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

Question 1

In setting the tax cost of Fund X assets entering the Company B tax consolidated group, is an amount in respect of part of the Transitional Balancing Adjustment (TBA) deduction to be included in the calculation of the step 7 amount under section 705-115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

1. Company B is the head company of the Company B tax consolidated group. Company B is an Australian company.

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

3. Fund X is a unit trust.

4. Division 230 of the 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 exceeds 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 the TOFA Act (the un-grandfathering election).

5. On XX XX 20XX, Company C acquired 100% of the membership interests in Fund X. As a consequence, under the 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.

Company B TOFA Application

6. Company B made the un-grandfathering election in respect of all of the Company B tax consolidated group's financial arrangements that were in existence at 1 July 2010.

7. As a consequence of making the un-grandfathering election, Fund X was required to calculate a TBA amount pursuant to the provisions in subitem 104(13) of Schedule 1 to the TOFA Act.

8. 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 section 110-40

Income Tax Assessment Act 1997 Division 230

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

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

Income Tax Assessment Act 1997 section 701-5

Income Tax Assessment Act 1997 section 705-60

Income Tax Assessment Act 1997 section 705-115

Income Tax Assessment Act 1997 subsection 705-115(1)

Income Tax Assessment Act 1997 subsection 705-115(2)

Income Tax Assessment Act 1997 Subdivision 713-L

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 subitem 104(8)

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

Reasons for decision

Summary

The inherited TBA deduction amount should be included in the calculation of the step 7 amount under section 705-115 of the ITAA 1997.

Detailed reasoning

1. Section 705-115 of the ITAA 1997 contains the rules for working out the amount (the step 7 amount) that is subtracted at step 7 in calculating the allocable cost amount (ACA) for a joining entity under section 705-60 of the ITAA 1997. Step 7 includes deductions covered by subsection 705-115(2) of the ITAA 1997 which are any deductions to which the head company becomes entitled to under the entry history rule in section 701-5 of the ITAA 1997, other than deductions for expenditure:

· That is, forms part of or reduces, the cost of assets of the joining entity that becomes assets of the head company because the single entity rule in subsection 701-1(1) of the ITAA 1997 applies

· To which section 110-40 of the ITAA 1997 (about expenditure on assets acquired before 7.30 pm on 13 May 1997) applies, or

· To the extent that the expenditure reduced the undistributed profits comprising the step 3 amount in the table in section 705-60 of the ITAA 1997.

2. The inherited TBA deductions in question come within the deductions covered by subsection 705-115(2) of the ITAA 1997 and none of the exclusions contained in the subsection apply.

3. Subsection 705-115(1) of the ITAA 1997 makes a distinction between 'owned deductions' and 'acquired deductions'. Owned deductions are deductions covered by subsection 705-115(2) of the ITAA 1997 that accrued to the joined group and acquired deductions are deductions covered by subsection 705-115(2) of the ITAA 1997 other than owned deductions.

4. As Company C acquired 100% of the membership interests in Fund X on XX XX 20XX (when Fund X joined the Company B tax consolidated group), the inherited TBA deductions are acquired deductions.

5. Consequently, under the formula in subsection 705-115(1) of the ITAA 1997, the step 7 amount is calculated by multiplying the inherited TBA deductions by the corporate tax rate.