Edited version of private ruling

Authorisation Number: 1011753154985

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Ruling

Subject: Market valuation

Questions

1. For the purposes of subsection 707-320(1) of the Income Tax Assessment Act 1997 (ITAA 1997), is the adjusted market value of entity Y at the initial transfer time the stated amount?

2. For the purposes of subsection 707-320(1) of the ITAA 1997, is the modified market value of entity X at the initial transfer time the stated amount?

3. For the purposes of subsection 707-320(1) of the ITAA 1997, is the modified market value of entity W at the initial transfer time the stated amount?

Advice/Answers:

1. Yes, the adjusted market value of entity Y at the initial transfer time is the stated amount.

2. Yes, the modified market value of entity X at the initial transfer time is the stated amount.

3. Yes, the modified market value of entity W at the initial transfer time is the stated amount.

This ruling applies for the following period:

The initial transfer time plus four years

The scheme commenced on:

The initial transfer time

Relevant facts:

Entity Y is an Australian resident company, and the parent company of a group of entities (the entity Y Group) that carry on business, including entity X and entity W.

Entity Y holds 100% of the ordinary shares and 100% of the financial instruments on issue by both entity X and entity W.

Proposed formation of an income tax consolidated group

Entity Y proposes to elect to form an income tax consolidated group for the first time as of a stated date. If entity Y elects to form a consolidated group on and from this stated date, that date will be the initial transfer time for a bundle of losses for the purpose of section 707-315 of the ITAA 1997 ('the initial transfer time').

Entity X and entity W each have carried forward tax losses at the initial transfer time. Entity X and entity W each propose to transfer these losses to entity Y (as head company) on formation of a consolidated group at the initial transfer time. These losses will form two bundles of losses for the purposes of the ITAA 1997.

When entity Y forms a consolidated group, entity X and entity W will transfer their respective losses to Entity Y on formation. The date of the transfer will be the date that is the initial transfer time. Entity X and entity W will each be a 'real loss-maker' for the purpose of section 707-320 of the ITAA 1997.

Market value of Entity Y at the initial transfer time

Entity Y considers that the market value of entity Y at the initial transfer time is a stated amount equal to the point-in-time share price at the close of ASX trading on the day before the initial transfer time for each individual share, multiplied by the number of ordinary shares at that time.

Adjusted market value of Entity Y at the initial transfer time

Entity Y considers that value of tax losses of any sort for an income year ending before the initial transfer time is a stated amount. This is the total of the market value of the tax losses of entity X at the initial transfer time and entity W at the initial transfer time.

Under the proposed scheme, there is no adjustment required pursuant to paragraph 707-320(1)(b) of the ITAA 1997 in determining the amount entity Y considers is the adjusted market value.

Entity Y has worked out the value for entity Y on the basis that the subsidiary members of the consolidated group for which entity Y is to be the head company are part of entity Y.

Entity Y considers the adjusted market value of entity Y at the initial transfer time is therefore the stated amount.

Market value of entity X and entity W at the initial transfer time

Entity Y considers the market value of entity X at the initial transfer time is a stated amount.

Entity Y considers the market value of entity W at the initial transfer time is a stated amount.

For the purposes of determining the amounts proposed as the market values of entity X and entity W at the initial transfer time, entity X and entity W were treated by entity Y as separate entities and not part of the head company at the time the market values of entity X and entity W were determined.

Modified market value of entity X and entity W at the initial transfer time

In working out the amounts it considers as the modified market values of entity X and entity W, entity Y has considered adjustments to the market values of entity X and entity W having regard to:

§ the amounts it considers as attributable to the market value of entity X's and entity W's tax losses carried forward at the initial transfer time, and

§ the amounts entity Y considers are attributable to membership interests held by entity X and entity W in other subsidiaries of entity Y Group that will become members of the entity Y consolidated group at the initial transfer time under the proposed scheme.

No amounts have been contributed to the market values of entity X or entity W by a trust.

The modified market value of entity X has been reduced, pursuant to subsection 707-325(3) of the ITAA 1997, by a stated amount.

None of the events described in subsection 707-325(4) of the ITAA 1997 occurred in the four years prior to the initial transfer time in relation to entity W.

Entity Y considers the modified market value of entity X at the initial transfer time is therefore a stated amount, and the modified market value of entity W is a stated amount.

Assumptions:

Entity Y will elect to form a tax consolidated group at the initial transfer time for the first time.

Relevant legislative provisions:

Taxation Administration Act 1953

section 359-5

paragraph 359-40(1)(b)

Income Tax Assessment Act 1997

section 701-1

Division 707

Subdivision 707-C

subsection 707-310(1)

section 707-320

subsection 707-320(1)

paragraph 707-320(1)(a)

paragraph 707-320(1)(b)

section 707-325

subsection 707-325(1)

paragraph 707-325(1)(a)

paragraph 707-325(1)(b)

paragraph 707-325(1)(c)

paragraph 707-325(1)(d)

subsection 707-325(2)

subsection 707-325(3)

subsection 707-325(4)

Reasons for decision

(All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.)

Division 707 provides for the transfer of a loss from an entity (the joining entity) becoming a member of a consolidated group to the head company of the group, if as a general principle, the joining entity could have utilised the loss if it had not become a member of the group.

The rate at which transferred losses can be used by the head company is generally limited to that which would have applied had the joining entity remained outside the consolidated group.

Subdivision 707-C determines the amount of transferred losses that can be utilised by the head company. Subsection 707-310(1) limits the amount of losses in a particular bundle of losses transferred by references to the available fraction for the bundle.

Pursuant to subsection 707-320(1), the available fraction for a bundle of losses at a time is:

§ modified market value of the real loss-maker at the initial transfer time

§ transferee's adjusted market value at the initial transfer time

The transferee's adjusted market value at the initial transfer time is defined in subsection 707-320(1) to mean the amount that would be the market value, at the initial transfer time, of the transferee to which the losses in the bundle were transferred at that time if:

§ the transferee did not have a loss of any sort for an income year ending before that time, and

§ the balance of the transferee's franking account were nil at that time.

The modified market value of the real loss-maker entity is defined in section 707-325. Pursuant to subsection 707-325(1), the modified market value of an entity that becomes a member of a consolidated group at a particular time is the amount that would be the market value of the entity at that time if:

§ the entity had no loss of any sort for any income year, and the balance of its franking account at that time were nil

§ the subsidiary members of the group at that time were separate entities and not just parts of the head company of the group.

The entity's market value did not include an amount attributable (directly or indirectly) to a membership interest in a member of the group (other than the entity):

§ that is a corporate tax entity, or

§ that transferred loss under subdivision 707-A to the head company of the group at or before that time, and

§ the contribution to the entity's market value made by a trust (other than one that is a member described in paragraph (c)) were limited to the amount attributable to the entity's fixed entitlements (if any) at that time to income or capital of the trust that is not attributable (directly or indirectly) to a membership interest in such a member.

Accordingly, in working out the available fraction, the market values of the joining entities (entity X and entity W) and entity Y at the initial transfer time are required.

Market valuation

Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that the Commissioner may, on application, make a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to you in relation to a specified scheme. Such a ruling is called a private ruling. A private ruling may cover any matter involved in the application of the provision.

Pursuant to paragraph 359-40(1)(b) of Schedule 1 to the TAA, if making a private ruling would require determining the value of any thing, the Commissioner may refer a valuation provided by the applicant to a valuer for review.

Entity Y has provided a valuation of the market values of entity Y, entity X and entity W, and of the adjusted market value of entity Y and modified market values of entity X and entity W respectively at the initial transfer time. In accordance with paragraph 359-40(1)(b) of Schedule 1 to the TAA, the entity Y valuation has been reviewed by an independent valuer (the valuer) and a report detailing the outcomes of the review has been provided to the Commissioner.

Adjusted market value - entity Y

Under the proposed scheme, entity Y is the transferee for the purpose of section 707-320. Entity Y's adjusted market value at the initial transfer time, pursuant to subsection 707-320(1) is the amount that would be the market value of entity Y at the initial transfer time if:

§ entity Y did not have a loss of any sort for an income year ending before that time, and

§ the balance of entity Y's franking account were nil at that time.

The value for entity Y will be worked out on the basis that the subsidiary members of the consolidated group for which entity Y is to be the head company are part of the transferee, because of the single entity rule - see section 701-1.

There is no definition of 'market value' in Division 707. The ATO Tax Consolidation Reference Manual confirms that the term takes on its ordinary meaning for tax consolidation purposes.

Business valuers in Australia typically define market value as: the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length.

Entity Y states that the market value of entity Y has been determined on the basis of this definition, at the initial transfer time. Entity Y proposes that the market value of entity Y at the initial transfer time is a stated amount.

The valuer has reviewed this amount. In the report the valuer has confirmed that the market value of entity Y at the initial transfer time is the stated amount. The Commissioner accepts the stated amount as the market value of entity Y at the initial transfer time.

Having determined the market value of entity Y, it is necessary to consider any adjustments pursuant to paragraphs 707-320(1)(a) and (b).

In relation to adjustments pursuant to paragraph 707-320(1)(a), entity Y states that the value of tax losses of any sort for an income year ending before the initial transfer time is a stated amount.

The valuer has reviewed this amount. In the report the valuer has confirmed that the stated amount is the value of the tax losses of entity X and entity W at the initial transfer time. The Commissioner accepts this amount as the value of the tax losses at the initial transfer time.

There is no adjustment to market value of entity Y pursuant to paragraph 707-320(1)(b).

Accordingly, as the Commissioner accepts the adjusted market value of entity Y at the initial transfer time is the stated amount.

Modified market values - entity X and entity W

The modified market value of the real loss-maker entity is defined in section 707-325. Pursuant to subsection 707-325(1), the modified market value of an entity that becomes a member of a consolidated group at a particular time is the amount that would be the market value of the entity at that time if:

§ the entity had no loss of any sort for any income year, and the balance of its franking account at that time were nil

§ the subsidiary members of the group at that time were separate entities and not just parts of the head company of the group

The entity's market value did not include an amount attributable (directly or indirectly) to a membership interest in a member of the group (other than the entity):

§ that is a corporate tax entity, or

§ that transferred a loss under subdivision 707-A to the head company of the group at or before that time; and

§ the contribution to the entity's market value made by a trust (other than one that is a member described in paragraph (c)) were limited to the amount attributable to the entity's fixed entitlements (if any) at that time to income or capital of the trust that is not attributable (directly or indirectly) to a membership interest in such a member.

However, pursuant to subsections 707-325(2), (3), and (4) there is a rule to prevent inflation of the modified market value of the real loss-maker. This is stated as follows:

707-325(2) However, if:

§ one or more of the events described in subsection (4) occurred in the 4 years before the time; and

§ the amount worked out under subsection (1) exceeds what it would have been if none of those events occurred;

§ the modified market value of the entity at the time is the amount worked out under subsection (1), reduced by the amount worked out under subsection (3).

Subsection 707-325(3)

The amount of the reduction is the lesser of:

§ the excess described in paragraph (2)(b); and

§ the total increase in the market value of the entity that occurred immediately after each event mentioned in paragraph (2)(a) because of the event.

Subsection 707-325(4)

These are the events:

§ an injection of capital into the entity or an entity that was an associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the injection;

§ a transaction that:

o did not take place at arm's length; and

o involved the entity or an entity that was an associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the transaction.

In calculating the amounts it considers are the market values of entity X and entity W at the initial transfer time, entity Y states that the market value of those entities has been determined on the basis of the definition of market value above (as used in determining the market value of entity Y), at the initial transfer time.

Entity Y's view is that the market value of entity X at the initial transfer time is a stated amount and that the market value of entity W at the initial transfer time is a stated amount.

The valuer has reviewed these amounts. In the report the valuer has confirmed that the market value of entity X at the initial transfer time is the stated amount and that the market value of entity W at the initial transfer time is the stated amount. The Commissioner accepts these stated amounts as the market values of entity X and entity W at the initial transfer time.

In considering the impact of any adjustments pursuant to paragraphs 707-325(1)(a), (b), (c) and (d) in determining the modified market values of entity X and entity W, entity Y has had regard to the matters below.

The amounts entity Y considers are the market values at the initial transfer time of tax losses carried forward that are attributable to entity X and entity W.

The valuer has confirmed these amounts as the market value of the losses, and the Commissioner accepts those amounts as the market values of the losses. These amounts have been deducted from the market value of entity X and entity W in determining their respective modified market values.

Entity Y has treated each subsidiary member as a separate entity and not a part of the head company when determining the modified market values of entity X and entity W. There is no further modification pursuant to paragraph 707-325(1)(b).

Entity Y states that the amount it considers as the market value of entity X includes stated amounts it considers attributable to the aggregate market value of entity X's membership interests in stated subsidiary companies. The market values of these membership interests have been confirmed by the independent valuation and are accepted by the Commissioner.

Pursuant to paragraph 707-325(1)(c) the aggregate value of the membership interests has been subtracted from the market value of entity X in determining its modified market value.

Entity Y states that the market value of entity W includes stated amounts it considers attributable to the aggregate market value of entity W's membership interests in stated subsidiary companies. The market values of these membership interests have been confirmed by the valuer and are accepted by the Commissioner.

Pursuant to paragraph 707-325(1)(c) the aggregate value of the membership interests has been subtracted from the market value of entity W in determining its modified market value.

No amounts have been contributed to the market value of entity X or entity W by a trust. There is no modification pursuant to paragraph 707-325(1)(d).

None of the events described in subsection 707-325(4) occurred in relation to entity W in the four years prior to the initial transfer time. There is no reduction to the modified market value of entity W pursuant to subsection 707-325(3).

The modified market value of entity X has been reduced, pursuant to subsection 707-325(3), by the amount stated by entity Y.

As the Commissioner accepts the stated amounts, the modified market values of entity X and entity W at the initial transfer time are the stated amounts.