Edited version of private ruling

Authorisation Number: 1011716007501

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Ruling

Subject : Cost to head company of assets of joining entity

Question 1

Is trading stock held by a subsidiary, at the time that subsidiary becomes a subsidiary member of a consolidated group, a reset cost-base asset for the purposes of setting the tax cost of assets under section 701-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The Head Company (Head Co) elected to form a tax consolidated group on in the recent year with a wholly-owned subsidiary (Sub Co).

Sub Co held trading stock at the time of forming a tax consolidated group.

Head Co incorporated prior to 27 June 2002 and ultimate beneficial ownership has not changed since that time.

Sub Co was incorporated prior to 27 June 2002 and has been wholly-owned by Head Co since that time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 701-10

Income Tax Assessment Act 1997 Subsection 701-10(4)

Income Tax Assessment Act 1997 Subsection 701-60

Income Tax Assessment Act 1997 Division 705

Income Tax Assessment Act 1997 Subsection 701-25(5)

Income Tax Assessment Act 1997 Subsection 701-35(1)

Income Tax (Transitional Provisions) Assessment Act 1997 Division 701A

Income Tax (Transitional Provisions) Assessment Act 1997 Subsection 701A-1(1)

Income Tax (Transitional Provisions) Assessment Act 1997 Subsection 701A-1(2)

Income Tax (Transitional Provisions) Assessment Act 1997 Paragraph 701A-1(2) (b)

Income Tax (Transitional Provisions) Assessment Act 1997 Section 701A-5

Income Tax (Transitional Provisions) Assessment Act 1997 Subsection 701A-5(1)

Income Tax (Transitional Provisions) Assessment Act 1997 Subsection 701A-5(2)

Income Tax (Transitional Provisions) Assessment Act 1997 Subsection 701A-5(3)

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Detailed reasoning

General discussion of the law

Income Tax Assessment Act 1997

Section 701-10 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out to identify the costs to the head company of assets of the joining entity at the time the joining entity becomes a subsidiary member of the group. Subsection 701-10(4) of the ITAA 1997 provides that

Each asset's *tax cost is set at the time the entity becomes a *subsidiary member of the group at the asset's *tax cost setting amount.

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

For the purposes of section 701-10 of the ITAA 1997, an asset's tax cost setting amount is defined in section 701-60 of the ITAA 1997 as 'the amount worked out in accordance with Division 705'.

Subsection 705-25(5) of the ITAA 1997 sets out a list of assets for the purpose of defining a 'retained cost base asset'. However that list only refers to 'trading stock' so as to exclude trading stock from being treated as Australian currency for the purposes of that definition.

Section 705-35(1) of the ITAA 1997 sets out the procedure for resetting the value of each asset held by a jointing entity, upon joining a tax consolidated group. Assets which are not retained cost base assets or excluded assets are required to be reset.

Income Tax (Transitional Provisions) Assessment Act 1997

Division 701A of the Income Tax (Transitional Provisions) Assessment Act 1997 (ITTPA 1997) sets out certain modifications in the application of provisions of the ITAA 1997 for entities with continuing majority ownership from 27 June 2002 until joining a consolidated group.

Subsection 701A-1(1) of the ITTPA 1997 sets out that the entity is a 'continuing majority owned entity' and the group is the entity's 'designated group' if:

(a) an entity becomes a subsidiary member of a consolidated group at any time on or after 1 July 2002; and

(b) a person or persons continued to be the majority owners (see subsection (2)) of the entity from the start of 27 June 2002 until the entity became a subsidiary member of the group

Subsection 701A-1(2) of the ITTPA 1997 states that:

A person or persons are the majority owners of an entity if they beneficially own, directly or indirectly through one or more interposed entities, membership interests in the entity whose market value is more than 50% of the market value of all of the membership interests in the entity.

Section 701A-5 of the ITTPA 1997 provides that, where the entity is a continuing majority owned entity, trading stock of that entity is to be treated differently upon consolidation than what is set out in the general cost setting rules under Division 705 of the ITAA 1997.

In particular, subsection 701A-5(1) of the ITTPA 1997 modifies the operation of Part 3-90 of the ITAA 1997 in relation to each asset of a continuing majority owned entity that is trading stock just before the entity becomes a subsidiary member of the entity's designated group.

Subsection 701A-5(2) of the ITTPA 1997 sets out that a continuing majority owned entity is to revalue its trading stock under normal provisions and provides that for the entity core purposes:

(a) subsection 701-35(4) of the Income Tax Assessment Act 1997 does not apply in relation to the asset; and

(b) instead, the value of the asset at the end of the income year that ends, or, if section 701-30 of that Act applies, of the income year that is taken by subsection (3) of that section to end, is the value determined in accordance with sections 70-45 to 70-70 of that Act.

Subsection 701A-5(3) of the ITTPA 1997 provides that, for the head company core purposes, when the continuing majority-owned entity becomes a subsidiary member of the designated group, the asset is a retained cost base asset whose tax cost setting amount is equal to the value applicable in accordance with paragraph 701A-5(2)(b).

ATO Interpretive Decision ATO ID 2007/39 discusses the issue of whether the trading stock assets of an entity that becomes a subsidiary member of a consolidated group are retained cost base assets for the purposes of Division 705 of the ITAA 1997. This ATO ID applies the 'continuing majority owned entity' test under section 701A-1 of the ITTPA 1997 to determine the treatment of the trading stock.

ATO ID 2007/39 finds that 'BCo is a continuing majority owned entity and holds trading stock as an individual entity. Thus, the trading stock assets held by BCo are eligible to be treated as retained cost base assets'.

Application of the law

Under the general consolidation rules trading stock is a reset cost base asset, however if the entity is a continuing majority-owned entity at the time it becomes a subsidiary member of a consolidated group, trading stock is treated as a retained cost base asset.

As Head Co has wholly owned Sub Co since prior to 27 June 2002, Head Co is considered to be a majority owner under subsection 701A-1(2) of the ITTPA 1997.

Further, as Sub Co has become a subsidiary member of a consolidated group in the recent year and Head Co has been a majority owner since prior to the start of 27 June 2002 until Sub Co became a subsidiary member of the group, Sub Co is considered to be a continuing majority owned entity and the group is the entity's designated group under subsection 701A-1(1) of the ITTPA 1997.

Therefore, Division 701A of the ITTPA 1997 will apply to modify the operation of Part 3-90 of the ITAA 1997 in respect of the value attributable to trading stock.

For the head company core purposes of Part 3-90 of the ITAA 1997, Sub Co's trading stock will be treated as a retained cost base asset in accordance with subsection 701A-5(3) of the ITTPA 1997.

Therefore, trading stock held by Sub Co, at the time that Sub Co becomes a subsidiary member of the group, is not a reset cost-base asset for the purposes of setting the tax cost of assets under section 701-10 of the ITAA 1997.