Edited version of your written advice

Authorisation Number: 1012686213749

Ruling

Subject: Income tax ~~Consolidation~~Tax cost setting

Question 1

When the Subsidiary joined the Tax Consolidated Group at the joining time, should the CGT assets owned by the Subsidiary each have been allocated a tax cost setting amount pursuant to sections 705-35 and 705-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

If each of the CGT assets are allocated a tax cost setting amount at the joining time, do these tax cost setting amounts also get reflected as the terminating values of the CGT assets pursuant to section 711-30 of the ITAA 1997 when the Subsidiary left the Tax Consolidated Group at the leaving time?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

When the Subsidiary joined the Tax Consolidated Group, the allocable cost amount (ACA) of the Subsidiary to the Tax Consolidated Group was calculated, with a calculated amount of that ACA allocated as tax cost setting amounts to the CGT assets, which were held on revenue account, and other reset cost base assets in proportion to their market values.

When the Tax Consolidated Group sold the shares in the Subsidiary to an outside entity, this resulted in the Subsidiary leaving the Tax Consolidated Group along with the CGT assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 110-25(12)

Income Tax Assessment Act 1997 Subsection 701-10(4)

Income Tax Assessment Act 1997 Subsection 705-25(5)

Income Tax Assessment Act 1997 Subsection 705-30(4)

Income Tax Assessment Act 1997 Section 705-35

Income Tax Assessment Act 1997 Subsection 705-35(1)

Income Tax Assessment Act 1997 Section 705-40

Income Tax Assessment Act 1997 Subsection 705-40(1)

Income Tax Assessment Act 1997 Section 705-60

Income Tax Assessment Act 1997 Section 711-25

Income Tax Assessment Act 1997 Section 711-30

Income Tax Assessment Act 1997 Subsection 711-30(2)

Income Tax Assessment Act 1997 Section 977-50

Reasons for decision

Summary

At the joining time, the CGT assets owned by the Subsidiary should each have been allocated a tax cost setting amount pursuant to sections 705-35 and 705-40 of the ITAA 1997.

Detailed reasoning

Subsection 701-10(4) of the ITAA 1997 states that the tax cost for each of the CGT assets is set at the joining time at their tax cost setting amounts.

As the CGT assets are reset cost base assets (as they are not retained cost base assets as defined in subsection 705-25(5) of the ITAA 1997 - e.g. cash), subsection 705-35(1) of the ITAA 1997 states that their tax cost setting amounts at the joining time are worked out by:

(a) first working out the Tax Consolidated Group's ACA for the Subsidiary in accordance with section 705-60 of the ITAA 1997 (i.e. the cost of the Subsidiary's shares to the Tax Consolidated Group acquired at market value plus any liabilities and retained profits of the Subsidiary and minus other applicable adjustments)

(b) then reducing the Tax Consolidated Group's ACA for the Subsidiary by the total cost setting amount for the Subsidiary's retained cost base assets, and

(c) finally, allocating the result to each of the Subsidiary's reset cost base assets, including the CGT assets, in proportion to their market values.

For completeness, subsection 705-40(1) of the ITAA 1997 will also apply to the CGT assets (as they are revenue assets under section 977-50 of the ITAA 1997) when calculating their tax cost setting amounts at the joining time, to ensure that they do not exceed the greater of:

(a) their market values, and

(b) their terminating values under subsection 705-30(4) of the ITAA 1997, being their cost bases as held by the Subsidiary just before the joining time.

In conclusion, the CGT assets should each have been allocated a tax cost setting amount at the joining time pursuant to sections 705-35 and 705-40 of the ITAA 1997.

Question 2

Summary

The tax cost setting amounts allocated to the CGT assets at the joining time pursuant to sections 705-35 and 705-40 of the ITAA 1997, will also get reflected as the terminating values of the CGT assets pursuant to section 711-30 of the ITAA 1997 at the leaving time.

Detailed reasoning

Paragraphs 1 to 3 of Taxation Determination TD 2006/19 relevantly state:

1. … Subsection 711-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) requires the terminating value of a CGT asset of a leaving entity for the purposes of section 711-25 of the ITAA 1997 to be worked out in accordance with subsection 705-30(4) of the ITAA 1997. The terminating value of a CGT asset of a leaving entity is equal to the asset's cost base or reduced cost base just before the leaving time.

2. The CGT asset's cost base or reduced cost base is worked out under Subdivisions 110-A and 110-B of the ITAA 1997 respectively. The tax cost that was set for the CGT asset under subsection 701-10(4) of the ITAA 1997 when the subsidiary member joined the consolidated group, is what would be the asset's cost base under section 110-25 of the ITAA 1997 or the asset's reduced cost base under section 110-55 of the ITAA 1997 if a cost base or reduced cost base was worked out at that time.

3. The terminating value of a CGT asset of a leaving entity that had its tax cost set at the joining time under subsection 701-10(4) of the ITAA 1997 will therefore consist of the cost set at the joining time …

When applying the paragraphs 1 to 3 of TD 2006/19, the terminating values of the CGT assets at the leaving time are determined as follows:

1. The terminating values of the CGT assets at the leaving time under subsection 711-30(2) of the ITAA 1997 for the purposes of section 711-25 of the ITAA 1997 are required to be worked out in accordance with subsection 705-30(4) of the ITAA 1997, meaning that they will equal the cost bases of the CGT assets just before the leaving time.

2. The cost bases of the CGT assets just before the leaving time are what their calculated cost bases would be at the joining time. As no CGT event occurred at the joining time, subsection 110-25(12) of the ITAA 1997 will apply so that the cost bases of the CGT assets will equal their tax cost setting amounts at that time (based on the assumption that a CGT event did happen at that time).

3. The terminating values of the CGT assets at the leaving time will therefore consist of their tax costs set at the joining time under subsection 701-10(4) of the ITAA 1997 (and more specifically pursuant to sections 705-35 and 705-40 of the ITAA 1997), as these tax cost setting amounts are also equal to the market values of the CGT assets at the joining time.

In conclusion, the tax cost setting amounts allocated to the CGT assets at the joining time pursuant to sections 705-35 and 705-40 of the ITAA 1997, will also get reflected as the terminating values of the CGT assets pursuant to section 711-30 of the ITAA 1997 at the leaving time.