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Ruling

Subject: Taxation of Financial Arrangements: Entry History Rule and Transitional Balancing Adjustment Deduction

Question 1

Is Company B, as the head company of a consolidated group, entitled to deductions under subitem 104(13) of Schedule 1 of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 for the undeducted part of the transitional balancing adjustment of Fund X as a result of Fund X joining the consolidated group?

Answer

Yes

This ruling applies for the following periods:

xx/xx/xxxx to xx/xx/xxxx

The scheme commences on:

xx/xx/xxxx

Relevant facts and circumstances

The taxpayer, Company B, is the head company of the Company B tax consolidated group.

Company B is an Australian company. Company C is an Australian subsidiary member of the Company B tax consolidated group.

Fund X is a unit trust. Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) and accompanying provisions within the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (the TOFA Act) apply to Fund X on a mandatory basis from XX XX 20XX as the value of Fund X's financial assets exceed the thresholds specified in subsection 230-455(4) of the ITAA 1997. Fund X also made the election to apply the provisions of the TOFA Act to its financial arrangements in existence at 1 July 2010, pursuant to subitem 104(2) of Schedule 1 to the TOFA Act (the un-grandfathering election).

On XX XX 20XX, Company C held all of the units in Fund X. Under modifications to the consolidation membership rules in Subdivision 713-L of the ITAA 1997, Fund X became a member of the Company B tax consolidated group when all its membership interests were held entirely by Company B.

The applicant advises that there has been no resettlement of Fund X as a result of amendments to the Fund X's deed.

Company B TOFA Application

Company B has not made any elections to apply any of the Taxation of Financial Arrangements (TOFA) elective methods to its financial arrangements.

Company B made the un-grandfathering election pursuant to subitem 104(2) of Schedule 1 to the TOFA Act in respect of all of the Company B tax consolidated group's financial arrangements that were in existence at XX XX 20XX. Company B has not specified the un-grandfathering election was not to apply to financial arrangements in relation to the business carried on by Company C (as per paragraph 104(4)(b) of Schedule 1 to the TOFA Act).

As a consequence of making the un-grandfathering election, Fund X was required to calculate a transitional balancing adjustment (TBA) amount, pursuant to the provisions in subitems 104(13) to (15) of Schedule 1 to the TOFA Act. That amount was calculated to be a loss of $X.

As Fund X has made the fair value election, the applicant advises that the TBA amount was calculated pursuant to the method statement in subitem 104(13) of Schedule 1 to the TOFA Act, on the basis that the fair value method applied to Fund X's financial arrangements (see subitem 104(8) of Schedule 1 to the TOFA Act).

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 subsection 230-455(4)

Income Tax Assessment Act 1997 Division 701

Income Tax Assessment Act 1997 section 701-1

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

Income Tax Assessment Act 1997 section 701-5

Income Tax Assessment Act 1997 Subdivision 713-L

Income Tax Assessment Act 1997 Subdivision 716-A

Income Tax Assessment Act 1997 section 716-25

Income Tax Assessment Act 1997 subsection 716-25(4)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Schedule 1 subitem 104(2)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Schedule 1 paragraph 104(4)(b)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Schedule 1 subitem 104(8)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Schedule 1 subitem 104(13)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Schedule 1 subitem 104(14)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Schedule 1 subitem 104(15)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Schedule 1 subitem 104(17)

Reasons for decision

Detailed reasoning

Entry History Rule

Division 701 of the ITAA 1997 comprises the core rules for tax consolidated groups.

Section 701-1 of the ITAA 1997 outlines the single entity rule and provides:

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.

Subsection 701-1(2) of the ITAA 1997 explains the head company core purposes:

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.

Section 701-5 of the ITAA 1997 contains the entry history rule. It states:

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.

Therefore, for the purposes of calculating the head company's income tax liability or loss, everything that happens to a subsidiary of a tax consolidated group is taken to have happened to the head company of that group for the relevant income year.

Where an entity is not a subsidiary member for the whole income year

When an entity elects to bring its existing financial arrangements into the TOFA regime, a TBA amount may arise. The TBA amount is subject to Subdivision 716-A of the ITAA 1997 as it represents an original (one-off) amount that is required to be spread on a straight-line basis over 4 income years.

Section 716-25 of the ITAA 1997 provides that where a subsidiary is part of a tax consolidated group for part of an income year the head company may deduct a proportion of an amount that is deducted over two or more income years.

Subsection 716-25(4) of the ITAA 1997 provides that the proportion is worked out in the following way:

The proportion is worked out by multiplying that part of the original amount by:

o the number of days that are in both the income year and the spreading period, and on which the entity was a subsidiary member of the group;

o divided by:

o the number of days that are in both the income year and the spreading period.

Therefore, if an entity joins a tax consolidated group part-way through an income year before it has fully brought to account a TBA amount, then Subdivision 716-A of the ITAA 1997 will apportion the amount between the joining entity's non-membership period (for the joining entity's purposes) and its membership period (for the head company's purposes) for that income year.

In this case, Fund X is a subsidiary of the Company B tax consolidated group of which Company B is the head company. Therefore, under the entry history rule everything that happened to Fund X prior to it joining the tax consolidated group is taken to have happened to Company B.

Fund X's TBA loss amount is encompassed by the entry history rule as the loss was incurred by Fund X arose before Fund X joined the tax consolidated group.

Company B is therefore entitled to claim deductions under subitem 104(13) of Schedule 1 to the TOFA Act in respect of the relevant portion of the TBA deduction that arose prior to the joining time of the Fund. Subitem 104(17) of Schedule 1 to the TOFA Act further provides that this amount is to be spread evenly over four income years.

As Fund X joined the tax consolidated group part-way through an income year Company B will, as head company, be eligible to apportion the deduction for that income year using the method in subsection 716-25(4) of the ITAA 1997.