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Ruling

Subject: Consolidation - Allocable cost amount and treatment of particular assets

Question 1

Will the Commissioner confirm the allocable cost amount (ACA) for the joining entity on entry into the income tax consolidated group has been calculated correctly under Division 705 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Commissioner confirm the Agreement is an asset for the purposes of Part 3-90 of the ITAA 1997?

Answer

Yes.

Question 3

Will the Commissioner confirm the tax cost setting amount (TCSA) for the asset that the joining entity brings into the income tax consolidated group has been calculated correctly under Division 705 of the ITAA 1997?

Answer

Yes.

Question 4

Will the Commissioner confirm that the asset is a depreciating asset under subsection 40-30(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

2009 income year

Relevant facts and circumstances

The non-resident ultimate holding company carries on a business, utilising the asset which is the subject of the Agreement. The asset is the essential component of the business as it and has been tailored to the specific needs of the non-resident ultimate holding company, its subsidiaries and its worldwide operations.

The non-resident ultimate holding company commenced to operate a business in Australia through a permanent establishment. The Australian branch utilised the asset to operate its Australian business. Subsequently, the joining entity and its subsidiary were incorporated.

The Australian branch assets of the non-resident holding company were transferred to the joining entity and its subsidiary. On the same day, the joining entity elected to form an income tax consolidated group with its single subsidiary member.

The asset was an essential asset and was made available to the joining entity in order for it to conduct the Australian business.

All decisions regarding the design and development of the asset are made by the non-resident holding company.

Under the Agreement the joining entity was granted a non-exclusive right to use the asset in Australia. The joining entity paid no consideration for the acquisition of the rights under the Agreement.

The non-resident holding company then acquired another company. During the negotiations for the acquisition, the group considered that it needed to change its corporate structure in order to undertake the acquisition without significant commercial complications and unnecessary costs.

Accordingly, a new company, which was a wholly owned subsidiary of the non-resident holding company, was incorporated with the purpose of being the Australian holding company for the group of companies.

The new company as the head company of the income tax consolidated group acquired 100% of the joining entity.

The joining entity received a market valuation report prepared by the valuer which advised fair market value of the the joining entity's equity. Following the acquisition of the joining entity by the income tax consolidated group, the joining entity ceased being a head company of the previous income tax consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 12

Income Tax Assessment Act 1997 section 25

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 Division 328

Income Tax Assessment Act 1997 Part 3-90

Income Tax Assessment Act 1997 Division 701

Income Tax Assessment Act 1997 subsection 701-1(1)

Income Tax Assessment Act 1997 subsection 701-1(2)

Income Tax Assessment Act 1997 subsection 701-1(5)

Income Tax Assessment Act 1997 section 701-5

Income Tax Assessment Act 1997 section 701-55

Income Tax Assessment Act 1997 section 705-65

Income Tax Assessment Act 1997 section 705-75

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Section 701-10 of the ITAA 1997 requires that the head company's cost for the assets of an acquired entity reflect the groups cost of acquiring the entity.

Item 1 of section 701-60 of the ITAA 1997 provides that the tax cost setting amount is the amount worked out in accordance with Division 705 of the ITAA 1997.

Division 705 of the ITAA 1997 sets out the tax cost setting rules for the assets of an entity that becomes a subsidiary member of a consolidated group.

Specifically section 705-60 of the ITAA 1997 details how to work out the ACA and provides 8 steps for calculating the ACA.

Subdivision 705-C of the ITAA 1997 modifies Division 701 of the ITAA 1997 and Subdivision 705-A of the ITAA 1997 so that the tax cost setting amount for assets of an acquired consolidated group that become those of an acquiring consolidated group reflects the cost to the latter group of acquiring the former.

Specifically, the head company of the acquired group is treated, with some modification, as a single joining entity. It is the only entity that joins the acquiring group. The subsidiary members of the acquired group are treated as parts of its head company, with their assets being treated as the head company's assets, which have their tax costs set at the acquisition time. Intra-group assets, liabilities and membership interests are ignored.

The modifications in Subdivision 705-C of the ITAA 1997 will apply to the acquisition of the joining entity when calculating the ACA.

After examining the ACA calculation schedule and the profit and loss statement and balance sheet for the relevant period provided by the Applicant the Commissioner is satisfied the necessary steps under section 705-60 of the ITAA 1997, as modified by Subdivision 705-C of the ITAA 1997, have been applied correctly to the acquisition of the joining entity. The ACA calculated as the joining entity into the consolidated group has been calculated correctly under Division 705 of the ITAA 1997.

Question 2

When an entity joins a consolidated group, new tax costs for the assets of the joining subsidiary are set as a result of allocating the ACA to the assets of the joining entity. Consequently, the relevant assets of the joining entity need to be identified for this purpose.

A general definition of 'asset' is not provided in the legislation. Taxation Ruling TR 2004/13 provides guidance on the meaning of an asset for the purposes of Part 3-90 of the ITAA 1997.

Based on the information provided by the Applicant, the Commissioner confirms the Agreement is an asset for the purposes of Part 3-90 of the ITAA 1997.

Question 3

Section 701-10 of the ITAA 1997 requires that the head company's cost for the assets of an acquired entity reflect the groups cost of acquiring the entity.

Item 1 of section 701-60 of the ITAA 1997 provides that the TCSA is the amount worked out in accordance with Division 705 of the ITAA 1997.

Subsection 705-35(1) of the ITAA 1997 states:

For each asset of the joining entity (a reset cost base asset) that is not a retained cost base asset or an asset (an excluded asset) covered by subsection (2), the assets tax cost setting amount is worked out by:

· first working out the joined group's allocable cost amount for the joining entity in accordance with section 705-60; and

· then reducing that amount by the total of the tax cost setting amounts in accordance with section 705-25 for each retained cost base asset (but not below zero); and

· finally, allocating the result to each of the joining entity's reset cost base assets (other than excluded assets) in proportion to their market values.

A reset cost base asset is any asset that is neither a retained cost base asset nor an excluded asset. Under subsection 705-25(5) of the ITAA 1997 a retained cost base asset is broadly Australian currency (other than certain exclusions), a right to receive a specified amount of such currency (with some exclusions) or an entitlement to prepaid services. An asset for the purposes of Part 3-90 of the ITAA 1997 is an excluded asset if it is taken into account as a reduction in any of the steps contained in section 705-60 of the ITAA 1997 in determining a joined group's ACA.

Based upon the facts submitted in this ruling application it is accepted that the Agreement is not a retained cost base asset pursuant to subsection 705-25(2) of the ITAA 1997, or an excluded asset covered by section 705-35(2) of the ITAA 1997.

Section 705-40 of the ITAA 1997 imposes a limit of the TCSA for reset cost base assets held on revenue account and at subsection 705-40(1) states that the TCSA for a reset cost base asset that is a depreciating asset must not exceed the greater of the asset's market value and the joining entity's terminating value for the asset.

After examining the ACA allocation schedule provided by the Applicant the Commissioner confirms the TCSA for the Ageement that the joining entity brings into the consolidated group has been calculated correctly under Division 705 of the ITAA 1997.

Question 4

The definition of a depreciating asset is provided under section 40-30 of the ITAA 1997. Based on the information provided, the Commissioner confirms that the asset, which is the subject of the Agreement is a depreciating asset under subsection 40-30(2) of the ITAA 1997.