Edited version of private advice

Authorisation Number: 1052069978581

Date of advice: 14 December 2022

Ruling

Subject: Temporary full expensing

Question

Is a head company of an income tax consolidated group (the Head Company) entitled to apply temporary full expensing under subsection 40-160(3) of the Income Tax (Transitional Provisions) Act 1997 and deduct in full the tax cost setting amount in respect of the intangible prospecting rights and information depreciating assets acquired when another income tax consolidated group (the Joining Group) joined the Head Company?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

DD MM 20YY

Relevant facts and circumstances

The Head Company is the head company of an income tax consolidated group (TCG).

The Head Company's business included mineral exploration, evaluation, and development.

For the year ended 30 June 20YY, the Head Company's total income was less than $50 million.

The Joining Group was acquired by the Head Company and joined the Head Company's TCG on DD MM 20YY (the Joining Time).

Immediately prior to the Joining Time, the Joining Group held exploration rights and information (the Relevant Assets).

Prior to the Joining Time, the Joining Group used the Relevant Assets.

At the Joining Time, the Relevant Assets were not allocated to low value pools or software development pools and were not previously subjected to any accelerated depreciation measures.

After the Joining Time, the Head Company did not hold the Relevant Assets as trading stock.

The Relevant Assets were located in Australia before and after the Joining Time.

At the date of the Joining Time, the Relevant Assets were used in Australia by the Head Company to undertake active mineral exploration, evaluation and development activities.

The purpose for which the Head Company used the Relevant Assets at the Joining Time was to derive future assessable income through the sale of mineral products.

The Head Company continued to use and hold the Relevant Assets between the Joining Time and 30 June 20YY.

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997 Subdivision 40-BB

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 Division 701

Income Tax Assessment Act 1997 Subdivision 705-A

Income Tax Assessment Act 1997 Subdivision 705-C

Reasons for decision

All legislative references are to the Income Tax (Transitional Provisions) Act 1997 unless otherwise specified.

Temporary full expensing (TFE) means the immediate deduction of the cost of depreciating assets in accordance with the provisions in Subdivision 40-BB.

Eligible entity

Section 40-155 requires an entity accessing TFE to be a 'small business entity'. This includes an entity that would satisfy the definition of a small business entity in Subdivision 328-C of the ITAA 1997 for an income year if each reference in Subdivision 328-C of the ITAA 1997 to an aggregated turnover of $10 million were instead a reference to $5 billion. Section 328-115 and section 328-120 of the ITAA 1997 provide that aggregated turnover generally includes the total ordinary income that an entity derives in the income year in the ordinary course of carrying on a business.

For the 20YY income year, the Head Company's total income was less than $50 million so its aggregated turnover is also less than $50 million. As a result, the Head Company is an eligible business and section 40-155 is satisfied.

Eligible assets

Under subsection 40-150, a depreciating asset held by an entity is eligible for TFE if:

a)            the entity starts to hold the asset on or before 30 June 2023; and

b)            the entity starts to use the asset, or have it installed ready for use, for a taxable purpose on or before 30 June 2023.

Subsection 40-30(2) of the ITAA 1997 states that the following intangible assets are depreciation assets if they are not trading stock:

a)            mining, quarrying or prospecting rights;

b)            mining, quarrying or prospecting information;

After the Head Company acquired the Joining Group at the Joining Time, the Relevant Assets were not held as trading stock. The exploration rights were items of mining, quarrying or prospecting rights and information according to paragraphs 40-30(2)(a) and (b) of the ITAA 1997. As a result, each Relevant Asset was a depreciating asset.

Item 10 of the table in section 40-40 of the ITAA 1997 states that the owner of a depreciating asset is generally the asset's holder.

Item 8 of the table in section 40-40 of the ITAA 1997 further states that the entity which has the mining, quarrying or prospecting information is the holder of the information.

Accordingly, the Head Company satisfies paragraph 40-150(1)(a) of the ITAA 1997 since it started to hold the Relevant Assets at the Joining Time by owning and having the Relevant Assets on that date.

The Head Company started to actively use every Relevant Asset upon at the Joining Time to undertake active exploration in Australia for the purpose of gaining assessable income through the sale of mineral products. The Head Company satisfies paragraph 40-150(1)(b) of the ITAA 1997 since it started to use the Relevant Assets for a taxable purpose at the Joining Time which occurred prior to 30 June 2023.

Section 40-150 further outlines exceptions which preclude an asset from being eligible for TFE. These exceptions do not apply to the Relevant Assets, in particular:

•                     The Relevant Assets are located in Australia, are being used in Australia, and were being used for the principal purpose of carrying on a mining exploration business. As such, subsection 40-150(3) does not apply.

•                     The Relevant Assets were not allocated to a low-value pool or to software development pool in accordance with Subdivision 40-E of the ITAA 1997, so paragraph 40-150(4)(a) does not apply.

Decline in value

Section 40-160 outlines when an entity can fully expense the first and second element of cost for a qualifying asset.

The Head Company satisfies the requirements in subsection 40-160(1) for the following reasons:

•                     The relevant 'current year' pursuant to subsection 40-160(1) is the year in which the Head Company started to hold the Relevant Assets. This was at the Joining Time which was within the year ended 30 June 20YY.

•                     The Head Company started to hold the Relevant Assets at the Joining Time which was after the 20YY budget time and before 30 June 2023 (paragraph 40-160(1)(a)).

•                     The Head Company satisfies the asset use criteria in paragraph 40-160(1)(b). Additionally, the Head Company is covered by section 40-150 for the Relevant Assets and therefore satisfies the criteria in paragraph 40-160(1)(c).

•                     The Head Company satisfies the entity turnover criteria in subparagraph 40-160(1)(d)(i).

•                     No balancing adjustment event happened to the Relevant Assets while they were held by the Head Company in the 20YY income year as there were no disposals, changes to the Relevant Assets, holdings/interests, or gaps in active use between the Joining Time and 30 June 20YY (paragraph 40-160(1)(e)).

•                     The Head Company has sought for TFE to apply to all the Relevant Assets so would not elect for TFE to not apply to any item of the Relevant Assets (paragraph 40-160(1)(f)).

Subsection 40-160(2) provides that TFE does not apply to eligible entities if an exclusion under section 40-165 applies. Subsection 40-165(1) provides that assets are excluded from the TFE regime if the entity's aggregated turnover for the relevant year is over $50 million and if any exclusions in subsection 40-165(2) to 40-165(9) apply.

As the Head Company's aggregated turnover for the 20YY income year was less than $50 million, no exclusions in section 40-165 apply.

As a result, paragraph 40-160(3)(a) applies to work out the TFE decline in value of the Relevant Assets, being their cost at the end of the 20YY income year.

Cost and consolidation

The costs to the Head Company of the Relevant Assets are determined at the Joining Time.

At the Joining Time, subsection 701-10(4) of the ITAA 1997 applied to result in the tax cost of each asset of the Joining Group being set at the asset's tax cost setting amount and subsection 701-55(2)(a) of the ITAA 1997 provides that the Relevant Assets were acquired for a payment equal to their tax cost setting amount.

Subdivision 705-A of the ITAA 1997, as modified by Subdivision 705-C of the ITAA 1997, determines the tax cost setting process for the Relevant Assets at the Joining Time. As depreciating assets, section 705-40 of the ITAA 1997 applies to generally determine the tax costs of the Relevant Assets so that the costs do not exceed the greater of market values or terminating values.

The Joining Group did not previously apply any accelerated depreciation provisions to the Relevant Assets. Therefore, subsection 705-45(2) of the ITAA 1997 does not apply to restrict or reduce their tax cost setting amount at Joining Time.

Paragraphs 701-55(2)(b)-(e) of the ITAA 1997 generally apply to provide that the decline in value should follow the depreciation method previously used by the Joining Group before the Joining Time.

However, section 40-145 states:

If this Subdivision applies to work out the decline in value of a depreciating asset you hold for an income year, no other provision of this Act or the Income Tax Assessment Act 1997 applies to work out that decline in value.

Accordingly, section 40-145 provides the Head Company with access to the TFE regime under Subdivision 40-BB via subsection 40-160(3), rather than by reference to the consolidation regime in paragraphs 701-55(2)(b)-(e) of the ITAA 1997.

Conclusion

The Head Company is entitled to apply TFE under subsection 40-160(3) and deduct in full the tax cost setting of the Relevant Assets acquired from the Joining Group at the Joining Time.