Edited version of your private ruling

Authorisation Number: 1012480346369

Ruling

Subject: Consolidation and taxation of financial arrangements

Question 1

Are the SWAPS taken to be entered into by Cpy A on the date at which they were originally entered into by Cpy B on a specific date (as a consequence of the acquisition of the shares in Cpy E by Cpy A and the operation of the single entity and entity history rules in section 701-1 and 701-5 respectively of the Income Tax Assessment Act 1997 (ITAA 1997))?

Answer

Yes

Question 2

Does either Division 230 or Subsection 715-375(2) of the ITAA 1997 apply to the SWAPS for the purpose of determining the taxable income of the Cpy A tax consolidated group for the relevant and subsequent income tax years?

Answer

No

This ruling applies for the following periods:

1 July 2011 to 30 June 2015.

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

Cpy C entered into two separate interest rate swap agreements (SWAPS) with third party financial institutions.

Cpy B was substituted for Cpy C in the X interest rate swap agreements in X novation agreements.

The taxpayer stated that Cpy B entered into the SWAPS to manage its interest rate risk on its external debts.

At the time of entering into the SWAPS, Cpy B was a member of a tax consolidated group of which Cpy D was the head company.

Cpy C later became a subsidiary member of another tax consolidated group on 30 June 20YY of which Cpy E was the head company.

Cpy A formed a tax consolidated group. Cpy A has a year end of 30 June for income tax purposes.

The Cpy A tax consolidated group acquired all of the issued shares of Cpy E resulting in Cpy E and its subsidiary members (including Cpy B) joining the Cpy A tax consolidated group from that day.

None of Cpy D, Cpy E and Cpy A have made transitional elections under item 104(2) of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (the TOFA Act) for financial arrangements entered into prior to 1 July 2010 (i.e. TOFA start date) to be subject to Division 230 of the Income Tax Assessment Act 1997 (ITTA 1997 - the TOFA provisions).

At the date of acquisition of the Cpy E shares by the Cpy A tax consolidated group, the SWAPS had not been closed out and were 'out of the money'. Under Australian Accounting Standards, an accounting liability was therefore required to be recognised in respect of the SWAPS.

This Application is only concerned with these SWAPS that were recorded as a liability in Cpy B's accounts at the time the company joined the Cpy A tax consolidated group.

Documents Relied Upon

Relevant legislative provisions

Division 230 of the Income Tax Assessment Act 1997

Division 701 of the Income Tax Assessment Act 1997

Section 701-1 of the Income Tax Assessment Act 1997

Subsection 701-1(1) of the Income Tax Assessment Act 1997

Section 701-5 of the Income Tax Assessment Act 1997

Division 715 of the Income Tax Assessment Act 1997

Subsection 715-375(2) of the Income Tax Assessment Act 1997

Subsection 701-55(5A) of the Income Tax Assessment Act 1997

Subsection 715-375(1)(c) of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

The SWAPS are taken to be entered into by Cpy A on the date at which they were originally entered into by Cpy B (as a consequence of the acquisition of the shares in Cpy E by Cpy A and the operation of the single entity and entity history rules in section 701-1 and 701-5 respectively of the Income Tax Assessment Act 1997 (ITAA 1997)).

Detailed reasoning

Under section 701-1 of the ITAA 1997, subsidiary members of a consolidated group are taken, for head company and entity core purposes (core purposes), to be part of the head company of the group, rather than separate entities for any period the subsidiaries are members of the group. The core purposes in question include the working out of the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period.

Thus, the effect of subsection 701-1(1) (the single entity rule), is that, for core purposes, the SWAPS entered into by Cpy B are taken to be liabilities held by Cpy A from when it became a member of the consolidated group through its acquisition of Cpy E and its subsidiaries including Cpy B.

Section 701-5, which is also a core rule, sets out the entry history rule;

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.

It therefore follows that the SWAPS are taken to have been entered into by Cpy A at the time the SWAPS were entered into by Cpy B by way of X novation agreements.

Question 2

Summary

Neither Division 230 nor Subsection 715-375(2) of the ITAA 1997 apply to the SWAPS for the purpose of determining the taxable income of the Cpy A tax consolidated group for the relevant and subsequent income tax years.

Detailed reasoning

Items 102 to 104 of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 set out the application provisions for Division 230. Item 103 sets out the income year from which Division 230 applies and item 104 sets out the financial arrangements to which Division 230 may apply.

Pursuant to item 103, Division 230 applies to Cpy A as head company of the Cpy A consolidated group from the date of its incorporation on a particular date (within the income year commencing 1 July 20YY), being the first income year that started on or after 1 July 20ZZ (the period 1 July 20ZZ to 31 December 20ZZ). Sub-item 104(2) provides that Division 230 applies to financial arrangements that Cpy A started to have in that first income year or a later year.

The question then becomes whether the financial arrangements that are the subject of this ruling were started by Cpy A before or after 1 July 20ZZ.

As stated above, the effect of the entry history rule is that Cpy A started to have the financial arrangements when the Cpy D consolidated group started to have them. All of the arrangements to which this ruling applies were acquired by those companies prior to 1 July 20ZZ.

It follows that these financial arrangements will not be financial arrangements to which Division 230 applies. Neither subsection 701-55(5A) (in the case of assets) nor subsection 715-375(2) (in the case of liabilities) will alter this result. In the case of assets, subsection 701-55(5A) will not operate to deem the assets to be started to be had at the joining time, because Division 230 is not to apply in relation to the asset. In the case of liabilities, subsection 715-375(2) will not operate to deem the liabilities to be started to be had at the joining time because, at the joining time, paragraph 715-375(1)(c) is not satisfied.

It is noted that any financial arrangements that were first held by Cpy A on or after its incorporation and up until the joining time will be subject to Division 230 at the joining time (when they will be held by Cpy A as head company) and are not the subject of this ruling request.