Edited version of private advice

Authorisation Number: 1051780396842

Date of advice: 13 November 2020

Ruling

Subject: CGT events straddling joining time

Question 1

In considering the capital gains tax (CGT) implications that will arise following the disposal of the Business Expansion Land held by the joining company, will the tax cost base of the Land be determined by application of the Allocable Cost Amount (the ACA) provisions set out in sections 705-65 to 705-115 of the ITAA 1997?

Answer

Yes

Question 2

Will CGT Event A1 as set out in section 104-10 of the ITAA 1997 occur on the settlement date following the completion of the relevant land contracts relating to those parts of the Business Expansion Land following subdivision which are not required by the Taxpayer?

Answer

Yes, but only in respect of Part 1 and Part 2.

This ruling applies for the following period(s)

1 July 2018 to 30 June 2019

The scheme commences on

In the income year beginning with 1 July 2018

Relevant facts and circumstances

A is an Australian resident company and the head entity of its tax consolidated group (TCG).

In 2019, A acquired 100% of the shares on issue in B, a private Australian company for a base purchase price plus deferred purchase price amount.

Prior to the completion of the acquisition, B was the head company its tax consolidated group. As a result, B and its wholly owned subsidiary members joined A TCG in 2019, among which is Land Co. whose shares are 100% owned by B.

Land Co owns a parcel land that was not subdivided. It has planned to submit subdivision application to create three titles, Part 1, Part 2 and Part 3.

At acquisition time, Part 1 and Part 2 are subject to conditional sales contracts. In respect of Part 3, A and the shareholder of B entered into an option deed that A has the right but obligation to sell the land to the shareholder of B at agreed contract price for 12 months after subdivision.

The purchase price for the Land is represented as 'deferred purchase price amount' which is the sum of the contract prices of the three parts.

A will satisfy the obligation of paying deferred purchase price by Land Co executing the sale contracts in respect of Part 1 and Part 2 after subdivision and in respect of part 3, by either excising put option or by paying the contract price.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Subdivision 110-A

Income Tax Assessment Act 1997 subsection 108-5(2)

Income Tax Assessment Act 1997 Subdivision 110-B

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 section 110-55

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

Income Tax Assessment Act 1997 section 701-67

Income Tax Assessment Act 1997 Subdivision 705-A

Income Tax Assessment Act 1997 section 705-20

Income Tax Assessment Act 1997 section 705-35

Income Tax Assessment Act 1997 Section 705-60

Income Tax Assessment Act 1997 section 705-65

Income Tax Assessment Act 1997 subsection 705-65(1)

Income Tax Assessment Act 1997 Subdivision 705-C

Income Tax Assessment Act 1997 section 705-180

Income Tax Assessment Act 1997 subsection 705-180(1)

Income Tax Assessment Act 1997 subsection 705-180(2)

Income Tax Assessment Act 1997 section 705-185

Income Tax Assessment Act 1997 section 716-860

Anti-avoidance rules

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or DPT tax benefit in connection with an arrangement.

If Part IVA applies the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'Part IVA general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Subsection 701-10(4) of the ITAA 1997 provides that when an entity becomes a subsidiary member of a tax consolidated group, each asset's tax cost is set at the assets' tax cost setting amounts. For assets which are CGT assets, subsection 701-55(5) of the ITAA 1997 defines setting the tax cost of an asset to mean that the cost base or reduced cost base at the particular time equals the asset ' s tax cost setting amount.

A general definition of 'asset' is not provided in the legislation. However, paragraph 5 of TR 2004/13 Income tax: the meaning of an asset for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (TR 2004/13) provides that an asset, for the purpose of the tax cost setting rules, is anything recognised in commerce and business as having economic value to the joining entity at the joining time for which a purchaser of its membership interests would be willing to pay. The business or commercial assets of a joining entity would include the things that would be expected to be identified by a prudent vendor and purchaser as having value in the making of a sale agreement in respect of all the membership interests in an entity and its business. Further, paragraph 6 of TR 2004/13 provides that the commercial or business meaning of an asset in Part 3-90 of the ITAA 1997 is not limited to assets that would be recognised under accounting standards or statements of accounting concepts.

At the joining time, the joining entity held the legal ownership of the Business Expansion Land although parts were subject to conditional sales contracts. However, the land was recognised as having economic values to B group and has been recognised as assets on the joining entity's financial statements.

At the joining time A as the purchaser was willing to pay for the land in order to secure their interest in part of the land by assuming liability of deferred consideration for acquiring membership interest in the joining entity. Although the obligation for the payment may be satisfied in future by A surrendering the Part 1 and Part 2 to respective contracted parties, the fact is that at the joining time all of the Land was acquired by A at an agreed price.

Thus the Business Expansion Land is an asset for cost setting purposes and it follows that the tax cost base of the Land is determined by application of the ACA provisions set out in sections 705-65 to 705-115 of the ITAA 1997.

Question 2

CGT event A1 happens to a taxpayer where change of ownership occurs to a CGT asset owned by the taxpayer pursuant to section 104-10 of the ITAA 1997. The timing of the CGT event is when the entity entered into the contract for the disposal or if there is no contract, when the change of ownership occurs.

Section 716-860 modifies the timing of CGT events which straddle the time when an entity joins or leaves a consolidated group. Pursuant to subsection 716-860 of the ITAA 1997, it applies where:

(1) a joining entity or leaving entity holds a CGT asset at a joining or leaving time, disregarding the single entity rule

(2) the head company of the consolidated group holds the CGT asset at that time, taking into account the single entity rule, and

(3) a CGT event happens before an entity joins a consolidated group, but

(4) the circumstances giving rise to the CGT event only first exist after that entity joins the consolidated group.

Prior to the joining entity joining A TCG, it entered into sales contracts in respect of the Parts 1 ad 2, although completion of the contracts are subject to the approval to subdivision. Whilst the legal title of the land could not be transferred as the Land is yet to be subdivided, pursuant to subsection 108-5(2) of the ITAA 1997, a part of or an interest in a property is also a CGT asset. Thus we consider the three parts of the Land are separate CGT assets as they are differentiated in various legal contracts with clear demarcation, albeit that separate legal titles have not yet been created. As CGT event A1 happened to the Part 1 prior to Land Co. joining the A tax consolidated group when the sales contract was entered into, section 716-860 of the ITAA 1997 applies to modify the timing of CGT event A1 to when the circumstances that gives rise to the CGT event first existed, which will be the settlement date for the land.

Similarly, CGT event A1 happened to Part 2 prior to Land Co. joining A TCG, when it entered the sales contract, although section 716-860 of the ITAA 1997 applies to modify the timing of CGT event A1 to when the circumstances that gives rise to the CGT event first existed, which will be the settlement date for the land.

However, we do not consider the option deed in respect of Part 3 constitutes a contract for changing ownership as the potential disposal of Part 3 remained contingent on the discretion of relevant parties exercising put option Thus section 716-860 of the ITAA 1997 does not apply to Part 3, and the CGT event A1 will happen to this asset when the parties enter into sale contract following the exercise of the put option.