZ Pty Ltd. This is because in effect the application of Division 57 is isolated to XYZ Pty Ltd as the transition taxpayer and therefore the provisions within section 57-60 will apply when working out how much of the relevant deduction is disallowed to ABC Pty Ltd as head company of the ABC consolidated group in relevant years of income.

Detailed reasoning

As established, on the facts provided XYZ Pty Ltd is a “transition taxpayer” and section 57-60 of Schedule 2D to the ITAA 1936 will apply to deductions otherwise allowable to XYZ Pty Ltd in respect of long service leave payments or annual leave payments to a person who was an employee of XYZ Pty Ltd at any time before or after the transition time. ABC Pty Ltd, as head company of the ABC consolidated group, will be the entity entitled to claim any such deductions (as above).

Subsection 57-60(2) is the provision that operates to disallow a deduction for a year of income if the sum of all deductions of the transition taxpayer to which this section applies for the year of income up to the leave threshold amount.

Accordingly, in order to determine how much of the deduction is disallowed in a particular year of income, ABC Pty Ltd will need to establish both:

● the total amounts that would otherwise be deductible to ABC (as head company) under subsection 8-1(1) of the ITAA 1997 in respect of long service leave payments or annual leave payments to XYZ Pty Ltd’ employees at any time before or after the transition time; and

● the leave threshold amount.

If the total of the amounts that would otherwise be deductible under subsection 8-1(1) does not exceed the leave threshold amount for that particular year, the deduction will be disallowed in full. Where the total exceeds the leave threshold amount, the deduction is allowed subject to the application of the formula provided at subsection 57-60(3).

Note

Subdivision 57-G of Schedule 2D to the ITAA 1936 does not require ABC to distinguish between long service leave payments and annual leave payments to a person who was an employee of XYZ Pty Ltd at any time before or after the transition time, that is, there is a single leave threshold amount inclusive of both long service leave and annual leave. Further, subdivision 57-G does not require tracking of the leave threshold amount on an individual employee basis, i.e. there is a single leave threshold amount covering all employees, regardless of whether it relates to a pre or post transition time employee.

ATO view documents

Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004 (Cth)

Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997

Other references (non ATO view)

Channel Pastoral Holdings Pty Ltd v. Federal Commissioner of Taxation [2015] FCAFC 57; (2015) 2015 ATC 20-503

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