Income Tax Assessment Act 1997

No. 38, 1997

Compilation No. 174

Compilation date:   12 October 2017

Includes amendments up to: Act No. 108, 2017

Registered:    12 October 2017

This compilation is in 11 volumes

Volume 1: sections 11 to 3655

Volume 2: sections 401 to 5510

Volume 3: sections 581 to 122205

Volume 4: sections 1241 to 152430

Volume 5: sections 1641 to 220800

Volume 6: sections 2301 to 31215

Volume 7: sections 3151 to 42070

Volume 8: sections 6151 to 727910

Volume 9: sections 7681 to 9951

Volume 10: Endnotes 1 to 3

Volume 11: Endnote 4

Each volume has its own contents

 

About this compilation

This compilation

This is a compilation of the Income Tax Assessment Act 1997 that shows the text of the law as amended and in force on 12 October 2017 (the compilation date).

The notes at the end of this compilation (the endnotes) include information about amending laws and the amendment history of provisions of the compiled law.

Uncommenced amendments

The effect of uncommenced amendments is not shown in the text of the compiled law. Any uncommenced amendments affecting the law are accessible on the Legislation Register (www.legislation.gov.au). The details of amendments made up to, but not commenced at, the compilation date are underlined in the endnotes. For more information on any uncommenced amendments, see the series page on the Legislation Register for the compiled law.

Application, saving and transitional provisions for provisions and amendments

If the operation of a provision or amendment of the compiled law is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes.

Editorial changes

For more information about any editorial changes made in this compilation, see the endnotes.

Modifications

If the compiled law is modified by another law, the compiled law operates as modified but the modification does not amend the text of the law. Accordingly, this compilation does not show the text of the compiled law as modified. For more information on any modifications, see the series page on the Legislation Register for the compiled law.

Selfrepealing provisions

If a provision of the compiled law has been repealed in accordance with a provision of the law, details are included in the endnotes.

 

 

 

Contents

Chapter 3—Specialist liability rules

Part 380—Rollovers applying to assets generally

Division 615—Rollovers for business restructures

Guide to Division 615 1

6151 What this Division is about

Subdivision 615A—Choosing to obtain rollovers

6155 Disposing of interests in one entity for shares in a company

61510 Redeeming or cancelling interests in one entity for shares in a company

Subdivision 615B—Further requirements for choosing to obtain rollovers

61515 Interposed company must own all the original interests

61520 Requirements relating to your interests in the original entity

61525 Requirements relating to the interposed company

61530 Interposed company must make a particular choice

61535 ADI restructures—disregard certain preference shares

Subdivision 615C—Consequences of rollovers

61540 CGT consequences

61545 Additional consequences—deferral of profit or loss

61550 Trading stock

61555 Revenue assets

61560 Disregard CGT exemption for trading stock

Subdivision 615D—Consequences for the interposed company

61565 Consequences for the interposed company

Division 620—Assets of woundup corporation passing to corporation with not significantly different ownership

Subdivision 620A—Corporations covered by Subdivision 124I

Guide to Subdivision 620A

6205 What this Subdivision is about

Application and object of this Subdivision

62010 Application

62015 Object

CGT consequences

62020 Disregard body’s capital gains and losses from CGT assets

62025 Cost base and preCGT status of CGT asset for company

Consequences for depreciating assets

62030 Rollover relief for balancing adjustment events

Consequences for trading stock

62040 Body taken to have sold trading stock to company

Consequences for revenue assets

62050 Body taken to have sold revenue assets to company

Part 390—Consolidated groups

Division 700—Guide and objects

Guide 

7001 What this Part is about

7005 Overview of this Part

Objects 

70010 Objects of this Part

Division 701—Core rules

Common rule 

7011 Single entity rule

Head company rules

7015 Entry history rule

70110 Cost to head company of assets of joining entity

70115 Cost to head company of membership interests in entity that leaves group

70120 Cost to head company of assets consisting of certain liabilities owed by entity that leaves group

70125 Taxneutral consequence for head company of ceasing to hold assets when entity leaves group

Entity rules 

70130 Where entity not subsidiary member for whole of income year

70135 Taxneutral consequence for entity of ceasing to hold assets when it joins group

70140 Exit history rule

70145 Cost of assets consisting of liabilities owed to entity by members of the group

70150 Cost of certain membership interests of which entity becomes holder on leaving group

Supporting provisions

70155 Setting the tax cost of an asset

70156 Application of subsection 70155(6)

70158 Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule

70160 Tax cost setting amount

70161 Assets in relation to Division 230 financial arrangement—head company’s assessable income or deduction

70163 Right to future income and WIP amount asset

70165 Net income and losses for trusts and partnerships

70167 Assets in this Part are CGT assets, etc.

Exceptions 

70170 Adjustments to taxable income where identities of parties to arrangement merge on joining group

70175 Adjustments to taxable income where identities of parties to arrangement reemerge on leaving group

70180 Accelerated depreciation

70185 Other exceptions etc. to the rules

Division 703—Consolidated groups and their members

Guide to Division 703 52

7031 What this Division is about

Basic concepts 

7035 What is a consolidated group?

70310 What is a consolidatable group?

70315 Members of a consolidated group or consolidatable group

70320 Certain entities that cannot be members of a consolidated group or consolidatable group

70325 Australian residence requirements for trusts

70330 When is one entity a whollyowned subsidiary of another?

70333 Transfer time for sale of shares in company

70335 Treating entities as whollyowned subsidiaries by disregarding employee shares

70337 Disregarding certain preference shares following an ADI restructure

70340 Treating entities held through nonfixed trusts as whollyowned subsidiaries

70345 Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group

Choice to consolidate a consolidatable group

70350 Choice to consolidate a consolidatable group

Consolidated group created when MEC group ceases to exist

70355 Creating consolidated groups from certain MEC groups

Notice of events affecting consolidated group

70358 Notice of choice to consolidate

70360 Notice of events affecting consolidated group

Effects of choice to continue group after shelf company becomes new head company

70365 Application

70370 Consolidated group continues in existence with interposed company as head company and original entity as a subsidiary member

70375 Interposed company treated as substituted for original entity at all times before the completion time

70380 Effects on the original entity’s tax position

Division 705—Tax cost setting amount for assets where entities become subsidiary members of consolidated groups

Guide to Division 705 73

7051 What this Division is about

Subdivision 705A—Basic case: a single entity joining an existing consolidated group

Guide to Subdivision 705A

7055 What this Subdivision is about

Application and object

70510 Application and object of this Subdivision

70515 Cases where this Subdivision does not have effect

Tax cost setting amount for assets that joining entity brings into joined group

70520 Tax cost setting amount worked out under this Subdivision

70525 Tax cost setting amount for retained cost base assets

70527 Reduction in tax cost setting amount that exceeds market value of certain retained cost base assets

70530 What is the joining entity’s terminating value for an asset?

70535 Tax cost setting amount for reset cost base assets

70540 Tax cost setting amount for reset cost base assets held on revenue account etc.

70545 Reduction in tax cost setting amount for accelerated depreciation assets

70547 Reduction in tax cost setting amount for some privatised assets

70555 Order of application of sections 70540, 70545 and 70547

70556 Modification for tax cost setting in relation to finance leases

70557 Adjustment to tax cost setting amount where loss of preCGT status of membership interests in joining entity

70558 Assets and liabilities not set off against each other

70559 Exception: treatment of linked assets and liabilities

How to work out the allocable cost amount

70560 What is the joined group’s allocable cost amount for the joining entity?

70562 No double counting of amounts in allocable cost amount

70565 Cost of membership interests in the joining entity—step 1 in working out allocable cost amount

70570 Liabilities of the joining entity—step 2 in working out allocable cost amount

70575 Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount

70580 Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount

70585 Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount

70590 Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount

70593 If prejoining time rollover from foreign resident company or head company—step 3A in working out allocable cost amount

70595 Prejoining time distributions out of certain profits—step 4 in working out allocable cost amount

705100 Losses accruing to joined group before joining time—step 5 in working out allocable cost amount

705105 Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount

705110 If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount

705115 If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount

How to work out a preCGT factor for assets of joining entity

705125 PreCGT proportion for joining entity

Subdivision 705B—Case of group formation

Guide to Subdivision 705B

705130 What this Subdivision is about

Application and object

705135 Application and object of this Subdivision

Modified application of Subdivision 705A

705140 Subdivision 705A has effect with modifications

705145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members

705147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members

705155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests

705160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members

705163 Modified application of section 70557

Subdivision 705C—Case where a consolidated group is acquired by another

Guide to Subdivision 705C

705170 What this Subdivision is about

Application and object

705175 Application and object of this Subdivision

Modified application of Division 701 in relation to acquired group etc.

705180 Modifications of Division 701

Modified application of Subdivision 705A in relation to acquiring group

705185 Subdivision 705A has effect with modifications

Modifications of Subdivision 705A for the purposes of this Subdivision

705195 Modified application of subsection 70565(6)

705200 Modified application of section 70585

Subdivision 705D—Where multiple entities are linked by membership interests

Guide to Subdivision 705D

705210 What this Subdivision is about

Application and object

705215 Application and object of this Subdivision

Modified application of Subdivision 705A

705220 Subdivision 705A has effect with modifications

705225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities

705227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities

705230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests

705235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities

705240 Modified application of section 70557

Subdivision 705E—Adjustments for errors etc.

Guide to Subdivision 705E

705300 What this Subdivision is about

Operative provisions

705305 Object of this Subdivision

705310 Operation of Part IVA of the Income Tax Assessment Act 1936

705315 Errors that attract special adjustment action

705320 Tax cost setting amounts taken to be correct

Division 707—Losses for head companies when entities become members etc.

Subdivision 707A—Transfer of losses to head company

Guide to Subdivision 707A

707100 What this Subdivision is about

707105 Who can utilise the loss?

Objects 

707110 Objects of this Subdivision

Application 

707115 What losses this Subdivision applies to

Transfer of loss from joining entity to head company

707120 Transfer of loss from joining entity to head company

707125 Modified same business test for companies’ post1999 losses

707130 Modified pattern of distributions test

707135 Transferring loss transferred to joining entity because same business test was passed

Effect of transfer of loss

707140 Effect of transfer of loss

Cancelling the transfer of the loss

707145 Cancelling the transfer of the loss

What happens if the loss is not transferred?

707150 Loss cannot be utilised for income year ending after the joining time

Subdivision 707B—Can a transferred loss be utilised?

Guide to Subdivision 707B

707200 What this Subdivision is about

Operative provisions

707205 Modified period for test for maintaining same ownership

707210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier

Subdivision 707C—Amount of transferred losses that can be utilised

Guide to Subdivision 707C

707300 What this Subdivision is about

Object 

707305 Object of this Subdivision

How much of a transferred loss can be utilised?

707310 How much of a transferred loss can be utilised?

707315 What is a bundle of losses?

707320 What is the available fraction for a bundle of losses?

707325 Modified market value of an entity becoming a member of a consolidated group

707330 Losses transferred from former head company

707335 Limit on utilising transferred losses if circumstances change during income year

707340 Utilising transferred losses while exempt income remains

707345 Other provisions are subject to this Subdivision

Subdivision 707D—Special rules about losses

707400 Head company’s business before and after consolidation not compared

707410 Exit history rule does not treat entity as having made a loss

707415 Application of losses with nil available fraction for certain purposes

Division 709—Other rules applying when entities become subsidiary members etc.

Subdivision 709A—Franking accounts

Guide to Subdivision 709A

70950 What this Subdivision is about

Object 

70955 Object of this Subdivision

Treatment of franking accounts at joining time

70960 Nil balance franking account for joining entity

Treatment of subsidiary member’s franking account

70965 Subsidiary member’s franking account does not operate

Treatment of head company’s franking account

70970 Credits arising in head company’s franking account

70975 Debits arising in head company’s franking account

Franking distributions by subsidiary member

70980 Subsidiary member’s distributions on employee shares and certain preference shares taken to be distributions by the head company

70985 Nonshare distributions by subsidiary members taken to be distributions by head company

70990 Subsidiary member’s distributions to foreign resident taken to be distributions by head company

Payment of group liability by former subsidiary member

70995 Payment of group liability by former subsidiary member

709100 Refund of income tax to former subsidiary member

Subdivision 709B—Imputation issues

Guide to Subdivision 709B

709150 What this Subdivision is about

Operative provisions

709155 Testing consolidated groups

709160 Subsidiary member is exempting entity

709165 Subsidiary member is former exempting entity

709170 Head company and subsidiary are exempting entities

709175 Head company is former exempting entity

Subdivision 709C—Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group

Guide to Subdivision 709C

709180 What this Subdivision is about

709185 Joining entity’s excess franking deficit tax offsets transferred to head company

709190 Exit history rule not to treat leaving entity as having a franking deficit tax offset excess

Subdivision 709D—Deducting bad debts

Guide to Subdivision 709D

709200 What this Subdivision is about

Application and object

709205 Application of this Subdivision

709210 Object of this Subdivision

Limit on deduction of bad debt

709215 Limit on deduction of bad debt

Extension of Subdivision to debt/equity swap loss

709220 Limit on deduction of swap loss

Division 711—Tax cost setting amount for membership interests where entities cease to be subsidiary members of consolidated groups

Guide to Division 711 211

7111 What this Division is about

Application and object of this Division

7115 Application and object of this Division

Tax cost setting amount for membership interests etc.

71110 Tax cost setting amount worked out under this Division

71115 Tax cost setting amount where no multiple exit

71120 What is the old group’s allocable cost amount for the leaving entity?

71125 Terminating values of the leaving entity’s assets—step 1 in working out allocable cost amount

71130 What is the head company’s terminating value for an asset?

71135 If head company becomes entitled to certain deductions—step 2 in working out allocable cost amount

71140 Liabilities owed to the leaving entity by members of the old group—step 3 in working out allocable cost amount

71145 Liabilities etc. owed by the leaving entity—step 4 in working out allocable cost amount

71155 Tax cost setting amount for membership interests where multiple exit

71165 Membership interests treated as having been acquired before 20 September 1985

71170 Additional integrity rule if membership interests treated as having been acquired before 20 September 1985 under section 71165—application of Division 149 to head company

71175 Additional integrity rule if membership interests treated as having been acquired before 20 September 1985 under section 71165—application of CGT event K6

Division 713—Rules for particular kinds of entities

Subdivision 713A—Trusts

Working out a joined group’s allocable cost amount for a joining trust

71320 Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests

71325 Undistributed, realised profits that accrue to joined group before joining time and could be distributed tax free—step 3 in working out allocable cost amount

Determining destination of distribution by nonfixed trust

71350 Factors to consider

Subdivision 713C—Some unit trusts treated like head companies of consolidated groups

Guide to Subdivision 713C

713120 What this Subdivision is about

Object of this Subdivision

713125 Object of this Subdivision

Choice to form a consolidated group

713130 Choosing to form a consolidated group

Effects of choice

713135 Effects of choice

713140 Modifications of the applied law

Subdivision 713E—Partnerships

Guide to Subdivision 713E

713200 What this Subdivision is about

Objects 

713205 Objects of this Subdivision

Partnership cost setting interests etc.

713210 Partnership cost setting interests

713215 Terminating value for partnership cost setting interest

Setting tax cost of partnership cost setting interests

713220 Set tax cost of partnership cost setting interests if partner joins consolidated group

713225 Tax cost setting amount for partnership cost setting interest

Special rules where partnership joins consolidated group

713235 Partnership joins group—set tax cost of partnership assets

713240 Partnership joins group—tax cost setting amount for partnership asset

Special rules where partnership leaves consolidated group

713250 Partnership leaves group—standard provisions modified

713255 Partnership leaves group—tax cost setting amount for partnership cost setting interests

713260 Partnership leaves group—tax cost setting amount for assets consisting of being owed certain liabilities

713265 Partnership leaves group—adjustments to allocable cost amount of partner who also leaves group

Subdivision 713L—Life insurance companies

Guide to Subdivision 713L

713500 What this Subdivision is about

General modifications for life insurance companies

713505 Head company treated as a life insurance company

713510 Certain subsidiaries of life insurance companies cannot be members of consolidated group

713510A Disregard single entity rule in working out certain amounts in respect of life insurance company

Life insurance companies’ liabilities on joining consolidated group

713511 Treatment of certain liabilities for income year when life insurance company joins consolidated group

Tax cost setting rules for life insurance companies joining consolidated group

713515 Certain assets taken to be retained cost base assets where life insurance company joins group

713520 Valuing certain liabilities where life insurance company joins group

713525 Obligation to value certain assets and liabilities at joining time

Losses of life insurance companies joining consolidated group

713530 Treatment of certain losses of life insurance company

Losses of life insurance companies’ subsidiaries joining consolidated group

713535 Losses of entities whose membership interests are complying superannuation assets of life insurance company

713540 Losses of entities whose membership interests are segregated exempt assets of life insurance company

Imputation rules for life insurance companies joining consolidated group

713545 Treatment of franking surplus in franking account of life insurance subsidiary joining group

713550 Treatment of head company’s franking account after joining

Liabilities for life insurance companies leaving consolidated group

713565 Treatment of certain liabilities for income year when life insurance company leaves consolidated group

Losses for life insurance companies leaving consolidated group

713570 Certain losses transferred to leaving company

Tax cost setting rules for life insurance companies leaving consolidated group

713575 Terminating value of certain assets where life insurance company leaves group

713580 Valuing certain liabilities where life insurance company leaves group

713585 Obligation to value certain assets and liabilities at leaving time

Subdivision 713M—General insurance companies

Guide to Subdivision 713M

713700 What this Subdivision is about

Tax cost setting rules for general insurance companies joining consolidated group

713705 Certain assets taken to be retained cost base assets where general insurance company joins group

Liabilities and reserves of general insurance companies joining and leaving consolidated groups

713710 Treatment of liabilities and reserves for income year when general insurance company joins or leaves group

713715 If general insurance company joins consolidated group

713720 If general insurance company leaves consolidated group

713725 Treatment of certain assets and liabilities of general insurance companies

Division 715—Interactions between this Part and other areas of the income tax law

Subdivision 715A—Treatment of unrealised losses existing when ownership or control of a company changes before or during consolidation

Object 

71515 Object of this Subdivision

Effect on Subdivision 165CC of a company becoming a member of a consolidated group

71525 Subdivision 165CC stops applying to earlier changeover time

71530 Meaning of 165CC tagged asset

71535 Meaning of final RUNL

165CC tagged assets that affect tax cost setting amounts

71550 Step 1 amount is reduced if membership interest in subsidiary member is 165CC tagged asset and same business test is failed

71555 Step 2 amount is affected if liability of subsidiary member is 165CC tagged asset of another group member and same business test is failed

165CC tagged assets that form loss denial pools of head company when consolidated group is formed

71560 Assets that the head company already owns

71570 Assets of subsidiary member that become those of head company

How Subdivision 165CC applies to consolidated groups

71575 Extension of single entity rule and entry history rule

Effect on Subdivision 165CC of entity leaving consolidated group

71580 Application of sections 71585 to 715110

71585 First changeover time for leaving company at or after leaving time

71590 How same business test applies if leaving time is changeover time for leaving company

71595 If ownership and control of leaving entity have not changed since head company’s last changeover time

715100 First choice: adjustable values of leaving assets reduced to nil

715105 Second choice: head company’s final RUNL applied in reducing adjustable values of leaving assets that are loss assets

715110 Third choice: loss denial pool of leaving entity created

Effect of assets in loss denial pool of head company becoming assets of leaving entity

715120 What happens

715125 First choice: adjustable values of leaving assets reduced to nil

715130 Second choice: pool’s loss denial balance applied in reducing adjustable values of leaving assets that are loss assets

715135 Third choice: loss denial pool of leaving entity created

Effect of first and second choices on various kinds of assets

715145 Effect of choice on adjustable value of leaving asset

General provisions about loss denial pools

715155 When asset leaves pool

715160 How loss denial balance is applied to losses realised on assets in pool

715165 When pool ceases to exist

Choices under this Subdivision

715175 When choice must be made

715180 Head company to notify leaving entity of choice

715185 Leaving entity may choose to cancel loss denial pool by reducing adjustable values of assets in the pool

Subdivision 715B—How Subdivision 165CD applies to consolidated groups and leaving entities

How Subdivision 165CD applies to consolidated groups

715215 Extension of single entity rule and entry history rule

715225 Working out adjusted unrealised loss using individual asset method

715230 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715H

How Subdivision 165CD applies to leaving entity that is a company

715240 Application of sections 715245 to 715260

715245 If ownership or control of leaving entity has altered since head company’s last alteration time or formation of group

715250 If head company has had an alteration time but ownership and control of leaving entity have not altered since

715255 Consequences if leaving entity is a loss company at the leaving time

715260 If neither of sections 715245 and 715250 applies

715265 Head company does not have relevant equity or debt interest in a loss company if widely held top company does not have such an interest

How Subdivision 165CD applies to leaving entity that is a trust

715270 Subdivision 165CD applies

Subdivision 715C—Common rules for the purposes of Subdivisions 715A and 715B

715290 Additional assumptions to be made when using reference time

Subdivision 715D—Treatment of company’s deferred losses under Subdivision 170D on joining a consolidated group

Key terminology

715310 What is a 170D deferred loss, and when it revives

Deferred loss on 165CC tagged asset

715355 Head company’s own deferred losses at formation time

715360 Deferred losses brought in by subsidiary member

715365 How loss denial balance is applied when 170D deferred loss revives

Subdivision 715E—Interactions with Division 775 (Foreign currency gains and losses)

715370 Cost setting—reference time for determining currency exchange rate effect

Subdivision 715F—Interactions with Division 230 (financial arrangements)

715375 Cost setting—amount of liability that is Division 230 financial arrangement

715378 Cost setting—head company’s right to receive or obligation to provide payment

715380 Exit history rule not to affect certain matters related to Division 230 financial arrangements

715385 Exit history rule and elective methods applying to Division 230 financial arrangements

Subdivision 715G—How value shifting rules apply to a consolidated group

715410 Extension of single entity rule and entry history rule

715450 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715H

Subdivision 715H—Cancelling loss on realisation event for direct or indirect interest in a member of a consolidated group

715610 Cancellation of loss

715615 Exception for interests in entity leaving consolidated group

715620 Exception if loss attributable to certain matters

Subdivision 715J—Entry history rule and choices

Head company’s choice overriding entry history rule

715660 Head company’s choice overriding entry history rule

Choices head company can make ignoring entry history rule to override inconsistencies

715665 Head company’s choice to override inconsistency

Choices with ongoing effect

715670 Ongoing effect of choices made by entities before joining group

715675 Head company adopting choice with ongoing effect

Subdivision 715K—Exit history rule and choices

Choices leaving entity can make ignoring exit history rule

715700 Choices leaving entity can make ignoring exit history rule

Choices leaving entity can make ignoring exit history rule to overcome inconsistencies

715705 Choices leaving entity can make ignoring exit history rule to overcome inconsistencies

Subdivision 715U—Effect on conduit foreign income

715875 Extension of single entity rule and entry history rule

715880 No CFI for leaving entity

Subdivision 715V—Entity ceasing to be exempt from income tax on becoming subsidiary member of consolidated group

715900 Transition time taken to be just before joining time

Subdivision 715W—Effect on arrangements where CGT rollovers are obtained

715910 Effect on restructures—original entity becomes a subsidiary member

715915 Effect on restructures—original entity is a head company

715920 Effect on restructures—original entity is a head company that becomes a subsidiary member of another group

715925 Effect on restructures—original entity ceases being a subsidiary member

Division 716—Miscellaneous special rules

Subdivision 716A—Assessable income and deductions spread over several membership or nonmembership periods

Guide to Subdivision 716A

7161 What this Division is about

Operative provisions

71615 Assessable income spread over 2 or more income years

71625 Deductions spread over 2 or more income years

71670 Capital expenditure that is fully deductible in one income year

Assessable income and deductions arising from share of net income of a partnership or trust, or from share of partnership loss

71675 Application

71680 Head company’s assessable income and deductions

71685 Entity’s assessable income and deductions for a nonmembership period

71690 Entity’s share of assessable income or deductions of partnership or trust

71695 Special rule if not all partnership or trust’s assessable income or deductions taken into account in working out amount

716100 Spreading period

Subdivision 716E—Tax cost setting for exploration and prospecting assets

716300 Prime cost method of working out decline in value

Subdivision 716G—Lowvalue and software development pools

Assets in joining entity’s lowvalue pool

716330 Head company’s deductions for decline in value of assets in joining entity’s lowvalue pool

Entity leaving group with asset allocated to head company’s lowvalue pool

716335 Entity leaving group with asset allocated to head company’s lowvalue pool

Depreciating assets arising from expenditure in joining entity’s software development pool

716340 Depreciating assets arising from expenditure in joining entity’s software development pool

Software development pools if entity leaves consolidated group

716345 Head company taken not to have incurred expenditure

Subdivision 716S—Miscellaneous consequences of tax cost setting

716400 Tax cost setting and bad debts

Subdivision 716V—Research and Development

716500 Head company bound by agreements binding on subsidiary members

716505 History for entitlement to tax offset: joining entity

716510 History for entitlement to tax offset: leaving entity

Subdivision 716Z—Other

716800 Allocating amounts to periods if head company and subsidiary member have different income years

716850 Grossing up threshold amounts for periods of less than 365 days

716855 Working out the cost base or reduced cost base of a preCGT asset after certain rollovers

716860 CGT event straddling joining or leaving time

Division 717—International tax rules

Subdivision 717A—Foreign income tax offsets

7171 What this Subdivision is about

Object 

7175 Object of this Subdivision

Foreign income tax on amounts in head company’s assessable income

71710 Head company taken to be liable for subsidiary member’s foreign income tax

Subdivision 717D—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: entry rules

Guide to Subdivision 717D

717200 What this Subdivision is about

Object 

717205 Object of this Subdivision

Transfers 

717210 Attribution surpluses

717220 FIF surpluses

717227 Deferred attribution credits

Subdivision 717E—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: exit rules

Guide to Subdivision 717E

717235 What this Subdivision is about

Object 

717240 Object of this Subdivision

Transfers 

717245 Attribution surpluses

717255 FIF surpluses

717262 Deferred attribution credits

Subdivision 717O—Offshore banking units

Guide to Subdivision 717O

717700 What this Subdivision is about

717705 Object of this Subdivision

717710 Head company treated as OBU

Division 719—MEC groups

Subdivision 719A—Modified application of Part 390 to MEC groups

7192 Modified application of Part 390 to MEC groups

Subdivision 719B—MEC groups and their members

7194 What this Subdivision is about

Basic concepts 

7195 What is a MEC group?

71910 What is a potential MEC group?

71915 What is an eligible tier1 company?

71920 What is a top company and a tier1 company?

71925 Head company, subsidiary members and members of a MEC group

71930 Treating entities as whollyowned subsidiaries by disregarding employee shares

71935 Treating entities held through nonfixed trusts as whollyowned subsidiaries

71940 Special conversion event—potential MEC group

71945 Application of sections 70320 and 70325

Choice to consolidate a potential MEC group

71950 Eligible tier1 companies may choose to consolidate a potential MEC group

71955 When choice starts to have effect

Provisional head company

71960 Appointment of provisional head company

71965 Qualifications for the provisional head company of a MEC group

71970 Income year of new provisional head company to be the same as that of former provisional head company

Head company 

71975 Head company

Notice of events affecting group

71976 Notice of choice to consolidate

71977 Notice in relation to new eligible tier1 members etc.

71978 Notice of special conversion event

71979 Notice of appointment of provisional head company after formation of group

71980 Notice of events affecting MEC group

Effects of change of head company

71985 Application

71990 New head company treated as substituted for old head company at all times before the transition time

71995 No consequences of old head company becoming, and new head company ceasing to be, subsidiary member of the group

Subdivision 719BA—Group conversions involving MEC groups

719120 Application

719125 Head company of new group retains history of head company of old group

719130 Provisions of this Part not to apply to conversion

719135 Provisions of this Part applying to conversion despite section 719130

719140 Other provisions of this Part not applying to conversion

Subdivision 719C—MEC group cost setting rules: joining cases

Guide to Subdivision 719C

719150 What this Subdivision is about

Application and object

719155 Object of this Subdivision

Modified application of tax cost setting rules for joining

719160 Tax cost setting rules for joining have effect with modifications

719165 Trading stock value and registered emissions unit value not set for assets of eligible tier1 companies

719170 Modified effect of subsections 705175(1) and 705185(1)

Subdivision 719F—Losses

Guide to Subdivision 719F

719250 What this Subdivision is about

Maintaining the same ownership to be able to utilise loss

719255 Special rules

719260 Special test for utilising a loss because a company maintains the same owners

719265 What is the test company?

719270 Assumptions about the test company having made the loss for an income year

719275 Assumptions about nothing happening to affect direct and indirect ownership of the test company

719280 Assumptions about the test company failing to meet the conditions in section 16512

Same business test and change of head company

719285 Same business test and change of head company

Bundles of losses and their available fractions

719300 Application

719305 Subdivision 707C affects utilisation of losses made by ongoing head company while it was head company

719310 Adjustment of available fractions for bundles of losses previously transferred to ongoing head company

719315 Further adjustment of available fractions for all bundles

719320 Limit on utilising losses other than the prior group losses

719325 Cancellation of all losses in a bundle

Subdivision 719H—Imputation issues

719425 Guide to Subdivision 719H

Operative provisions

719430 Transfer of franking account balance on cessation event

719435 Distributions by subsidiary members of MEC group taken to be distributions by head company

Subdivision 719I—Bad debts

Guide to Subdivision 719I

719450 What this Subdivision is about

Maintaining the same ownership to be able to deduct bad debt

719455 Special test for deducting a bad debt because a company maintains the same owners

719460 Assumptions about nothing happening to affect direct and indirect ownership of the test company

719465 Assumptions about the test company failing to meet the conditions in section 165123

Subdivision 719J—MEC group cost setting rules: leaving cases

Guide to Subdivision 719J

719500 What this Subdivision is about

719505 Application and object of this Subdivision

719510 Modified operation of paragraphs 71115(1)(b) and (c)

Subdivision 719K—MEC group cost setting rules: pooling cases

Guide to Subdivision 719K

719550 What this Subdivision is about

719555 Application and object of this Subdivision

719560 Pooled interests

719565 Setting cost of reset interests

719570 Cost setting amount

Subdivision 719T—Interactions between this Part and other areas of the income tax law: special rules for MEC groups

How Subdivision 165CC applies to MEC groups

719700 Changeover times under section 165115C or 165115D

719705 Additional changeover times for head company of MEC group

How Subdivision 165CD applies to MEC groups

719720 Alteration times under section 165115L or 165115M

719725 Additional alteration times for head company of MEC group

719730 Some alteration times only affect interests in top company

719735 Some alteration times affect only pooled interests

719740 Head company does not have relevant equity or debt interest in a loss company if widely held top company does not have such an interest

How indirect value shifting rules apply to a MEC group

719755 Effect on MEC group cost setting rules if head company is losing entity or gaining entity for indirect value shift

Cancelling loss on realisation event for direct or indirect interest in a subsidiary member of a MEC group

719775 Cancellation of loss

719780 Exception for pooled interests in eligible tier1 companies

719785 Exception for interests in top company

719790 Exception for interests in entity leaving MEC group

719795 Exception if loss attributable to certain matters

Division 721—Liability for payment of tax where head company fails to pay on time

Guide to Division 721 464

7211 What this Division is about

Object 

7215 Object of this Division

When this Division operates

72110 When this Division operates

Joint and several liability of contributing member

72115 Head company and contributing members jointly and severally liable to pay group liability

72117 Notice of joint and several liability for general interest charge

72120 Limit on liability where group first comes into existence

Tax sharing agreements

72125 When a group liability is covered by a tax sharing agreement

72130 TSA contributing members liable for contribution amounts

72132 Notice of general interest charge liability under TSA

72135 When a TSA contributing member has left the group clear of the group liability

72140 TSA liability and group liability are linked

Part 395—Value shifting

Division 723—Direct value shifting by creating right over nondepreciating asset

Subdivision 723A—Reduction in loss from realising nondepreciating asset

7231 Object

72310 Reduction in loss from realising nondepreciating asset over which right has been created

72315 Reduction in loss from realising nondepreciating asset at the same time as right is created over it

72320 Exceptions

72325 Realisation event that is only a partial realisation

72335 Multiple rights created to take advantage of the $50,000 threshold

72340 Application to CGT asset that is also trading stock or revenue asset

72350 Effects if right created over underlying asset is also trading stock or a revenue asset

Subdivision 723B—Reducing reduced cost base of interests in entity that acquires nondepreciating asset under rollover

723105 Reduced cost base of interest reduced when interest realised at a loss

723110 Direct and indirect rollover replacement for underlying asset

Division 725—Direct value shifting affecting interests in companies and trusts

Guide to Division 725 488

7251 What this Division is about

Subdivision 725A—Scope of the direct value shifting rules

72545 Main object

72550 When a direct value shift has consequences under this Division

72555 Controlling entity test

72565 Cause of the value shift

72570 Consequences for down interest only if there is a material decrease in its market value

72580 Who is an affected owner of a down interest?

72585 Who is an affected owner of an up interest?

72590 Direct value shift that will be reversed

72595 Direct value shift resulting from reversal

Subdivision 725B—What is a direct value shift

725145 When there is a direct value shift

725150 Issue of equity or loan interests at a discount

725155 Meaning of down interests, decrease time, up interests and increase time

725160 What is the nature of a direct value shift?

725165 If market value decrease or increase is only partly attributable to the scheme

Subdivision 725C—Consequences of a direct value shift

General 

725205 Consequences depend on character of down interests and up interests

725210 Consequences for down interests depend on preshift gains and losses

Special cases 

725220 Neutral direct value shifts

725225 Issue of bonus shares or units

725230 Offmarket buybacks

Subdivision 725D—Consequences for down interest or up interest as CGT asset

725240 CGT consequences; meaning of adjustable value

725245 Table of taxing events generating a gain for interests as CGT assets

725250 Table of consequences for adjustable values of interests as CGT assets

725255 Multiple CGT consequences for the same down interest or up interest

Subdivision 725E—Consequences for down interest or up interest as trading stock or a revenue asset

725310 Consequences for down interest or up interest as trading stock

725315 Adjustable value of trading stock

725320 Consequences for down interest or up interest as a revenue asset

725325 Adjustable value of revenue asset

725335 How to work out those consequences

725340 Multiple trading stock or revenue asset consequences for the same down interest or up interest

Subdivision 725F—Value adjustments and taxed gains

725365 Decreases in adjustable values of down interests (with preshift gains), and taxing events generating a gain

725370 Uplifts in adjustable values of up interests under certain table items

725375 Uplifts in adjustable values of up interests under other table items

725380 Decreases in adjustable value of down interests (with preshift losses)

Division 727—Indirect value shifting affecting interests in companies and trusts, and arising from nonarm’s length dealings

Guide to Division 727 524

7271 What this Division is about

7275 What is an indirect value shift?

72710 How does this Division deal with indirect value shifts?

72715 When does an indirect value shift have consequences under this Division?

72725 Effect of this Division on realisations at a loss that occur before the nature or extent of an indirect value shift can be fully determined

Subdivision 727A—Scope of the indirect value shifting rules

72795 Main object

727100 When an indirect value shift has consequences under this Division

727105 Ultimate controller test

727110 Commonownership nexus test (if both losing and gaining entities are closely held)

727125 No consequences if losing entity is a superannuation entity

Subdivision 727B—What is an indirect value shift

727150 How to determine whether a scheme results in an indirect value shift

727155 Providing economic benefits

727160 When an economic benefit is provided in connection with a scheme

727165 Preventing doublecounting of economic benefits

Subdivision 727C—Exclusions

Guide to Subdivision 727C

727200 What this Subdivision is about

General 

727215 Amount does not exceed $50,000

727220 Disposal of asset at cost, or at undervalue if full value is not reflected in adjustable values of equity or loan interests in the losing entity

Indirect value shifts involving services

727230 Services provided by losing entity to gaining entity for at least their direct cost

727235 Services provided by gaining entity to losing entity for no more than a commercially realistic price

727240 What services certain provisions apply to

727245 How to work out certain amounts for the purposes of sections 727230 and 727235

Antioverlap provisions

727250 Distribution by an entity to a member or beneficiary

Miscellaneous 

727260 Shift down a whollyowned chain of entities

Subdivision 727D—Working out the market value of economic benefits

727300 What the rules in this Subdivision are for

727315 Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000

Subdivision 727E—Key concepts

Ultimate controller

727350 Ultimate controller

727355 Control (for value shifting purposes) of a company

727360 Control (for value shifting purposes) of a fixed trust

727365 Control (for value shifting purposes) of a nonfixed trust

727370 Preventing double counting for percentage stake tests

727375 Tests in this Subdivision are exhaustive

Commonownership nexus and ultimate stake of a particular percentage

727400 When 2 entities have a commonownership nexus within a period

727405 Ultimate stake of a particular percentage in a company

727410 Ultimate stake of a particular percentage in a fixed trust

727415 Rules for tracing

Subdivision 727F—Consequences of an indirect value shift

Guide to Subdivision 727F

727450 What this Subdivision is about

Operative provisions

727455 Consequences of the indirect value shift

Affected interests

727460 Affected interests in the losing entity

727465 Affected interests in the gaining entity

727470 Exceptions

727520 Equity or loan interest and related terms

727525 Indirect equity or loan interest

Affected owners

727530 Who are the affected owners

Choices about method to be used

727550 Choosing the adjustable value method

727555 Giving other affected owners information about the choice

Subdivision 727G—The realisation time method

727600 What this Subdivision is about

Operative provisions

727610 Consequences of indirect value shift

727615 Reduction of loss on realisation event for affected interest in losing entity

727620 Reduction of gain on realisation event for affected interest in gaining entity

727625 Total gain reductions not to exceed total loss reductions

727630 How cap in section 727625 applies if affected interest is also trading stock or a revenue asset

727635 Splitting an equity or loan interest

727640 Merging equity or loan interests

727645 Effect of CGT rollover

Further exclusion for certain 95% services indirect value shifts if realisation time method must be used

727700 When 95% services indirect value shift is excluded

95% services indirect value shifts that are not excluded

727705 Another provision of the income tax law affects amount related to services by at least $100,000

727710 Ongoing or recent service arrangement reduces value of losing entity by at least $100,000

727715 Service arrangements reduce value of losing entity that is a group service provider by at least $500,000

727720 Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000

727725 Meaning of predominantlyservices indirect value shift

Subdivision 727H—The adjustable value method

Guide to Subdivision 727H

727750 What this Subdivision is about

727755 Consequences of indirect value shift

Reductions of adjustable value

727770 Reduction under the adjustable value method

727775 Has there been a disaggregated attributable decrease?

727780 Working out the reduction on a lossfocussed basis

Uplifts of adjustable value

727800 Uplift under the attributable increase method

727805 Has there been a disaggregated attributable increase?

727810 Scalingdown formula

Consequences of the method for various kinds of assets

727830 CGT assets

727835 Trading stock

727840 Revenue assets

Subdivision 727K—Reduction of loss on equity or loan interests realised before the IVS time

727850 Consequences of scheme under this Subdivision

727855 Presumed indirect value shift

727860 Conditions about the prospective gaining entity

727865 How other provisions of this Division apply to support this Subdivision

727870 Effect of CGT rollover

727875 Application to CGT asset that is also trading stock or revenue asset

Subdivision 727L—Indirect value shift resulting from a direct value shift

727905 How this Subdivision affects the rest of this Division

727910 Treatment of value shifted under the direct value shift

Chapter 3Specialist liability rules

Part 380Rollovers applying to assets generally

Division 615Rollovers for business restructures

Table of Subdivisions

 Guide to Division 615

615A Choosing to obtain rollovers

615B Further requirements for choosing to obtain rollovers

615C Consequences of rollovers

615D Consequences for the interposed company

Guide to Division 615

6151  What this Division is about

You can choose for transactions under a scheme to restructure a company’s or unit trust’s business to be tax neutral if, under the scheme:

 (a) you cease to own shares in the company or units in the trust; and

 (b) in exchange, you become the owner of new shares in another company.

Subdivision 615AChoosing to obtain rollovers

Table of sections

6155 Disposing of interests in one entity for shares in a company

61510 Redeeming or cancelling interests in one entity for shares in a company

6155  Disposing of interests in one entity for shares in a company

 (1) You can choose to obtain a rollover if:

 (a) you are a *member of a company or a unit trust (the original entity); and

 (b) you and at least one other entity (the exchanging members) own all the *shares or units in it; and

 (c) under a *scheme for reorganising its affairs, the exchanging members *dispose of all their shares or units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and

 (d) the requirements in Subdivision 615B are satisfied.

Note 1: For paragraph (c), see section 12420 if an exchanging member uses a share sale facility.

Note 2: After the completion of the scheme, later dealings between the interposed company and the original entity may be subject to the rules for consolidated groups (see Part 390).

 (2) You are taken to have chosen to obtain the rollover if:

 (a) immediately before the completion time (see section 61515), the original entity is the *head company of a *consolidated group; and

 (b) immediately after the completion time, the interposed company is the head company of the group.

Note: The consolidated group continues in existence because of section 70370.

61510  Redeeming or cancelling interests in one entity for shares in a company

 (1) You can choose to obtain a rollover if you are a *member of a company or a unit trust (the original entity), and under a *scheme for reorganising its affairs:

 (a) a company (the interposed company) *acquires one or more, but not all, of the *shares or units in the original entity; and

 (b) these are the first shares or units that the interposed company acquires in the original entity; and

 (c) you and at least one other entity (the exchanging members) own all the remaining shares or units in the original entity; and

 (d) those remaining shares or units are redeemed or cancelled; and

 (e) each exchanging member receives shares (and nothing else) in the interposed company in return for their shares or units in the original entity being redeemed or cancelled;

and the requirements in Subdivision 615B are satisfied.

Note: For paragraph (e), see section 12420 if an exchanging member uses a share sale facility.

 (2) You are taken to have chosen to obtain the rollover if:

 (a) immediately before the completion time (see section 61515), the original entity is the *head company of a *consolidated group; and

 (b) immediately after the completion time, the interposed company is the head company of the group.

Note: The consolidated group continues in existence because of section 70370.

 (3) The original entity, or its trustee if it is a unit trust, can issue other *shares or units to the interposed company as part of the *scheme.

Note: Some of the interposed company’s shares or units in the original entity may be taken to be acquired before 20 September 1985: see section 61565.

Subdivision 615BFurther requirements for choosing to obtain rollovers

Table of sections

61515 Interposed company must own all the original interests

61520 Requirements relating to your interests in the original entity

61525 Requirements relating to the interposed company

61530 Interposed company must make a particular choice

61535 ADI restructures—disregard certain preference shares

61515  Interposed company must own all the original interests

  The interposed company must own all the *shares or units in the original entity immediately after the time (the completion time) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the *scheme.

61520  Requirements relating to your interests in the original entity

 (1) Immediately after the completion time, each exchanging member must own:

 (a) a whole number of *shares in the interposed company; and

 (b) a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares or units in the original entity that were:

 (i) owned by the member; and

 (ii) disposed of, redeemed or cancelled under the *scheme.

 (2) The following ratios must be equal:

 (a) the ratio of:

 (i) the *market value of each exchanging member’s *shares in the interposed company; to

 (ii) the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time);

 (b) the ratio of:

 (i) the market value of that member’s shares or units in the original entity that were disposed of, redeemed or cancelled under the *scheme; to

 (ii) the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation).

Example 1: There are 100 shares in A Pty Ltd (the original entity), all having the same rights. B Pty Ltd (the interposed company) acquires all the shares in A by issuing each shareholder in A 10 shares in itself for each share they have in A. All shares in B have the same rights. Bill owned 15 shares in A and received 150 shares in B in exchange.

Example 2: There are 1,000 units in the A unit trust (the original entity), all having the same rights. 2 new units in A are issued to B Pty Ltd (the interposed company), and all other units in A are cancelled. Each unitholder in A is issued 10 shares in B for each 100 units they have in A. All shares in B have the same rights. Alison owned 200 units in A and received 20 shares in B in exchange.

 (3) Either:

 (a) you are an Australian resident at the time your *shares or units in the original entity are disposed of, redeemed or cancelled under the *scheme; or

 (b) if you are a foreign resident at that time:

 (i) your shares or units in the original entity were *taxable Australian property immediately before that time; and

 (ii) your shares in the interposed company are taxable Australian property immediately after the completion time.

61525  Requirements relating to the interposed company

 (1) The *shares issued in the interposed company must not be *redeemable shares.

 (2) Each exchanging member who is issued *shares in the interposed company must own the shares from the time they are issued until at least the completion time.

 (3) Immediately after the completion time:

 (a) the exchanging members must own all the *shares in the interposed company; or

 (b) entities other than those members must own no more than 5 shares in the interposed company, and the *market value of those shares expressed as a percentage of the market value of all the shares in the interposed company must be such that it is reasonable to treat the exchanging members as owning all the shares.

61530  Interposed company must make a particular choice

 (1) Unless subsection (2) applies, the interposed company must choose that section 61565 applies.

 (2) The interposed company must choose that a *consolidated group continues in existence at and after the completion time with the interposed company as its *head company, if:

 (a) immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members); and

 (b) immediately after the completion time, the interposed company is the head company of a *consolidatable group consisting only of itself and the other group members.

Note: Sections 70365 to 70380 deal with the effects of the choice for the consolidated group.

 (3) A choice under subsection (1) or (2) must be made:

 (a) within 2 months after the completion time, if the choice is under subsection (1); or

 (b) within 28 days after the completion time, if the choice is under subsection (2); or

 (c) within such further time as the Commissioner allows.

The choice cannot be revoked.

 (4) The way the interposed company prepares its *income tax returns is sufficient evidence of the making of the choice.

61535  ADI restructures—disregard certain preference shares

  For the purposes of this Division, disregard any *shares in the original entity that can be disregarded under subsection 70337(4) if:

 (a) the interposed company is a nonoperating holding company within the meaning of the Financial Sector (Business Transfer and Group Restructure) Act 1999; and

 (b) a restructure instrument under Part 4A of that Act is in force in relation to the interposed company; and

 (c) because of the restructure to which the instrument relates, an *ADI becomes a subsidiary (within the meaning of that Act) of the interposed company; and

 (d) the original entity is:

 (i) the ADI; or

 (ii) part of an extended licensed entity (within the meaning of the *prudential standards) that includes the ADI.

Subdivision 615CConsequences of rollovers

Table of sections

61540 CGT consequences

61545 Additional consequences—deferral of profit or loss

61550 Trading stock

61555 Revenue assets

61560 Disregard CGT exemption for trading stock

61540  CGT consequences

  The consequences set out in Subdivision 124A also apply to a rollover under this Division as if that rollover were a rollover covered by Division 124 (about replacementasset rollovers).

Note: Those consequences generally involve:

(a) disregarding a capital gain or capital loss you make from the disposal, redemption or cancellation of your shares or units in the original entity; and

(b) working out the first element of the cost base of each of your new shares in the interposed entity by reference to the cost bases of your shares or units in the original entity.

61545  Additional consequences—deferral of profit or loss

  The additional consequences in sections 61550 and 61555 apply if:

 (a) under this Division:

 (i) you are taken to have chosen to obtain the rollover; or

 (ii) you otherwise choose to obtain the rollover; and

 (b) if subparagraph (a)(ii) applies to you, you choose for these additional consequences to apply; and

 (c) some or all of your *shares or units in the original entity at the time immediately before they were:

 (i) disposed of as described in paragraph 6155(1)(c); or

 (ii) redeemed or cancelled as described in paragraph 61510(1)(d);

  had the character of being your *trading stock or *revenue assets; and

 (d) the shares in the interposed company that you acquired in return for those shares or units have the same character.

Note 1: Apply this section separately for assets of each character.

Note 2: The CGT exemption for trading stock does not prevent you obtaining the rollover (see section 61560).

61550  Trading stock

 (1) The amount included in your assessable income because of the disposal, redemption or cancellation of each of your *shares or units described in paragraph 61545(c) that was your *trading stock at the time mentioned in that paragraph is equal to:

 (a) if the share or unit had been your trading stock ever since the start of the income year that included that time—the total of:

 (i) its *value as trading stock at the start of the income year; and

 (ii) the amount (if any) by which its cost had increased since the start of the income year; or

 (b) otherwise—its cost at that time.

 (2) For each of the *shares that you acquired as described in paragraph 61545(d) that is your *trading stock, you are taken to have paid:

 (3) For the purposes of Division 70 (about trading stock), you, the original entity and the interposed company are taken to have dealt with each other in the ordinary course of *business and at *arm’s length for each of the transactions referred to in paragraph 6155(1)(c) or 61510(1)(d) or (e).

61555  Revenue assets

 (1) For each of your *shares or units that:

 (a) is described in paragraph 61545(c); and

 (b) was a *revenue asset immediately before its disposal, redemption or cancellation;

your gross proceeds for that disposal, redemption or cancellation are taken to be the amount you would have needed to have received in order to have a nil profit and nil loss for that disposal, redemption or cancellation.

 (2) For the purpose of calculating any profit or loss on a future disposal, cessation of ownership, or other realisation of a *share that:

 (a) you acquired as described in paragraph 61545(d); and

 (b) is a *revenue asset;

you are taken to have paid the following for your acquisition of that share:

61560  Disregard CGT exemption for trading stock

  For the purposes of this Division, disregard section 11825 (which gives a CGT exemption for trading stock).

Subdivision 615DConsequences for the interposed company

Table of sections

61565 Consequences for the interposed company

61565  Consequences for the interposed company

 (1) This section applies if the interposed company so chooses under subsection 61530(1).

 (2) A number of the *shares or units that the interposed company owns in the original entity (immediately after the completion time) are taken to have been *acquired before 20 September 1985 if any of the original entity’s assets as at the completion time were acquired by it before that day.

Note: Generally, a capital gain or capital loss you make from a CGT asset that you acquired before 20 September 1985 can be disregarded: see Division 104.

 (3) That number (worked out as at the completion time) is the greatest possible whole number that (when expressed as a percentage of all the *shares or units) does not exceed:

 (a) the *market value of the original entity’s assets that it *acquired before 20 September 1985; less

 (b) its liabilities (if any) in respect of those assets;

expressed as a percentage of the market value of all the original entity’s assets less all of its liabilities.

 (4) The first element of the *cost base of the interposed company’s *shares or units in the original entity that are not taken to have been *acquired before 20 September 1985 is:

 (a) the total of the cost bases (as at the completion time) of the original entity’s assets that it acquired on or after that day; less

 (b) its liabilities (if any) in respect of those assets.

The first element of the *reduced cost base of those shares or units is worked out similarly.

 (5) A liability of the original entity that is not a liability in respect of a specific asset or assets of the original entity is taken to be a liability in respect of all the assets of the original entity.

Note: An example is a bank overdraft.

 (6) If a liability is in respect of 2 or more assets, the proportion of the liability that is in respect of any one of those assets is equal to:

Division 620Assets of woundup corporation passing to corporation with not significantly different ownership

Table of Subdivisions

620A Corporations covered by Subdivision 124I

Subdivision 620ACorporations covered by Subdivision 124I

Guide to Subdivision 620A

6205  What this Subdivision is about

There are taxneutral consequences of a body, that is incorporated under one law and ceases to exist, disposing of an asset to a company incorporated under another law, if the ownership of the company is not significantly different from the ownership of the body.

Table of sections

Application and object of this Subdivision

62010 Application

62015 Object

CGT consequences

62020 Disregard body’s capital gains and losses from CGT assets

62025 Cost base and preCGT status of CGT asset for company

Consequences for depreciating assets

62030 Rollover relief for balancing adjustment events

Consequences for trading stock

62040 Body taken to have sold trading stock to company

Consequences for revenue assets

62050 Body taken to have sold revenue assets to company

Application and object of this Subdivision

62010  Application

  This Subdivision applies to a body that is incorporated under one law and ceases to exist, and to a company incorporated under another law, if section 124525 applies in relation to the body and the company.

Note: That section applies if the ownership of the company is not significantly different from the ownership of the body and rights relating to the body.

62015  Object

  The object of this Subdivision is to ensure taxneutral consequences when the body ceases to hold an asset and also if the asset becomes held by the company.

CGT consequences

62020  Disregard body’s capital gains and losses from CGT assets

 (1) This section applies if:

 (a) the body *disposes of a *CGT asset to the company because the body ceases to exist; or

 (b) another *CGT event happens to a CGT asset of the body because the body ceases to exist.

 (2) A *capital gain or a *capital loss the body makes from the *CGT asset is disregarded.

62025  Cost base and preCGT status of CGT asset for company

 (1) This section applies to a *CGT asset if the body *disposes of it to the company because the body ceases to exist.

 (2) The first element of the *CGT asset’s *cost base for the company is equal to the asset’s cost base for the body in connection with the *disposal.

 (3) The first element of the *CGT asset’s *reduced cost base for the company is worked out similarly.

 (4) If the body *acquired the *CGT asset before 20 September 1985, the company is taken to have acquired the CGT asset before that day.

Consequences for depreciating assets

62030  Rollover relief for balancing adjustment events

 (1) This section applies if:

 (a) there is a *balancing adjustment event because the body disposes of a *depreciating asset in an income year to the company because the body ceases to exist; and

 (b) the disposal involves a *CGT event.

 (2) This Act applies as if:

 (a) there were rollover relief under subsection 40340(1) for the *balancing adjustment event; and

 (b) the body were the transferor mentioned in that subsection and subsection 328243(1A); and

 (c) the company were the transferee mentioned in that subsection and subsection 328243(1A).

Note: Some effects of this are as follows:

(a) the balancing adjustment event does not affect the body’s assessable income or deductions (see subsection 40345(1));

(b) the company can deduct for the decline in value of the asset on the same basis as the body did (see subsection 40345(2));

(c) Division 45 (Disposal of leases and leased plant) applies to the company as if it had done the things the body did (see subsection 40350(1)).

 (3) Disregard paragraph 328243(1A)(c) in determining whether subsection 328243(1A) applies.

Consequences for trading stock

62040  Body taken to have sold trading stock to company

 (1) This subsection applies to each item of *trading stock that the body disposes of to the company because the body ceases to exist.

 (2) The body is taken to have sold, and the company is taken to have bought, the item (in the ordinary course of *business and dealing with each other at *arm’s length), at the time of the disposal (or just before that time if the disposal occurred when the body ceased to exist), for:

 (a) the *cost of the item for the body; or

 (b) if the body held the item as *trading stock at the start of the income year, the *value of the item for the body then.

 (3) The company is taken to have held the item as *trading stock when it bought the item.

Consequences for revenue assets

62050  Body taken to have sold revenue assets to company

Disposal

 (1) Subsections (2) and (3) apply to a *CGT asset:

 (a) that the body *disposes of to the company because the body ceases to exist; and

 (b) that is a *revenue asset of the body just before the disposal.

Note: Trading stock and depreciating assets are not revenue assets. See section 97750.

 (2) The body is taken to have disposed of the *revenue asset to the company for an amount such that the body would not make a profit or a loss on the disposal.

 (3) For the purpose of calculating any profit or loss on a future disposal of, cessation of owning, or other realisation of, the *revenue asset, the company is taken to have paid the body that amount for the disposal of the revenue asset to the company.

Ceasing to own or other realising

 (4) Subsection (5) applies to a *CGT asset:

 (a) that the body ceases to own, or otherwise realises, because the body ceases to exist; and

 (b) that is a *revenue asset of the body just before the cessation or realisation.

Note: Trading stock and depreciating assets are not revenue assets. See section 97750.

 (5) The body is taken to have disposed of the *revenue asset for an amount such that the body would not make a profit or a loss on the disposal.

Part 390Consolidated groups

Division 700Guide and objects

 

Table of sections

Guide

7001 What this Part is about

7005 Overview of this Part

Objects

70010 Objects of this Part

Guide

7001  What this Part is about

This Part allows certain groups of entities to be treated as single entities for income tax purposes.

Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members.

This is supported by rules that:

 (a) set the cost for income tax purposes of assets that subsidiary members bring into the group; and

 (b) determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and

 (c) deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group.

7005  Overview of this Part

 (1) The single entity rule determines how the income tax liability of a consolidated group will be ascertained. The basic principle is contained in the Core Rules in Division 701.

 (2) Essentially, a consolidated group consists of an Australian resident head company and all of its Australian resident whollyowned subsidiaries (which may be companies, trusts or partnerships). Special rules apply to foreignowned groups with no single Australian resident head company.

 (3) An eligible whollyowned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner.

 (4) This Part also contains rules which set the cost for income tax purposes of assets of entities when they become subsidiary members of a consolidated group and of membership interests in those entities when they cease to be subsidiary members of the group.

 (5) Certain tax attributes (such as losses and franking credits) of entities that become subsidiary members of a consolidated group are transferred under this Part to the head company of the group. These tax attributes remain with the group after an entity ceases to be a subsidiary member.

Objects

70010  Objects of this Part

  The objects of this Part are:

 (a) to prevent double taxation of the same economic gain realised by a consolidated group; and

 (b) to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and

 (c) to provide a systematic solution to the prevention of such double taxation and double tax benefits that will:

 (i) reduce the cost of complying with this Act; and

 (ii) improve business efficiency by removing complexities and promoting simplicity in the taxation of whollyowned groups.

Division 701Core rules

Table of sections

Common rule

7011 Single entity rule

Head company rules

7015 Entry history rule

70110 Cost to head company of assets of joining entity

70115 Cost to head company of membership interests in entity that leaves group

70120 Cost to head company of assets consisting of certain liabilities owed by entity that leaves group

70125 Taxneutral consequence for head company of ceasing to hold assets when entity leaves group

Entity rules

70130 Where entity not subsidiary member for whole of income year

70135 Taxneutral consequence for entity of ceasing to hold assets when it joins group

70140 Exit history rule

70145 Cost of assets consisting of liabilities owed to entity by members of the group

70150 Cost of certain membership interests of which entity becomes holder on leaving group

Supporting provisions

70155 Setting the tax cost of an asset

70156 Application of subsection 70155(6)

70158 Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule

70160 Tax cost setting amount

70161 Assets in relation to Division 230 financial arrangement—head company’s assessable income or deduction

70163 Right to future income and WIP amount asset

70165 Net income and losses for trusts and partnerships

70167 Assets in this Part are CGT assets, etc.

Exceptions

70170 Adjustments to taxable income where identities of parties to arrangement merge on joining group

70175 Adjustments to taxable income where identities of parties to arrangement reemerge on leaving group

70180 Accelerated depreciation

70185 Other exceptions etc. to the rules

Common rule

7011  Single entity rule

 (1) If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period.

Head company core purposes

 (2) The purposes covered by this subsection (the head company core purposes) are:

 (a) working out the amount of the *head company’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

 (b) working out the amount of the head company’s loss (if any) of a particular *sort for any such income year.

Note: The single entity rule would affect the head company’s income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.

Entity core purposes

 (3) The purposes covered by this subsection (the entity core purposes) are:

 (a) working out the amount of the entity’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

 (b) working out the amount of the entity’s loss (if any) of a particular *sort for any such income year.

Note: An assessment of the entity’s liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.

What is a sort of loss?

 (4) Each of these paragraphs identifies a sort of loss:

 (a) *tax loss;

 (b) *film loss;

 (c) *net capital loss.

This subsection lists all the sorts of loss.

Head company rules

7015  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.

Note 1: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 70110 and tax loss history is affected by Division 707).

Note 3: Section 165212E overrides this rule for the purposes of the same business test.

70110  Cost to head company of assets of joining entity

 (1) This section has effect for the head company core purposes when the entity becomes a *subsidiary member of the group.

Assets to which section applies

 (2) This section applies in relation to each asset that would be an asset of the entity at the time it becomes a *subsidiary member of the group, assuming that subsection 7011(1) (the single entity rule) did not apply.

Note: See subsection 70535(3) for the treatment of a goodwill asset resulting from the head company’s ownership and control of the joining entity.

Object

 (3) The object of this section (and Division 705 which relates to it) is to recognise the cost to the *head company of such assets as an amount reflecting the group’s cost of acquiring the entity.

Setting tax cost of assets

 (4) Each asset’s *tax cost is set at the time the entity becomes a *subsidiary member of the group at the asset’s *tax cost setting amount.

Multiple setting of tax cost for same trading stock or registered emissions unit

 (5) However, if:

 (a) the asset is *trading stock or a *registered emissions unit; and

 (b) the asset’s *tax cost is set by this section at more than one time (each of which is a setting time) for the same income year;

then, except where subsection (6) applies, only the amount at which the tax cost is set at the last of the setting times is to be taken into account.

 (6) If:

 (a) the *head company’s *terminating value for the asset; or

 (b) the *value of the asset at the start of the income year;

is required to be worked out for one or more occasions when an entity (whether or not the same entity) ceases to be a *subsidiary member of the group in the income year, then the amount at which the asset’s *tax cost is set by this section at a particular setting time is only taken into account in working out the head company’s terminating value for a particular occasion if:

 (c) the setting time occurs before the occasion; and

 (d) there is no intervening setting time or occasion.

70115  Cost to head company of membership interests in entity that leaves group

 (1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the head company core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.

Note: This section could have effect, for example, if an entity ceases to be a subsidiary member of the group because:

(a) it ceases to satisfy the requirements to be a subsidiary member; or

(b) the head company ceases to satisfy the requirements to be a head company (thereby bringing the group to an end).

Object

 (2) The object of this section is to preserve the alignment of the *head company’s costs for *membership interests in each entity and its assets by recognising, when an entity ceases to be a *subsidiary member of the group, the cost of those interests as an amount equal to the cost of the entity’s assets at that time reduced by the amount of its liabilities.

Note: The head company’s costs for membership interests in entities was aligned with the costs of their assets when the entities became subsidiary members of the group.

Setting tax cost of membership interests

 (3) For each *membership interest that the *head company of the group holds in an entity that ceases to be a *subsidiary member, the interest’s *tax cost is set just before the entity ceases to be a subsidiary member at the interest’s *tax cost setting amount.

Note 1: The membership interests would include those that are actually held by subsidiary members of the group, but which are treated as those of the head company under the single entity rule.

Note 2: If the entity is a partnership, Subdivision 713E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership.

70120  Cost to head company of assets consisting of certain liabilities owed by entity that leaves group

 (1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the head company core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.

Assets to which section applies

 (2) This section applies in relation to each asset, consisting of a liability owed by the entity, that becomes an asset of the *head company because subsection 7011(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member. This is a liability that, ignoring that subsection, is owed to a *member of the group.

Object

 (3) The object of this section is to set a cost for the asset to enable income tax consequences for the *head company in respect of the asset to be determined.

Setting tax cost of assets

 (4) The asset’s *tax cost is set at the time the entity ceases to be a *subsidiary member of the group at the asset’s *tax cost setting amount.

Note: If the entity is a partnership, Subdivision 713E sets the tax cost of assets consisting of a partner’s share of a liability owed by the partnership to a member of the group.

70125  Taxneutral consequence for head company of ceasing to hold assets when entity leaves group

 (1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the head company core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.

Assets to which section applies

 (2) This section applies in relation to an asset if:

 (a) either:

 (i) the asset is *trading stock of the *head company; or

 (ii) the asset is a *registered emissions unit and an asset of the head company; and

 (b) the asset becomes an asset of the entity because subsection 7011(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group; and

 (c) the asset is not again an asset of the head company at or before the end of the income year.

Object

 (3) The object of this section is to ensure that there is no income tax consequence for the *head company in respect of the asset.

Note: In the case of assets other than trading stock or registered emissions units, the fact that the head company ceases to hold them when the single entity rules ceases to apply to them would not constitute a disposal or other event having tax consequences for the head company.

Setting value of trading stock at taxneutral amount

 (4) If subparagraph (2)(a)(i) applies, the asset is taken to be *trading stock of the *head company at the end of the income year (but not at the start of the next income year) and its *value at that time is taken to be equal to:

 (a) if the asset was trading stock of the head company at the start of the income year (including as a result of its *tax cost being set)—the asset’s value at that time; or

 (b) if paragraph (a) does not apply and the asset is *live stock that was acquired by natural increase—the *cost of the asset; or

 (c) in any other case—the amount of the outgoing incurred by the head company in connection with the acquisition of the asset;

increased by the amount of any outgoing forming part of the cost of the asset that was incurred by the head company during its current holding of the asset.

Note: As a consequence of fixing the trading stock’s value at the end of the income year under this subsection, no election would be available under section 7045 to value the trading stock at that time.

Setting value of registered emissions unit at taxneutral amount

 (5) If subparagraph (2)(a)(ii) applies, the asset is taken to be an asset of the *head company at the end of the income year (but not at the start of the next income year) and the head company’s *value for the asset at that time is taken to be equal to:

 (a) if the asset was *held by the head company at the start of the income year—the value of the asset at the start of the income year; or

 (b) otherwise—the expenditure incurred by the head company in becoming the holder of the asset.

Entity rules

70130  Where entity not subsidiary member for whole of income year

Object

 (1) The object of this section is to provide for a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them.

When section has effect

 (2) This section has effect for the entity core purposes if:

 (a) the entity is a *subsidiary member of the group for some but not all of an income year; and

 (b) there are one or more periods in the income year (each of which is a nonmembership period) during which the entity is not a subsidiary member of any *consolidated group.

Tax position of each nonmembership period to be worked out

 (3) For every nonmembership period, work out the entity’s taxable income (if any) for the period, the income tax (if any) payable on that taxable income and the entity’s loss (if any) (a nonmembership period loss) of each *sort for the period. Work them out:

 (a) as if the start and end of the period were the start and end of the income year; and

 (b) ignoring the operation of this section in relation to each other nonmembership period (if any); and

 (c) so that each relevant item is either:

 (i) allocated to only one of the nonmembership periods or to a period that is all or part of the rest of the income year; or

 (ii) apportioned among such periods (for example, by Subdivision 716A (see note to this subsection)).

Note: Other provisions of this Part are to be applied in working out the taxable income or loss, for example:

 section 70140 (Exit history rule); and

 Subdivision 716A (about assessable income and deductions spread over several membership or nonmembership periods); and

 section 716850 (about grossing up threshold amounts for periods of less than 365 days).

 Subdivision 716 also affects the tax position of the head company of a group of which the entity has been a subsidiary member for some but not all of the income year.

 (3A) For the purposes of working out the entity’s taxable income (if any) for the nonmembership period, determine:

 (a) whether the entity can *utilise a loss of any *sort transferred to the entity in the period; and

 (b) if the period started at the start of the income year—whether the entity can utilise a loss of any sort:

 (i) made by the entity, without a transfer, for an earlier income year; or

 (ii) transferred to the entity in an earlier income year;

as if the time just after the end of the period were the end of the income year and the entity carried on at that time the same business that it carried on just before that time. Paragraph (3)(a) has effect subject to this subsection.

Note: This means that things that happen in relation to the entity at the time it becomes a subsidiary member of the group are taken into account in determining whether the entity can utilise such a loss to affect its taxable income for the nonmembership period.

Income tax for the financial year

 (4) The entity’s income tax (if any) for the *financial year concerned is the total of every amount of income tax worked out for the entity under subsection (3).

Taxable income for the income year

 (5) The entity’s taxable income for the income year is the total of every amount of taxable income worked out for the entity under subsection (3).

 (6) The entity’s income tax worked out under subsection (4) is taken to be payable on the entity’s taxable income for the income year worked out under subsection (5), even if the amount of the tax differs from the amount that would be worked out by reference to that taxable income apart from subsection (5).

Loss for the income year

 (7) The entity has a loss of a particular *sort for the income year if and only if it has a nonmembership period loss of that sort for the nonmembership period (if any) ending at the end of the income year. The amount of the loss for the income year is the amount of the nonmembership period loss.

Utilisation and transfer of nonmembership period loss

 (8) However, the provisions of this Act relating to transfer or *utilisation of a loss of any *sort have effect in relation to a nonmembership period loss of that sort for any nonmembership period as if the nonmembership period loss were the entity’s loss for an income year that:

 (a) started at the start of the period; and

 (b) ended at the end of the period.

 (9) Subsection (8) has effect not only for the entity core purposes, but also (despite subsection (2)) for other purposes.

Excess franking deficit tax offset for the income year

 (10) For the purposes of applying section 20570 in relation to an income year after the income year (the current income year) to which this section applies, the entity has an excess mentioned in paragraph 20570(1)(c) (about excess franking deficit tax offsets) for the current income year only if it has such an excess for the nonmembership period (if any) ending at the end of the current income year. The amount of the excess for the current income year is the amount of the excess for the nonmembership period.

70135  Taxneutral consequence for entity of ceasing to hold assets when it joins group

 (1) When the entity becomes a *subsidiary member of the group, this section has effect for the entity core purposes.

Assets to which section applies

 (2) This section applies in relation to an asset if:

 (a) the asset is *trading stock of the entity just before it becomes a *subsidiary member of the group; or

 (b) the asset is:

 (i) a *registered emissions unit; and

 (ii) an asset of the entity;

  just before it becomes a subsidiary member of the group.

Object

 (3) The object of this section is to ensure that there is no income tax consequence for the entity in respect of the asset.

Note: In the case of assets other than trading stock or registered emissions units, the fact that the entity ceases to hold them when the single entity rule begins to apply to them would not constitute a disposal or other event having tax consequences for the entity.

Setting value of trading stock at taxneutral amount

 (4) If paragraph (2)(a) applies, the *value of the *trading stock at the end of the income year that ends, or, if section 70130 applies, of the income year that is taken by subsection (3) of that section to end, when the entity becomes a *subsidiary member is taken to be equal to:

 (a) if the asset was trading stock of the entity at the start of the income year—the asset’s value at that time; or

 (b) if paragraph (a) does not apply and the asset is *live stock that was acquired by natural increase—the *cost of the asset; or

 (c) in any other case—the amount of the outgoing incurred by the entity in connection with the acquisition of the asset;

increased by the amount of any outgoing forming part of the cost of the asset that was incurred by the entity during its current holding of the asset.

Note: As a consequence of fixing the trading stock’s value at the end of the income year under this subsection, no election would be available under section 7045 to value the trading stock at that time.

Setting value of registered emissions unit at taxneutral amount

 (5) If paragraph (2)(b) applies, the *value of the *registered emissions unit at the end of the income year that ends, or, if section 70130 applies, of the income year that is taken by subsection (3) of that section to end, when the entity becomes a *subsidiary member is taken to be equal to:

 (a) if the unit was *held by the joining entity at the start of the income year—the value of the unit at the start of the income year; or

 (b) otherwise—the expenditure incurred by the joining entity in becoming the holder of the unit.

Note: See also section 701A7 of the Income Tax (Transitional Provisions) Act 1997.

70140  Exit history rule

 (1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to any thing covered by subsection (2) (an eligible asset etc.) after it becomes that of the entity because subsection 7011(1) (the single entity rule) ceases to apply to the entity.

Assets, liabilities and businesses covered

 (2) This subsection covers the following:

 (a) any asset;

 (b) any liability or other thing that, in accordance with *accounting principles, is a liability;

 (c) any business;

that becomes that of the entity because subsection 7011(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group.

Head company history inherited

 (3) Everything that happened in relation to any eligible asset etc. while it was that of the *head company, including because of any application of section 7015 (the entry history rule), is taken to have happened in relation to it as if it had been an eligible asset etc. of the entity.

Note 1: If the eligible asset etc. was brought into the group when an entity became a subsidiary member, section 7015 (the entry history rule) would have had the effect that things happening to the eligible asset etc. while it was that of the entity would be taken to have happened as if it was that of the head company. Such things will in turn be taken by this subsection to have happened in relation to the eligible asset etc. as if it were that of the entity that takes the asset out of the group.

Note 2: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 70145).

70145  Cost of assets consisting of liabilities owed to entity by members of the group

 (1) If the entity ceases to be a *subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.

Assets to which section applies

 (2) This section applies in relation to an asset if:

 (a) it becomes an asset of the entity because subsection 7011(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group; and

 (b) the asset consists of a liability owed to the entity by a *member of the group.

Object

 (3) The object of this section is to set the cost of the asset to enable income tax consequences for the entity in respect of the asset to be determined.

Note: In the case of other assets, the fact that the entity inherits their history under section 70140 when the entity ceases to be a subsidiary member of the group means that the assets would be treated as having the same cost as they would for the head company at that time. However, assets consisting of liabilities do not have such a history because they are only recognised when the entity ceases to be a subsidiary member and the single entity rule ceases to apply.

Setting the asset’s tax cost

 (4) The asset’s *tax cost is set at the time the entity ceases to be a *subsidiary member of the group at the asset’s *tax cost setting amount.

Note 1: If section 70130 (Where entity not subsidiary member for whole of income year) applies, the time the entity ceases to be a subsidiary member will be treated as the start of an income year.

Note 2: If the entity is a partnership, Subdivision 713E sets the tax cost of a partner’s interest in an asset consisting of a liability that a member of the group owes to the partnership.

70150  Cost of certain membership interests of which entity becomes holder on leaving group

 (1) If:

 (a) the entity and one or more other entities cease to be *subsidiary members of the group at the same time because of an event happening in relation to one of them; and

 (b) when the entity ceases to be a subsidiary member, it holds an asset consisting of a *membership interest in any of the other entities;

this section has effect for the entity core purposes.

Object

 (2) The cost of any *membership interest that one of the entities holds in another is to be treated in the same way as membership interests held by the *head company. In both cases the object is to preserve the alignment of costs for membership interests and assets (that was established when each entity became a *subsidiary member) by recognising the cost of those interests, when it ceases to be a subsidiary member, as an amount equal to the cost of the entity’s assets at that time reduced by the amount of its liabilities.

Setting tax cost of membership interests

 (3) The asset’s *tax cost is set just before the entity ceases to be a *subsidiary member of the group at the asset’s *tax cost setting amount.

Note: If the asset consists of a membership interest in a partnership, Subdivision 713E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership.

Supporting provisions

70155  Setting the tax cost of an asset

 (1) This section states the meaning of the expression an asset’s tax cost is set at a particular time at the asset’s *tax cost setting amount.

Depreciating asset provisions

 (2) If any of Subdivisions 40A to 40D, sections 40425 to 40445 and Subdivisions 328D and 355E is to apply in relation to the asset, the expression means that the provisions apply as if:

 (a) the asset were *acquired at the particular time for a payment equal to its *tax cost setting amount; and

 (b) at that time the same method of working out the decline in value were chosen for the asset as applied to it just before that time; and

 (c) where just before that time the prime cost method applied for working out the asset’s decline in value and the asset’s tax cost setting amount does not exceed the joining entity’s *terminating value for the asset—at that time an *effective life were chosen for the asset equal to the remainder of the effective life of the asset just before that time; and

 (d) where just before that time the prime cost method applied for working out the asset’s decline in value and the asset’s *tax cost setting amount exceeds the joining entity’s terminating value for the asset—either:

 (i) the *head company were required to choose at that time an effective life for the asset in accordance with subsections 4095(1) and (3), and any choice of an effective life determined by the Commissioner were limited to one in force at that time; or

 (ii) an effective life for the asset were worked out under subsection 4095(7), (8), (9) or (10) at that time; and

 (e) where neither paragraph (c) nor (d) applies—at that time an effective life were chosen for the asset equal to the asset’s effective life just before that time.

Trading stock provisions

 (3) If Division 70 (other than Subdivision 70E) is to apply in relation to the asset, the expression means that the Division applies as if the asset were *trading stock at the start of the income year in which the particular time occurs and its *value at that time were equal to its *tax cost setting amount.

Registered emissions unit provisions

 (3A) If Division 420 is to apply in relation to the asset, the expression means that the Division applies as if the asset were a *registered emissions unit at the start of the income year in which the particular time occurs, and its *value at that time were equal to the asset’s *tax cost setting amount.

Qualifying security provisions

 (4) If Division 16E of Part III of the Income Tax Assessment Act 1936 is to apply in relation to the asset, the expression means that the Division applies as if the asset were acquired at the particular time for a payment equal to the asset’s *tax cost setting amount.

Capital gain and loss provisions

 (5) If Part 31 or 33 is to apply in relation to the asset, the expression means that the Part applies as if the asset’s *cost base or *reduced cost base were increased or reduced so that the cost base or reduced cost base at the particular time equals the asset’s *tax cost setting amount.

Division 230 (financial arrangements)

 (5A) If Division 230 is to apply in relation to the asset, the expression means that the Division applies as if the asset were acquired at the particular time for a payment equal to:

 (a) unless paragraph (b) applies—the asset’s *tax cost setting amount; or

 (b) if the asset’s tax cost is set because an entity becomes a *subsidiary member of a *consolidated group, and Subdivision 230C (fair value method), Subdivision 230D (foreign exchange retranslation method) or Subdivision 230F (reliance on financial reports method) is to apply in relation to the asset—the asset’s *Division 230 starting value at the particular time.

 (5B) To avoid doubt, for the purposes of paragraph (5A)(b), determine the asset’s *Division 230 starting value by reference to the relevant standards (as mentioned in section 230230, 230280 or 230420) that apply in relation to the *head company’s financial report for the income year in which the entity becomes a subsidiary member of the group.

WIP amount assets

 (5C) If:

 (a) the asset’s tax cost is set because an entity becomes a *subsidiary member of a *consolidated group at the particular time; and

 (b) the asset is a *WIP amount asset;

the expression means that section 2595 applies as if the *head company had paid a *work in progress amount for the income year in which the particular time occurs equal to the *tax cost setting amount of the asset.

Consumable stores

 (5D) If:

 (a) the asset’s tax cost is set because an entity becomes a *subsidiary member of a *consolidated group at the particular time; and

 (b) the asset is consumable stores;

the expression means that, for the purposes of section 81, the *head company of the group is taken to have incurred an outgoing at the particular time in acquiring the asset equal to the asset’s *tax cost setting amount.

Other provisions

 (6) If any provision of this Act that is not mentioned above is to apply in relation to the asset by including an amount in assessable income, or by allowing an amount as a deduction, in a way that brings into account (directly or indirectly) any of the following amounts:

 (a) the cost of the asset;

 (b) outgoings incurred, or amounts paid, in respect of the asset;

 (c) expenditure in respect of the asset;

 (d) an amount of a similar kind in respect of the asset;

the expression means that the provision applies, for the purpose of determining the amount included in assessable income or the amount of the deduction, as if the cost, outgoing, expenditure or other amount had been incurred or paid to acquire the asset at the particular time for an amount equal to its *tax cost setting amount.

Note 2: For specific clarifications of the operation of this subsection in relation to bad debts, see Subdivision 716S.

70156  Application of subsection 70155(6)

 (1) Subsection (2) applies in relation to each asset that would be an asset of an entity at the time (the joining time) it becomes a *subsidiary member of a *consolidated group, assuming that subsection 7011(1) (the single entity rule) did not apply.

 (1A) Subsection (2) applies only to the extent necessary for the purposes of subsection 70155(6) to determine whether a provision of this Act is to apply in relation to each of those assets on and after the joining time.

 (1B) Subsection (2) applies despite section 7015 (the entry history rule).

 (2) Treat the *head company as having acquired each of those assets at the joining time as part of acquiring the business of the joining entity as a going concern.

Certain depreciating assets etc.

 (3) Subsection 70155(6) does not apply in relation to an asset if any of the following provisions are to apply in relation to the asset:

 (a) Subdivision 40F (Primary production depreciating assets);

 (b) Subdivision 40G (Capital expenditure of primary producers and other landholders);

 (c) Subdivision 40H (Capital expenditure that is immediately deductible);

 (d) Subdivision 40I (Capital expenditure that is deductible over time);

 (e) Subdivision 40J (Capital expenditure for the establishment of trees in carbon sink forests);

 (f) Division 41 (Additional deduction for certain new business investment);

 (g) Division 43 (Deductions for capital works).

70158  Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule

 (1) This section applies if:

 (a) the *tax cost of an asset was set at the time (the joining time) an entity became a *subsidiary member of a *consolidated group, at the asset’s *tax cost setting amount; and

 (b) ignoring the operation of subsection 7011(1) (the single entity rule), the entity held the asset at the joining time; and

 (c) taking into account the operation of subsection 7011(1) (the single entity rule), the *head company of the group did not hold the asset at the joining time.

Example: A debt owed by a member of the group to the joining entity at the joining time.

 (2) To avoid doubt, the asset’s *tax cost setting amount mentioned in paragraph (1)(a) is not to be taken into account in applying the provisions mentioned in subsections 70155(2), (3) (3A),, (4), (5), (5A), (5C), (5D) and (6) in relation to the asset at and after the joining time.

70160  Tax cost setting amount

  The asset’s tax cost setting amount is worked out using this table.

 

Tax cost setting amount

Item

If the asset’s tax cost is set by:

The asset’s tax cost setting amount is:

1

section 70110 (Cost to head company of assets of joining entity)

the amount worked out in accordance with Division 705

2

section 70115 (Cost to head company of membership interests in entity that leaves group)

the amount worked out in accordance with section 71115 or 71155

3

section 70120 (Cost to head company of assets consisting of certain liabilities owed by entity that leaves group) or section 70145 (Cost of assets consisting of liabilities owed to entity by members of the group)

the *market value of the asset

4

section 70150 (Cost of certain membership interests of which entity becomes holder on leaving group)

the amount worked out in accordance with section 71155

Note 1: The tax cost setting amount of certain interests in partnership assets is worked out under Subdivision 713E.

Note 2: The tax cost setting amount of certain assets of a life insurance company is worked out under Subdivision 713L.

70161  Assets in relation to Division 230 financial arrangement—head company’s assessable income or deduction

 (1) This section applies if:

 (a) an entity (the joining entity) becomes a *subsidiary member of a *consolidated group; and

 (b) paragraph 70155(5A)(b) applies in relation to one or more assets of the joining entity.

 (2) Work out if the total of the *Division 230 starting values for those assets exceeds or falls short of the total of their *tax cost setting amounts.

 (3) If there is an excess, an amount equal to 25% of that excess is included in the *head company’s assessable income for:

 (a) the income year in which the particular time mentioned in subsection 70155(5A) occurs; and

 (b) each of the 3 subsequent income years.

 (4) If there is a shortfall, the *head company is entitled to a deduction equal to 25% of that shortfall for:

 (a) the income year in which the particular time mentioned in subsection 70155(5A) occurs; and

 (b) each of the 3 subsequent income years.

70163  Right to future income and WIP amount asset

 (5) A right to future income is a valuable right (including a contingent right) to receive an amount if:

 (a) the valuable right forms part of a contract or agreement; and

 (b) the *market value of the valuable right (taking into account all the obligations and conditions relating to the right) is greater than nil; and

 (c) the valuable right is neither a *Division 230 financial arrangement nor a part of a Division 230 financial arrangement; and

 (d) it is reasonable to expect that an amount attributable to the right will be included in the assessable income of any entity at a later time.

 (6) WIP amount asset means an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in paragraph 2595(3)(b) for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work.

70165  Net income and losses for trusts and partnerships

Net income of partnerships and trusts

 (1) If:

 (a) another provision of this Division applies for the purpose of:

 (i) working out the amount of the entity’s liability (if any) for income tax calculated by reference to an income year; or

 (ii) working out the amount of the entity’s taxable income for an income year; and

 (b) the entity is a trust or partnership;

the provision instead applies in a corresponding way for the purpose of working out the amount of the entity’s net income, as defined in the Income Tax Assessment Act 1936, (if any) for the income year.

Note: Subsection 70130(3) requires nonmembership periods mentioned in that subsection to be treated as the start and end of an income year. This section would therefore also apply to those periods.

Partnership losses

 (2) If:

 (a) another provision of this Division applies for the purpose of working out the amount of the entity’s loss (if any) of a particular *sort for an income year; and

 (b) the entity is a partnership;

the provision instead applies in a corresponding way for the purpose of working out the amount of an entity’s partnership loss, as defined in section 90 of the Income Tax Assessment Act 1936, (if any) for the income year.

Note: The provision applies normally to a trust, as it can have a loss of any sort worked out in the same way as a loss of the same sort for an entity of another kind.

70167  Assets in this Part are CGT assets, etc.

  This Part applies to an asset only if the asset is one or more of the following:

 (a) a *CGT asset;

 (b) a *revenue asset;

 (c) a *depreciating asset;

 (d) *trading stock;

 (e) a thing that is or is part of a *Division 230 financial arrangement.

Exceptions

70170  Adjustments to taxable income where identities of parties to arrangement merge on joining group

Section applies to certain arrangements

 (1) This section applies for the head company core purposes and the entity core purposes if, just before the time (the joining time) when the entity becomes a *subsidiary member of the group, an *arrangement is in force under which:

 (a) expenditure is to be, or has been, incurred in return for the doing of some thing; and

 (b) the persons incurring the expenditure and *deriving the corresponding amount (each of which is a combining entity) are the entity and either:

 (i) another entity that became a subsidiary member at the same time; or

 (ii) the *head company.

Note 1: If expenditure incurred under an arrangement consists of a payment of loan interest or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the loan principal, or other amount of a similar kind, under the arrangement.

Note 2: If expenditure incurred under an arrangement consists of a payment of rent, a lease payment or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the thing rented or leased, or other thing of a similar kind, under the arrangement.

Note 3: If expenditure incurred under an arrangement consists of a payment of an insurance premium or a payment of a similar kind, the expenditure would be incurred in return for the provision or continued provision of insurance against the risk concerned, or of a thing of a similar kind, under the arrangement.

Object

 (2) The object of this section is to align the income tax position of the combining entities at the joining time, because after that time they lose their separate tax identities under the single entity rule in subsection 7011(1) and this would preserve any imbalance.

Adjustment for disproportionate deductibility

 (3) If the total of a combining entity’s deductions that are allowable for:

 (a) the following income year (the joining adjustment year):

 (i) if the combining entity is the *head company and the joining time occurs at the start of an income year—the income year before that income year;

 (ii) if the combining entity is the head company and subparagraph (i) does not apply—the income year in which the joining time occurs;

 (iii) in any other case—the income year that ends, or, if section 70130 applies, the income year that is taken by subsection (3) of that section to end, at the joining time; and

 (b) all earlier income years;

is not equal to the amount worked out under subsection (4), then:

 (c) if the total is less—the entity is entitled to deduct the difference for the joining adjustment year; and

 (d) if it is more—the entity’s assessable income for the joining adjustment year includes the difference.

Prejoining time proportion of total arrangement deductions

 (4) The amount is worked out using the formula:

where:

prejoining time services proportion means the proportion of all things to be done under the arrangement in return for the incurring of the expenditure represented by those things that were done before the joining time.

total arrangement deductions means the total of the deductions that, ignoring this Part (other than subsection (7) of this section), would be allowable for expenditure incurred by the combining entity under the arrangement for all income years.

Adjustment for disproportionate assessability

 (5) If the total of the amounts included in a combining entity’s assessable income in respect of amounts *derived under the arrangement for the joining adjustment year and all earlier income years is not equal to the amount worked out under subsection (6):

 (a) if the total is less—the entity’s assessable income for the joining adjustment year includes the difference; and

 (b) if it is more—the entity is entitled to deduct the difference for the joining adjustment year.

Prejoining time proportion of total arrangement assessable income

 (6) The amount is worked out using the formula:

where:

prejoining time services proportion has the same meaning as in subsection (4).

total arrangement assessable income means the total of the amounts that, ignoring this Part (other than subsection (7) of this section), would be included in the combining entity’s assessable income for amounts *derived by it under the arrangement for all income years.

Modified application of section if combining entities previously members of same group

 (7) If the combining entities were *members of the same *consolidated group (whether or not the group to which this section applies) on one or more previous occasions, this section applies in relation to the entities as if:

 (a) the only things to be done under the arrangement in return for the incurring of the expenditure were those things to be done after the entities ceased to be members of the same group on the previous occasion or the last of the previous occasions; and

 (b) the only deductions allowable to an entity for expenditure incurred by it under the arrangement, and the only amounts included in an entity’s assessable income in respect of amounts *derived under the arrangement, were:

 (i) if the entity was the *head company of the consolidated group of which the combining entities were members on the previous occasion or last of the previous occasions—those for the income year, in which the previous occasion or the last of the previous occasions occurred, that are attributable to the period after that occasion and those for all later income years; and

 (ii) in any other case—those for the income year that started, or, if section 70130 applies, the income year that is taken by subsection (3) of that section to have started, when the entity ceased to be a *subsidiary member of the group on the previous occasion or the last of the previous occasions and those for all later income years.

70175  Adjustments to taxable income where identities of parties to arrangement reemerge on leaving group

Section applies to certain arrangements

 (1) This section applies for the head company core purposes and the entity core purposes if the entity ceases to be a *subsidiary member of the group and, just before the time (the leaving time) when it does so, an *arrangement is in force under which:

 (a) expenditure is to be, or has been, incurred in return for the doing of some thing; and

 (b) the persons incurring the expenditure and *deriving the corresponding amount (each of which is a separating entity) are the entity and either:

 (i) another entity that ceases to be a subsidiary member at the same time; or

 (ii) the *head company.

Note: The notes to subsection 70170(1) on the application of that subsection to expenditure under certain kinds of arrangements are equally applicable for the purposes of this subsection.

Object

 (2) The object of this section is to align the income tax position of the separating entities at the leaving time, because from that time they have separate tax identities as a result of the single entity rule in subsection 7011(1) ceasing to apply, and this may create an imbalance.

Adjustment for disproportionate deductibility

 (3) If the total of the deductions that are or will be allowable for expenditure incurred by the separating entity under the arrangement for:

 (a) the following income year (the leaving adjustment year):

 (i) if the separating entity is the *head company—the income year in which the leaving time occurs;

 (ii) in any other case—the income year that starts, or, if section 70130 applies, the income year that is taken by subsection (3) of that section to start, at the leaving time; and

 (b) all later income years;

is not equal to the amount worked out under subsection (4), the deductions are adjusted so that they do equal the amount.

Postleaving time proportion of total arrangement deductions

 (4) The amount is worked out using the formula:

where:

postleaving time services proportion means the proportion of all things to be done under the arrangement in return for the incurring of the expenditure represented by those things that are to be done after the leaving time.

total arrangement deductions means the total of the deductions that, ignoring this Part, would be allowable for expenditure incurred by the separating entity under the arrangement for all income years.

Adjustment for disproportionate assessability

 (5) If the total of the amounts that are or will be included in its assessable income in respect of amounts *derived under the arrangement for the leaving adjustment year and all later income years is not equal to the amount worked out under subsection (6), the amounts that are or will be included in its assessable income are adjusted so that they do equal the amount worked out under subsection (6).

Postleaving time proportion of total arrangement assessable income

 (6) The amount is worked out using the formula:

where:

postleaving time services proportion has the same meaning as in subsection (4).

total arrangement assessable income means the total of the amounts that, ignoring this Part, would be included in the separating entity’s assessable income for amounts *derived by it under the arrangement for all income years.

70180  Accelerated depreciation

 (1) This section has effect for the head company core purposes when the entity becomes a *subsidiary member of the group.

Object

 (2) The object of this section is to preserve any entitlement to accelerated depreciation for assets that become those of the *head company because subsection 7011(1) (the single entity rule) applies when the entity becomes a *subsidiary member of the group. This is only to apply where the asset’s *tax cost setting amount is not more than the entity’s *terminating value for the asset.

Section applies to certain depreciating assets

 (3) This section applies if:

 (a) a *depreciating asset to which Division 40 applies becomes that of the *head company because subsection 7011(1) (the single entity rule) applies when the entity becomes a *subsidiary member of the group; and

 (b) just before the entity became a subsidiary member, subsection 4010(3) or 4012(3) of the Income Tax (Transitional Provisions) Act 1997 applied for the purpose of the entity working out the asset’s decline in value under Division 40; and

Note: The effect of those subsections was to preserve an entitlement to accelerated depreciation.

 (c) the *tax cost setting amount that applies in relation to the asset for the purposes of section 70110 when it becomes an asset of the head company is not more than the entity’s *terminating value for the asset.

Preservation of accelerated depreciation

 (4) While the asset is held by the *head company under subsection 7011(1) (the single entity rule), the decline in its value under Division 40 is worked out by replacing the component in the formula in subsection 4070(1) or 4075(1) that includes the asset’s *effective life with the rate that would apply under subsection 42160(1) or 42165(1) of this Act if it had not been amended by the New Business Tax System (Capital Allowances) Act 2001.

70185  Other exceptions etc. to the rules

  The operation of each provision of this Division is subject to any provision of this Act that so requires, either expressly or impliedly.

Note: An example of such a provision is Division 707 (about the transfer of certain losses to the head company of a consolidated group). That Division modifies the effect that the inheritance of history rule in section 7015 would otherwise have.

Division 703Consolidated groups and their members

 

Guide to Division 703

7031  What this Division is about

A consolidated group and a consolidatable group each consists of a head company and all the companies, trusts and partnerships that:

 (a) are resident in Australia; and

 (b) are whollyowned subsidiaries of the head company (either directly or through other companies, trusts and partnerships).

A consolidatable group becomes consolidated at a time chosen by the company that was the head company at the time.

Table of sections

Basic concepts

7035 What is a consolidated group?

70310 What is a consolidatable group?

70315 Members of a consolidated group or consolidatable group

70320 Certain entities that cannot be members of a consolidated group or consolidatable group

70325 Australian residence requirements for trusts

70330 When is one entity a whollyowned subsidiary of another?

70333 Transfer time for sale of shares in company

70335 Treating entities as whollyowned subsidiaries by disregarding employee shares

70337 Disregarding certain preference shares following an ADI restructure

70340 Treating entities held through nonfixed trusts as whollyowned subsidiaries

70345 Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group

Choice to consolidate a consolidatable group

70350 Choice to consolidate a consolidatable group

Consolidated group created when MEC group ceases to exist

70355 Creating consolidated groups from certain MEC groups

Notice of events affecting consolidated group

70358 Notice of choice to consolidate

70360 Notice of events affecting consolidated group

Effects of choice to continue group after shelf company becomes new head company

70365 Application

70370 Consolidated group continues in existence with interposed company as head company and original entity as a subsidiary member

70375 Interposed company treated as substituted for original entity at all times before the completion time

70380 Effects on the original entity’s tax position

Basic concepts

7035  What is a consolidated group?

 (1) A consolidated group comes into existence:

 (a) on the day specified in a choice by a company under section 70350 as the day on and after which a *consolidatable group is taken to be consolidated; or

 (b) as described in section 70355 (about creating a consolidated group from a *MEC group).

Note: The day specified in a choice under section 70350 as the day on and after which a consolidatable group is taken to be consolidated may be a day before the choice is made.

 (2) The consolidated group continues to exist until the *head company of the group:

 (a) ceases to be a head company; or

 (b) becomes a member of a *MEC group.

The consolidated group ceases to exist when one of those events happens to the head company.

Note: The group does not cease to exist in some cases where a shelf company is interposed between the head company and its former members: see subsection 61530(2) and section 70370.

 (3) At any time while it is in existence, the consolidated group consists of the *head company and all of the *subsidiary members (if any) of the group at the time.

Note: A consolidated group continues to exist despite one or more entities ceasing to be subsidiary members of the group or becoming subsidiaries of the group, as long as the events described in subsection (2) do not happen to the head company. Thus a consolidated group may come to consist of a head company alone at various times.

70310  What is a consolidatable group?

 (1) A consolidatable group consists of:

 (a) a single *head company; and

 (b) all the *subsidiary members of the group.

 (2) To avoid doubt, a consolidatable group cannot consist of a *head company alone.

70315  Members of a consolidated group or consolidatable group

 (1) An entity is a member of a *consolidated group or *consolidatable group while the entity is:

 (a) the *head company of the group; or

 (b) a *subsidiary member of the group.

 (2) At a particular time in an income year, an entity is:

 (a) a head company if all the requirements in item 1 of the table are met in relation to the entity; or

 (b) a subsidiary member of a *consolidated group or *consolidatable group if all the requirements in item 2 of the table are met in relation to the entity:

 

Head companies and subsidiary members of groups

Column 1
Entity’s role in relation to group

Column 2
Income tax treatment requirements

Column 3
Australian residence requirements

Column 4
Ownership requirements

1 Head company

The entity must be a company (but not one covered by section 70320) that has all or some of its taxable income (if any) taxed at a rate that is or equals the *corporate tax rate

The entity must be an Australian resident (but not a *prescribed dual resident)

The entity must not be a *whollyowned subsidiary of another entity that meets the requirements in columns 2 and 3 of this item or, if it is, it must not be a subsidiary member of a *consolidatable group or *consolidated group

2 Subsidiary member

The requirements are that:

(a) the entity must be a company, trust or partnership (but not one covered by section 70320); and

(b) if the entity is a company—all or some of its taxable income (if any) must be taxable apart from this Part at a rate that is or equals the *corporate tax rate; and

(c) the entity must not be a nonprofit company (as defined in the Income Tax Rates Act 1986)

The entity must:

(a) be an Australian resident (but not a *prescribed dual resident), if it is a company; or

(b) comply with section 70325, if it is a trust; or

(c) be a partnership

The entity must be a *whollyowned subsidiary of the head company of the group and, if there are interposed between them any entities, the set of requirements in section 70345, section 701C10 of the Income Tax (Transitional Provisions) Act 1997 or section 701C15 of that Act must be met

70320  Certain entities that cannot be members of a consolidated group or consolidatable group

 (1) The object of this section is to specify certain entities that cannot be *members of a *consolidated group because of the way their income is treated for income tax purposes.

 (2) An entity of a kind specified in an item of the table cannot be a *member of a *consolidated group or a *consolidatable group at a time in an income year if the conditions specified in the item exist:

 

Certain entities that cannot be members of a consolidated or consolidatable group

Item

An entity of this kind:

Cannot be a member of a consolidated group or consolidatable group if:

1

An entity of any kind

At the time, the total *ordinary income and *statutory income of the entity is exempt from income tax under Division 50

2

A company

The company is a recognised medium credit union (as defined in section 6H of the Income Tax Assessment Act 1936) for the income year

3

A company

The company:

(a) is an approved credit union for the income year for the purposes of section 23G of the Income Tax Assessment Act 1936; and

(b) is not a recognised medium credit union (as defined in section 6H of that Act) or a recognised large credit union (as defined in that section) for the income year

5

A company

The company is a *PDF at the end of the income year

7

A trust

The trust is:

(a) a *complying superannuation entity for the income year; or

(b) a *noncomplying approved deposit fund or a *noncomplying superannuation fund for the income year

Note: A subsidiary of a life insurance company cannot be a member of a consolidated group or consolidatable group in certain circumstances: see section 713510.

70325  Australian residence requirements for trusts

  A trust described in an item of the table must meet the requirements specified in the item to be able to be a *subsidiary member of a *consolidated group or a *consolidatable group at a time in an income year:

 

Australian residence requirements for trusts

Item

A trust of this kind:

Can be a member of a consolidated group or consolidatable group only if these requirements are met:

1

A trust (except a unit trust)

The trust must be a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936

2

A unit trust (except a *public trading trust for the income year)

The trust must be:

(a) a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936; and

(b) a *resident trust for CGT purposes for the income year

3

A *public trading trust for the income year

The trust must be a *resident unit trust for the income year

70330  When is one entity a whollyowned subsidiary of another?

 (1) One entity (the subsidiary entity) is a whollyowned subsidiary of another entity (the holding entity) if all the *membership interests in the subsidiary entity are beneficially owned by:

 (a) the holding entity; or

 (b) one or more whollyowned subsidiaries of the holding entity; or

 (c) the holding entity and one or more whollyowned subsidiaries of the holding entity.

 (2) An entity (other than the subsidiary entity) is a whollyowned subsidiary of the holding entity if, and only if:

 (a) it is a whollyowned subsidiary of the holding entity; or

 (b) it is a whollyowned subsidiary of a whollyowned subsidiary of the holding entity;

because of any other application or applications of this section.

Note: This Part also operates in some cases as if an entity were a whollyowned subsidiary of another entity, even though the entity is not covered by the definition in this section because of:

(a) ownership of shares under certain arrangements for employee shareholding (see section 70335); or

(aa) ownership of certain preference shares following an ADI restructure (see section 70337); or

(b) interposed trusts that are not fixed trusts (see section 70340).

 (3) For the purposes of this section, one entity is not prevented from being the beneficial owner of a *membership interest in another entity merely because the first entity is or becomes:

 (a) a Chapter 5 body corporate within the meaning of the Corporations Act 2001; or

 (b) an entity with a status under a *foreign law similar to the status of a Chapter 5 body corporate under the Corporations Act 2001.

70333  Transfer time for sale of shares in company

 (1) This section applies if:

 (a) under a contract:

 (i) a person (the seller) stops being entitled to be registered as the holder of a *share in a company at a time (the transfer time); and

 (ii) another person (the buyer) becomes entitled to be registered as the holder of the share in the company at the transfer time; and

 (b) as a result of the contract, the seller stops being the beneficial owner of the share, and the buyer becomes the beneficial owner of the share; and

 (c) the seller and the buyer dealt with each other at *arm’s length in relation to the contract; and

 (d) the seller and the buyer were not *associates of one another at any time during the period:

 (i) starting when the contract was entered into; and

 (ii) ending at the transfer time.

 (2) For the purposes of subsection 70330(1):

 (a) the seller is taken to have stopped being the beneficial owner of the share at the transfer time; and

 (b) the buyer is taken to have become the beneficial owner of the share at the transfer time.

70335  Treating entities as whollyowned subsidiaries by disregarding employee shares

 (1) The object of this section is to ensure that an entity (the first entity) is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because there are minor holdings of *membership interests in an entity (the employee share scheme entity) issued under *arrangements for employee shareholdings. (It does not matter whether the employee share scheme entity is the first entity or is interposed between the first entity and a *member of the group.)

Note: A company that is prevented from being a subsidiary member of a consolidated group may be a head company (so there could be 2 consolidated or consolidatable groups, instead of the one that this section ensures exists).

 (2) This Part (except Division 719) operates as if an entity that meets the requirement of subsection (3) at a particular time were a *whollyowned subsidiary of an entity (the holding entity) at the time.

 (3) The entity must be one that would be a *whollyowned subsidiary of the holding entity at the time if the *membership interests in the entity that are to be disregarded under subsection (4) did not exist.

 (4) Disregard:

 (a) each of the *shares described in subsection (5) if the total number of those shares is not more than 1% of the number of ordinary shares in the company; and

 (b) each of the *membership interests in an entity described in subsection (5) if the total number of those membership interests is not more than 1% of the number of membership interests of that kind in the entity.

 (5) A *share or *membership interest in a company may be disregarded under subsection (4) if:

 (a) the entity who holds the beneficial interest in the share or membership interest acquired that beneficial interest:

 (i) under an *employee share scheme; or

 (ii) by exercising a right, a beneficial interest in which was acquired under an employee share scheme; and

 (b) paragraphs 83A105(1)(a) and (b) and subsection 83A105(2) apply to the beneficial interest acquired under the scheme; and

 (c) in the case of a membership interest—the interest is part of a stapled security.

70337  Disregarding certain preference shares following an ADI restructure

 (1) The object of this section is to ensure that, following an *ADI restructure to which Part 4A of the Financial Sector (Business Transfer and Group Restructure) Act 1999 applies, a body corporate is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because the body (or another body corporate) has issued, or issues, certain preference *shares.

 (2) This Part (except Division 719) operates as if a body corporate that meets the requirement of subsection (3) at a particular time were a *whollyowned subsidiary of another body corporate (the holding body) at the time.

 (3) The body corporate (the preferenceshare issuing body) must be one that would be a *whollyowned subsidiary of the holding body at the time if the *shares in the preference shareissuing body that are to be disregarded under subsection (4) did not exist.

 (4) Disregard a *share in the preferenceshare issuing body if:

 (a) a restructure instrument under Part 4A of the Financial Sector (Business Transfer and Group Restructure) Act 1999 is in force in relation to a nonoperating holding company within the meaning of that Act; and

 (b) because of the restructure to which the instrument relates, an *ADI becomes a subsidiary (within the meaning of that Act) of the nonoperating holding company; and

 (c) the preference shareissuing body is:

 (i) the ADI; or

 (ii) part of an extended licensed entity (within the meaning of the *prudential standards) that includes the ADI; and

 (d) the shares are covered by subsection (5).

 (5) A *share is covered by this subsection if:

 (a) the share is a preference share; and

 (b) any *return on the share is fixed at the time of issue by reference to the amount subscribed; and

 (c) the share is not a *voting share; and

 (d) either:

 (i) the share is Tier 1 capital (within the meaning of the *prudential standards); or

 (ii) the share would be Tier 1 capital (within the meaning of the prudential standards) were it not for a limit, imposed by those standards, on the proportion of Tier 1 capital that can be made up of such shares.

 (6) Paragraph (5)(a) covers a preference share if it is issued:

 (a) by itself; or

 (b) in combination with one or more *schemes that are *related schemes in relation to a scheme under which a preference share is issued.

 (7) If subsection (5) has covered a *share, but would (apart from this subsection) stop covering the share from a particular time, then for a period of 180 days after that time the subsection is taken to continue to cover the share.

70340  Treating entities held through nonfixed trusts as whollyowned subsidiaries

 (1) This section operates to ensure that an entity (the test entity) is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because there is a trust that is not a *fixed trust interposed between the test entity and the *head company of the group.

 (2) This Part (except Division 719) operates as if the test entity were a *whollyowned subsidiary of the *head company if the test entity would have been a whollyowned subsidiary of the head company had the interposed trust been a *fixed trust and all its objects been beneficiaries.

70345  Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group

 (1) This section describes, for the purposes of item 2, column 4 of the table in subsection 70315(2), a set of requirements that must be met for an entity (the test entity) to be a *subsidiary member of a *consolidated group or a *consolidatable group at a particular time (the test time).

 (2) At the test time, each of the interposed entities must either:

 (a) be a *subsidiary member of the group; or

 (b) hold *membership interests in:

 (i) the test entity; or

 (ii) a subsidiary member of the group interposed between the *head company of the group and the test entity;

  only as a nominee of one or more entities each of which is a *member of the group.

Choice to consolidate a consolidatable group

70350  Choice to consolidate a consolidatable group

 (1) A company may make a choice in writing that a *consolidatable group is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the *head company of the group on the day specified.

Note 1: The head company of the group must give the Commissioner a notice in the approved form containing information about the group (see sections 70358 and 70360).

Note 3: A group that is consolidated for income tax purposes may also consolidate for the purposes of the Petroleum Resource Rent Tax Assessment Act 1987 (see section 58N of that Act).

Choice is irrevocable

 (2) The choice cannot be revoked, and the specification of the day cannot be amended, after the choice is made under subsection (1).

 (3) The choice can be made no later than:

 (a) if the company is required to give the Commissioner its *income tax return for the income year during which the specified day mentioned in subsection (1) occurs—the day on which the company gives the Commissioner that income tax return; or

 (b) otherwise—the last day in the period within which the company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return.

Choice has no effect after consolidated group ceases to exist

 (4) The choice does not have effect after the *consolidated group that came into existence because of the choice ceases to exist. To avoid doubt, this subsection does not prevent the choice from:

 (a) being made by the company at a time when it is not a head company; or

 (b) having effect in relation to a time before the consolidated group ceased to exist, even if that time is before the choice is made.

Choice does not have effect if company is a member of a MEC group

 (7) The choice does not have effect (and is taken not to have had effect) if, on the day specified, the company was a member of a *MEC group.

Consolidated group created when MEC group ceases to exist

70355  Creating consolidated groups from certain MEC groups

 (1) A *consolidated group comes into existence at the time a *MEC group ceases to exist if:

 (a) the MEC group included only one *eligible tier1 company just before the time; and

 (b) the MEC group ceases to exist only because the company ceases to be an eligible tier1 company; and

 (c) the company is a *head company as defined in section 70315 at the time.

 (2) To avoid doubt, the *consolidated group consists at the time of:

 (a) the company (as the *head company of the consolidated group); and

 (b) every entity (if any) that was a *subsidiary member of the *MEC group just before that time (as a subsidiary member of the consolidated group).

Notice of events affecting consolidated group

70358  Notice of choice to consolidate

 (1) If a *consolidated group comes into existence on the day specified in a choice under section 70350, the *head company of the group must give the Commissioner a notice in the *approved form containing the following information:

 (a) the identity of the head company;

 (b) the day specified in the choice on which the *consolidatable group is taken to be consolidated;

 (c) the identity of each *subsidiary member of the group on that day;

 (d) the identity of each entity that was a subsidiary member of the group on that day but was not such a subsidiary member when the notice is given;

 (e) the identity of each entity that was not a subsidiary member of the group on that day but was such a subsidiary member when the notice is given;

 (f) the identity of each entity that became a subsidiary member of the group after that day but was not such a subsidiary member when the notice is given.

 (2) The notice must be given no later than:

 (a) if the *head company is required to give the Commissioner its *income tax return for the income year during which that day occurs—the day on which the company gives the Commissioner that income tax return; or

 (b) otherwise—the last day in the period within which the head company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return.

70360  Notice of events affecting consolidated group

 (1) Within 28 days of an event described in an item of the table, the entity described in column 3 of the item must give the Commissioner notice in the *approved form of the event.

 

Notice of events

Column 1

Item

Column 2

If this event happens:

Column 3

Notice must be given by:

1

An entity becomes a *member of a *consolidated group

The *head company of the consolidated group

2

An entity ceases to be a *subsidiary member of a *consolidated group

The *head company of the group, or the person who was its public officer just before it ceased to exist if the former subsidiary member ceases to be a *member of the group because the head company ceases to exist

3

A *consolidated group ceases to exist

The company that was the *head company of the group, or the person who was its public officer just before it ceased to exist if it ceases to be the head company of the group because it ceases to exist

 (2) Despite subsection (1), if:

 (a) an event described in subsection (1) happens in relation to a *consolidated group that comes into existence on the day specified in a choice under section 70350; and

 (b) the event happens before the relevant notice is given to the Commissioner under section 70358 (notice of choice to consolidate);

the *head company of the consolidated group must give the Commissioner notice in the *approved form of the event.

 (2A) The notice must be given no later than:

 (a) if the *head company is required to give the Commissioner its *income tax return for the income year during which that day occurs—the day on which the company gives the Commissioner that income tax return; or

 (b) otherwise—the last day in the period within which the head company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return.

 (3) Despite subsection (1), if:

 (a) an event described in subsection (1) happens in relation to a *consolidated group that comes into existence at a time under subsection 70355(1) because a *MEC group ceased to exist at that time; and

 (b) the *MEC group came into existence under paragraph 7195(1)(a) because a choice under section 71950 is made after that time; and

 (c) the event happens before the relevant notice is given to the Commissioner under section 71976 (notice of choice to consolidate);

the *head company of the consolidated group must give the Commissioner notice in the *approved form of the event.

 (4) The notice must be given no later than:

 (a) if the *head company is required to give the Commissioner its *income tax return for the income year during which that day occurs—the day on which the company gives the Commissioner that income tax return; or

 (b) otherwise—the last day in the period within which the head company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return.

Effects of choice to continue group after shelf company becomes new head company

70365  Application

  Sections 70370 to 70380 set out the effects if a company (the interposed company) chooses under subsection 61530(2) that a *consolidated group is to continue in existence at and after the time referred to in that subsection as the completion time.

Note: The choice is one of the conditions for a compulsory rollover under Division 615 on an exchange of shares in the head company of a consolidated group for shares in the interposed company.

70370  Consolidated group continues in existence with interposed company as head company and original entity as a subsidiary member

 (1) The *consolidated group is taken not to have ceased to exist under subsection 7035(2) because the company referred to in subsection 61530(2) as the original entity ceases to be the *head company of the group.

 (2) To avoid doubt, the interposed company is taken to have become the *head company of the *consolidated group at the completion time, and the original entity is taken to have ceased to be the head company at that time.

Note: A further result is that the original entity is taken to have become a subsidiary member of the group at that time. Section 70380 deals with the original entity’s tax position for the income year that includes the completion time.

 (3) A provision of this Part that applies on an entity becoming a *subsidiary member of a *consolidated group does not apply to an entity being taken to have become such a member as a result of this section, unless the provision is expressed to apply despite this subsection.

Note: An example of the effect of this subsection is that there is no resetting under section 70110 of the tax cost of assets of the original entity that become assets of the interposed company because of subsection 7011(1) (the single entity rule).

 (4) To avoid doubt, subsection (3) does not affect the application of subsection 7011(1) (the single entity rule).

70375  Interposed company treated as substituted for original entity at all times before the completion time

 (1) Everything that happened in relation to the original entity before the completion time:

 (a) is taken to have happened in relation to the interposed company instead of in relation to the original entity; and

 (b) is taken to have happened in relation to the interposed company instead of what would (apart from this section) be taken to have happened in relation to the interposed company before that time;

just as if, at all times before the completion time:

 (c) the interposed company had been the original entity; and

 (d) the original entity had been the interposed company.

Note: This section treats the original entity and the interposed company as having in effect exchanged identities throughout the period before the completion time, but without affecting any of the original entity’s other attributes.

 (2) To avoid doubt, subsection (1) also covers everything that, immediately before the completion time, was taken, because of:

 (a) section 7011 (Single entity rule); or

 (b) section 7015 (Entry history rule); or

 (c) one or more previous applications of this section; or

 (d) section 71990 (about the effects of a change of head company of a MEC group); or

 (e) section 719125 (about the effects of a group conversion involving a MEC group);

to have happened in relation to the original entity.

 (3) Subsections (1) and (2) have effect:

 (a) for the head company core purposes in relation to an income year ending after the completion time; and

 (b) for the entity core purposes in relation to an income year ending after the completion time; and

 (c) for the purposes of determining the respective balances of the *franking accounts of the original entity and the interposed company at and after the completion time.

 (4) Subsections (1) and (2) have effect subject to:

 (a) section 70140 (Exit history rule); and

 (b) a provision of this Act to which section 70140 is subject because of section 70185 (about exceptions to the core rules in Division 701).

Note: An example of provisions covered by paragraph (b) of this subsection is Subdivision 717E (about transferring to a company leaving a consolidated group various surpluses under the CFC rules in Part X of the Income Tax Assessment Act 1936).

70380  Effects on the original entity’s tax position

  In applying section 70130 to the original entity for the income year that includes the completion time, disregard a nonmembership period that starts before the completion time.

Note 1: Section 70130 is about working out an entity’s tax position for a period when it is not a subsidiary member of any consolidated group. Its application can also affect the entity’s tax position in later income years.

Note 2: Under section 70375 the interposed company inherits the original entity’s tax position for the part of the income year that ends before the completion time, with the consequence that the original entity’s taxable income, income tax payable, and losses of any sort, for that part are each nil.

 Because of section 70375 and this section, the only tax payable by the original entity for the income year arises because of the application of section 70130 to nonmembership periods in the income year after the completion time.

Division 705Tax cost setting amount for assets where entities become subsidiary members of consolidated groups

 

Guide to Division 705

7051  What this Division is about

When an entity becomes a subsidiary member of a consolidated group, the tax cost of its assets is set at a tax cost setting amount that is worked out in accordance with this Division.

Table of Subdivisions

705A Basic case: a single entity joining an existing consolidated group

705B Case of group formation

705C Case where a consolidated group is acquired by another

705D Where multiple entities are linked by membership interests

705E Adjustments for errors etc.

Subdivision 705ABasic case: a single entity joining an existing consolidated group

Guide to Subdivision 705A

7055  What this Subdivision is about

When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity.

Table of sections

Application and object

70510 Application and object of this Subdivision

70515 Cases where this Subdivision does not have effect

Tax cost setting amount for assets that joining entity brings into joined group

70520 Tax cost setting amount worked out under this Subdivision

70525 Tax cost setting amount for retained cost base assets

70527 Reduction in tax cost setting amount that exceeds market value of certain retained cost base assets

70530 What is the joining entity’s terminating value for an asset?

70535 Tax cost setting amount for reset cost base assets

70540 Tax cost setting amount for reset cost base assets held on revenue account etc.

70545 Reduction in tax cost setting amount for accelerated depreciation assets

70547 Reduction in tax cost setting amount for some privatised assets

70555 Order of application of sections 70540, 70545 and 70547

70556 Modification for tax cost setting in relation to finance leases

70557 Adjustment to tax cost setting amount where loss of preCGT status of membership interests in joining entity

70558 Assets and liabilities not set off against each other

70559 Exception: treatment of linked assets and liabilities

How to work out the allocable cost amount

70560 What is the joined group’s allocable cost amount for the joining entity?

70562 No double counting of amounts in allocable cost amount

70565 Cost of membership interests in the joining entity—step 1 in working out allocable cost amount

70570 Liabilities of the joining entity—step 2 in working out allocable cost amount

70575 Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount

70580 Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount

70585 Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount

70590 Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount

70593 If prejoining time rollover from foreign resident company or head company—step 3A in working out allocable cost amount

70595 Prejoining time distributions out of certain profits—step 4 in working out allocable cost amount

705100 Losses accruing to joined group before joining time—step 5 in working out allocable cost amount

705105 Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount

705110 If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount

705115 If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount

How to work out a preCGT factor for assets of joining entity

705125 PreCGT proportion for joining entity

Application and object

70510  Application and object of this Subdivision

Application

 (1) This Subdivision has effect, subject to section 70515, for the head company core purposes set out in subsection 7011(2) if an entity (the joining entity) becomes a *subsidiary member of a *consolidated group (the joined group) at a particular time (the joining time).

Object

 (2) The object of this Subdivision is to recognise the *head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity. That amount consists of the cost of the group’s *membership interests in the joining entity, increased by the joining entity’s liabilities and adjusted to take account of the joining entity’s retained profits, distributions of profits, deductions and losses.

 (3) The reason for recognising the *head company’s cost in this way is to align the costs of assets with the costs of *membership interests, and to allow for the preservation of this alignment until the entity ceases to be a *subsidiary member, in order to:

 (a) prevent double taxation of gains and duplication of losses; and

 (b) remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically.

Note: Under Division 711, the alignment is preserved by recognising the head company’s cost of membership interests in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.

70515  Cases where this Subdivision does not have effect

  This Subdivision does not have effect if any of the following exceptions applies:

 (a) the first exception is where the joining entity becomes a *member of the joined group because it is a member of that group at the time it comes into existence as a *consolidated group;

Note: See Subdivision 705B for rules about the treatment of assets if entities become members in circumstances covered by this exception.

 (b) the second exception is where all of the members of another consolidated group become members of the joined group as a result of the *acquisition of *membership interests in the *head company of the joining group;

Note: See Subdivision 705C for rules about the treatment of assets if entities become members in circumstances covered by this exception.

 (c) the third exception is where:

 (i) the joining entity and one or more other entities become members of the joined group at the same time as a result of an event that happens in relation to one of them; and

 (ii) the case is not covered by the second exception;

Note: See Subdivision 705D for rules about the treatment of assets if entities become members in circumstances covered by this exception.

Tax cost setting amount for assets that joining entity brings into joined group

70520  Tax cost setting amount worked out under this Subdivision

  If this Subdivision has effect, for the purposes of item 1 in the table in section 70160 (Tax cost setting amount) the *tax cost setting amount for an asset whose *tax cost is set at the time the joining entity becomes a *subsidiary member of the joined group is worked out under this Subdivision.

70525  Tax cost setting amount for retained cost base assets

 (1) This section states what the *tax cost setting amount is for a *retained cost base asset.

Australian currency

 (2) If the *retained cost base asset is covered by paragraph (a), (b) or (ba) of the definition of that expression and is not covered by another subsection of this section, its *tax cost setting amount is equal to the amount of the Australian currency concerned.

Qualifying securities

 (3) If the *retained cost base asset is a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936), the *tax cost setting amount for the qualifying security is instead equal to the joining entity’s *terminating value for the asset.

Entitlements to prepaid services etc.

 (4) If the *retained cost base asset is covered by paragraph (c) of the definition of that expression, its *tax cost setting amount is equal to the amount of the deductions to which the *head company is entitled under section 7015 (the entry history rule) in respect of the expenditure that gave rise to the entitlement.

Note: If the total amount to be treated as tax cost setting amounts for retained cost base assets exceeds the joined group’s allocable cost amount for the joining entity, the head company makes a capital gain equal to the excess: see CGT event L3.

Financial arrangements to which Subdivision 250E applies

 (4A) The *tax cost setting amount is instead equal to the joining entity’s *terminating value for the *retained cost base asset if the asset is a *financial arrangement to which Subdivision 250E applies immediately before the joining time.

Rights to payments in respect of uncompleted work etc.

 (4B) If the *retained cost base asset is covered by paragraph (d) of the definition of that expression, its *tax cost setting amount is equal to the joining entity’s *terminating value for the asset.

Retained cost base asset

 (5) A retained cost base asset is:

 (a) Australian currency, other than *trading stock or *collectables of the joining entity; or

 (b) a right to receive a specified amount of such Australian currency, other than a right that is a marketable security within the meaning of section 70B of the Income Tax Assessment Act 1936; or

Example: A debt or a bank deposit.

 (ba) a unit in a *cash management trust, if:

 (i) the redemption value of the unit is expressed in Australian dollars; and

 (ii) the redemption value of the unit cannot increase; or

 (c) a right to have something done under an *arrangement under which:

 (i) expenditure has been incurred in return for the doing of the thing; and

 (ii) the thing is required or permitted to be done, or to cease being done, after the expenditure is incurred; or

 (d) a *right to future income (other than a *WIP amount asset).

Note 1: There are some additional retained cost base assets for a joining entity that is a life insurance company: see Subdivision 713L. The tax cost setting amount for those assets is worked out under that Subdivision.

Note 2: The joining entity’s right to receive lease payments under a finance lease is treated as a retained cost base asset in some circumstances (see paragraph 70556(3)(b)).

70527  Reduction in tax cost setting amount that exceeds market value of certain retained cost base assets

 (1) If:

 (a) a *retained cost base asset of the joining entity is a right to receive a specified amount of such Australian currency, covered by paragraph 70525(5)(b); and

 (b) the *market value of the asset is less than the *tax cost setting amount of the asset; and

 (c) the head company makes a *capital gain under *CGT event L3 (disregarding this subsection) as a result of the joining entity becoming a *subsidiary member of the group;

reduce the tax cost setting amount of the asset by the amount of the gain (but not below zero).

Note: Reducing the tax cost setting amount of the asset will also reduce the amount of the capital gain (see paragraph 104510(1)(b)). The amount of the capital gain might be reduced to nil.

 (2) If:

 (a) the requirements in subsection 70158(1) (intragroup assets) are satisfied in relation to the asset; and

 (b) the joining entity has been entitled to a deduction for an income year ending on or before the joining time because of the *market value of the asset being less than the specified amount mentioned in paragraph (1)(a); and

 (c) the accounting liability that corresponds to the asset has not been reduced under subsection 70575(2);

reduce the amount of the reduction under subsection (1) by the amount of the deduction (but not below zero).

 (3) If the *tax cost setting amount of 2 or more of the joining entity’s assets could be reduced in accordance with subsections (1) and (2):

 (a) subsections (1) and (2) apply sequentially to each of those assets; and

 (b) the *head company may choose the sequence of assets to which subsections (1) and (2) apply; and

 (c) if the head company does not make such a choice—subsections (1) and (2) apply sequentially to each of those assets according to the time at which they were created, from earliest to latest.

Note: Once the amount of the capital gain is reduced to nil as a result of the application of subsections (1) and (2), no further reductions of tax cost setting amount can be made under those subsections.

 (4) A choice the *head company can make under paragraph (3)(b) must be made:

 (a) by the day the head company lodges its *income tax return for the income year in which the *CGT event happened; or

 (b) within a further time allowed by the Commissioner.

 (5) The way the *head company prepares its *income tax return is sufficient evidence of the making of the choice.

70530  What is the joining entity’s terminating value for an asset?

Trading stock

 (1) If an asset of the joining entity is *trading stock, the joining entity’s terminating value for the asset is:

 (a) if the asset was on hand at the start of the income year in which the joining time occurs (including because of the operation of Division 701)—its *value at that time; or

 (b) if paragraph (a) does not apply and the asset is *live stock that was acquired by natural increase—the *cost of the asset; or

 (c) in any other case—the amount of the outgoing incurred by the joining entity in connection with the acquisition of the asset;

increased by the amount of any outgoing forming part of the cost of the asset that is incurred by the joining entity during its current holding of the asset.

Registered emissions units

 (1A) If an asset of the joining entity is a *registered emissions unit, the joining entity’s terminating value for the unit is equal to:

 (a) if the unit was *held by the joining entity at the start of the income year—the *value of the unit at the start of the income year; or

 (b) otherwise—the expenditure incurred by the joining entity in becoming the holder of the unit.

Qualifying securities

 (2) If an asset of the joining entity is a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936) that is not *trading stock, the joining entity’s terminating value for the asset is equal to the amount of consideration that the joining entity would need to receive, if it were to dispose of the asset just before the joining time, without an amount being assessable income of, or deductible to, the joining entity under section 159GS of the Income Tax Assessment Act 1936.

Depreciating assets

 (3) If an asset of the joining entity is a *depreciating asset to which Division 40 applies, the joining entity’s terminating value for the asset is equal to the asset’s *adjustable value just before the joining time.

Financial arrangements to which Subdivision 250E applies

 (3A) If an asset of the joining entity is a *financial arrangement to which Subdivision 250E applies, the joining entity’s terminating value for the asset is equal to the amount of consideration that the joining entity would need to receive, if it were to dispose of the asset just before the joining time, without an amount being assessable income of, or deductible to, the joining entity under Subdivision 250E.

Division 230 financial arrangements

 (3B) If an asset of the joining entity is or is part of a *Division 230 financial arrangement, the joining entity’s terminating value for the asset is equal to the amount of consideration that the joining entity would need to receive, if it were to dispose of the asset just before the joining time, without an amount being assessable income of, or deductible to, the joining entity under Division 230.

Other CGT assets

 (4) If an asset of the joining entity is a *CGT asset that is not covered by any of the above subsections, the joining entity’s terminating value for the asset is equal to the asset’s *cost base just before the joining time.

Other assets

 (5) The joining entity’s terminating value for any other asset that it holds is the amount that would be the asset’s *cost base just before the joining time if it were an asset covered by subsection (4).

70535  Tax cost setting amount for reset cost base assets

 (1) For each asset of the joining entity (a reset cost base asset) that is not a *retained cost base asset, the asset’s *tax cost setting amount is worked out by:

 (a) first working out the joined group’s *allocable cost amount for the joining entity in accordance with section 70560; and

 (b) then reducing that amount by the total of the *tax cost setting amounts for each retained cost base asset (but not below zero); and

 (c) finally, allocating the result to each of the joining entity’s reset cost base assets in proportion to their *market values.

Note 1: For an asset consisting of an entitlement to receive an amount that will be included in assessable income, the market value of the asset would take into account the tax payable on the amount.

Note 1A: If a set of linked assets and liabilities includes one or more reset cost base assets, section 70559 may affect how this section applies. In particular, that section may exclude the application of paragraph 70535(1)(b) to retained cost base assets in the set; this in turn may affect the application of CGT event L3.

Note 2: If there are no reset cost base assets, the result is instead treated as a capital loss of the head company: see CGT event L4.

Goodwill resulting from ownership and control of the joining entity

 (3) If, just after the joining time, the *head company has, because of its ownership and control of the joining entity, a goodwill asset associated with assets or businesses of the joined group:

 (a) for the head company core purposes, the asset’s *tax cost is set at the joining time at its *tax cost setting amount; and

 (b) for the purpose of doing so:

 (i) the asset is taken to be an asset of the joining entity that becomes an asset of the head company because subsection 7011(1) (the single entity rule) applies; and

 (ii) it is taken to have a *market value just before the joining time of an amount equal to its market value just after the joining time.

70540  Tax cost setting amount for reset cost base assets held on revenue account etc.

 (1) The *tax cost setting amount for a reset cost base asset that is *trading stock, a *depreciating asset, a *registered emissions unit or a *revenue asset must not exceed the greater of:

 (a) the asset’s *market value; and

 (b) the joining entity’s *terminating value for the asset.

 (2) If subsection (1) reduces the asset’s *tax cost setting amount, the amount of the reduction is allocated among the other reset cost base assets (including other *trading stock, *depreciating assets, *registered emissions units and *revenue assets), so as to increase their tax cost setting amounts, in accordance with the principles set out in subsection (3).

Note: If any of the amount of the reduction cannot be allocated, it is instead treated as a capital loss of the head company: see CGT event L8.

 (3) These are the principles:

 (a) the allocation is to be in proportion to the *market values of the assets;

 (b) the amount allocated to an item of *trading stock, to a *depreciating asset, to a *registered emissions unit or to a *revenue asset must not cause its *tax cost setting amount to contravene subsection (1);

 (c) any of the amount that cannot be allocated is to be reallocated, to the maximum extent possible, among the remaining reset cost base assets by applying this subsection a further one or more times.

70545  Reduction in tax cost setting amount for accelerated depreciation assets

  If:

 (a) an asset of the joining entity is a *depreciating asset to which Division 40 applies; and

 (aa) just before the entity became a subsidiary member, subsection 4010(3) or 4012(3) of the Income Tax (Transitional Provisions) Act 1997 applied for the purposes of the joining entity working out the asset’s decline in value under Division 40; and

Note: The effect of those subsections was to preserve an entitlement to accelerated depreciation.

 (b) the asset’s *tax cost setting amount would be greater than the joining entity’s *terminating value for the asset; and

 (c) the *head company chooses to apply this section to the asset;

the asset’s tax cost setting amount is reduced so that it equals the terminating value.

Note 1: A consequence of the choice is that accelerated depreciation will apply to the asset: see section 70180.

Note 2: Unlike the position with a reduction in tax cost setting amount under section 70540, the amount of the reduction is not reallocated among other assets.

70547  Reduction in tax cost setting amount for some privatised assets

Object

 (1) The object of this section is to limit appropriately the amount the *head company of the joined group can deduct for a *depreciating asset it starts to *hold because the joining entity becomes a *subsidiary member of the group, by reference to the direct or indirect effect of the following provisions on the amount the joining entity could deduct for the asset:

 (a) former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for taxexempt entities that become taxable);

 (b) former Subdivision 57I, and Subdivision 57J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and capital allowance deductions);

 (c) Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001).

Reduction of tax cost setting amount

 (2) The *tax cost setting amount for a *depreciating asset is reduced to the joining entity’s *terminating value for the asset if:

 (a) at a time before the joining entity became a *subsidiary member of the joined group, the asset was *held by an entity (whether the joining entity or another entity) that, at that time, was:

 (i) an *exempt Australian government agency; or

 (ii) another entity whose *ordinary income and *statutory income were exempt from income tax; and

 (b) any of the following provisions directly or indirectly affected the amount the joining entity could deduct for the asset:

 (i) former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for taxexempt entities that become taxable);

 (ii) former Subdivision 57I, and Subdivision 57J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and *capital allowance deductions);

 (iii) Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001); and

 (c) apart from this section, the tax cost setting amount for the asset would exceed the joining entity’s terminating value for the asset.

Note 1: Unlike the position with a reduction in tax cost setting amount under section 70540, the amount of the reduction is not reallocated among other assets.

Note 2: Former section 61A of, or former Subdivision 57I or Subdivision 57J in Schedule 2D to, the Income Tax Assessment Act 1936 or Division 58 of this Act may, for example, have indirectly affected the amount the joining entity could deduct for the asset because:

(a) that section, Subdivision or Division affected the amount that could be deducted by an entity that held the asset before the joining entity and that effect extended to the joining entity because of a previous application of this subsection, rollover relief or section 70140 (the exit history rule); or

(b) this subsection affected the amount the joining entity could deduct for the asset (either directly or because of section 70140).

Note 3: Subsection (2) has effect even if, just before the joining time, the joining entity was:

(a) an exempt Australian government agency; or

(b) another entity whose ordinary income and statutory income were exempt from income tax.

This is because section 715900 causes Division 58 to apply as if, just before the joining time, the joining entity’s ordinary income or statutory income had become assessable income to some extent.

Exception to reduction of tax cost setting amount

 (3) Subsection (2) does not apply if:

 (a) just before the joining time, the joining entity was neither an *exempt Australian government agency nor another entity whose *ordinary income and *statutory income were exempt from income tax; and

 (b) a condition in subsection (4) or (5) is met in relation to the period (the prejoining taxable period) between the last time for which the condition in paragraph (2)(a) is met and the joining time.

 (4) One condition for subsection (2) not to apply is that an amount was included in an entity’s assessable income, or an entity could deduct an amount, because of a *balancing adjustment event that occurred for the asset during the prejoining taxable period.

 (5) Another condition for subsection (2) not to apply is that:

 (a) for at least some of the prejoining taxable period, the asset was *held by the *head company of a *consolidated group (the earlier group) for the period (the earlier group period):

 (i) starting when (and because) an entity that had previously held the asset became a *subsidiary member of the earlier group or when the asset started to be held by that company because of an asset sale situation described in subsection 585(4) involving a *member of the earlier group as the purchaser mentioned in that subsection; and

 (ii) ending when (and because) an entity ceased to be a subsidiary member of the earlier group or when the earlier group ceased to exist; and

 (b) the company that was the head company of the earlier group just before the end of the earlier group period was not:

 (i) an *associate of the head company of the joined group just before the joining time; or

 (ii) the same company as the head company of the joined group; and

 (c) the earlier group period was at least 24 months.

70555  Order of application of sections 70540, 70545 and 70547

  If more than one of sections 70540, 70545 and 70550 apply:

 (a) the *head company may choose the order in which the sections are to apply; and

 (b) if it does not, the order is as follows:

 (i) first, section 70540;

 (ii) second, section 70545;

 (iii) third, section 70547.

70556  Modification for tax cost setting in relation to finance leases

 (1) This section applies if, just before the joining time:

 (a) the joining entity is the lessor or lessee under a lease of a *depreciating asset (the underlying asset) to which Division 40 applies; and

 (b) the joining entity classifies the lease, in accordance with its *accounting principles for tax cost setting, as a finance lease.

Joining entity is lessor

 (2) If the joining entity is the lessor under the lease and *holds the underlying asset just before the joining time, subsection (5) applies, in relation to the joining entity, to the asset that is the joining entity’s right to receive lease payments.

Note: In this situation, the underlying asset will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 70110).

 (3) If the joining entity is the lessor under the lease and does not *hold the underlying asset just before the joining time:

 (a) subsection (5) applies to the underlying asset in relation to the joining entity; and

 (b) for the purposes of this Division:

 (i) the joining entity’s right to receive lease payments is taken to be a *retained cost base asset; and

 (ii) the *tax cost setting amount of that retained cost base asset is taken to be equal to its *market value just before the joining time.

Note: In this situation, the asset that is the joining entity’s right to receive lease payments will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 70110).

Joining entity is lessee

 (4) If the joining entity is the lessee under the lease and does not *hold the underlying asset just before the joining time:

 (a) subsection (5) applies to the underlying asset in relation to the joining entity; and

 (b) the liability that is the lessee’s obligation to make lease payments is not taken into account under subsection 70570(1).

Note: If the joining entity is the lessee under the lease and holds the underlying asset just before the joining time:

(a) the underlying asset will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 70110); and

(b) the liability that is the lessee’s obligation to make lease payments is taken into account under subsection 70570(1).

Tax cost of certain assets set at nil

 (5) If this subsection applies to an asset, in relation to the joining entity:

 (a) the asset is not taken into account under paragraph 70535(1)(b) or (c); and

 (b) the asset’s *tax cost setting amount is taken to be nil.

70557  Adjustment to tax cost setting amount where loss of preCGT status of membership interests in joining entity

Object

 (1) The object of this section is to ensure that provisions that cause *membership interests in the joining entity to stop being *preCGT assets, with a resultant increase in their *cost base and *reduced cost base, do not increase *tax cost setting amounts for *trading stock, *depreciating assets, *registered emissions units or *revenue assets of the joining entity, where those amounts are above the joining entity’s *terminating values for the assets.

When section applies

 (2) This section applies if:

 (a) a *membership interest that a *member of the joined group holds in the joining entity at the joining time had previously stopped being a *preCGT asset in the circumstances covered by any of subsections (3) to (5); and

 (b) the *cost base or *reduced cost base of the membership interest just after it stopped being a preCGT asset exceeded (the excess being the loss of preCGT status adjustment amount) its cost base or reduced cost base just before it stopped being a preCGT asset; and

 (c) an asset (a revenue etc. asset) that is *trading stock, a *depreciating asset, a *registered emissions unit or a *revenue asset becomes that of the *head company of the joined group because subsection 7011(1) (the single entity rule) applies when the joining entity becomes a *subsidiary member of the group; and

 (d) the revenue etc. asset’s *tax cost setting amount (after any application of section 70540, 70545 or 70547) exceeds the joining entity’s *terminating value for the asset.

Loss of preCGT status because Division 149 etc. applied while interest held by member

 (3) The first circumstance for the purpose of paragraph (2)(a) is where Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the *membership interest to stop being a *preCGT asset while the *member held the membership interest.

Loss of preCGT status because Division 149 etc. applied before current holding by member

 (4) The second circumstance for the purpose of paragraph (2)(a) is where:

 (a) either:

 (i) the *member *acquired the *membership interest directly from another entity; or

 (ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions; and

 (b) Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the membership interest to stop being a *preCGT asset while the other entity held the membership interest or while the member held the membership interest on the previous occasion; and

 (c) if subparagraph (a)(i) applies—at the time of the acquisition, the member *controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and

 (d) if subparagraph (a)(ii) applies—the same entity:

 (i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other party; or

 (ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or

 (iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;

  or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.

Loss of preCGT status because of acquisition from another entity

 (5) The third circumstance for the purpose of paragraph (2)(a) is where:

 (a) either:

 (i) the *member acquired the *membership interest after 16 May 2002 directly from another entity; or

 (ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions, all of which took place after 16 May 2002; and

 (b) the membership interest stopped being a *preCGT asset because of the acquisition from the other entity or from the member while the member held the membership interest on a previous occasion; and

 (c) if subparagraph (a)(i) applies—at the time of the acquisition, the member *controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and

 (d) if subparagraph (a)(ii) applies—the same entity:

 (i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other parties; or

 (ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or

 (iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;

  or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.

Reduction in revenue etc. asset’s tax cost setting amount

 (6) The revenue etc. asset’s *tax cost setting amount (after any application of section 70540, 70545 or 70547) is instead the amount that would apply if, in working out the step 1 amount in the table in section 70560, the *cost base and *reduced cost base of the *membership interest were reduced by the sum of the loss of preCGT status adjustment amounts for the membership interest and all other membership interests that have loss of preCGT status adjustment amounts.

Limit on reduction

 (7) However, the reduction only takes place to the extent that it does not result in the asset’s *tax cost setting amount being less than the joining entity’s *terminating value for the asset.

Note: The reduction under this section is converted into a capital loss available over a period of 5 income years starting with the income year in which the joining time occurs: see CGT event L1.

70558  Assets and liabilities not set off against each other

 (1) This Part applies separately to each asset and liability even if, in accordance with *accounting principles, they are required to be set off against each other.

 (2) This section has effect subject to section 70559.

70559  Exception: treatment of linked assets and liabilities

 (1) This section applies to each set of *linked assets and liabilities that the joining entity has immediately before the joining time.

 (2) One or more assets, and one or more liabilities, that an entity has constitute a set of linked assets and liabilities of the entity if, and only if, in accordance with the entity’s *accounting principles for tax cost setting:

 (a) the total of the one or more assets is to be set off against the total of the one or more liabilities in preparing statements of the entity’s financial position; and

 (b) the net amount after the setoff is to be recognised in those statements.

 (3) If the set consists only of one reset cost base asset for the purposes of section 70535, and one or more liabilities:

 (a) first, work out the total (the available amount) that, apart from this section and the accounting requirement referred to in subsection (2) of this section, would be taken into account under subsection 70570(1) (about step 2 in working out the allocable cost amount) for the one or more liabilities; and

 (b) next, work out the consequences under this table.

 

Treatment of linked assets and liabilities: single reset cost base asset case

Item

If the asset’s *market value at the joining time:

This is the result for the asset:

This is the result for the one or more liabilities:

1

is less than or equal to the available amount

its *tax cost setting amount is that market value (and the asset is not taken into account under paragraph 70535(1)(c))

only the difference (if any) is taken into account under subsection 70570(1) for the one or more liabilities

2

is greater than the available amount

its *tax cost setting amount is:

(a) the available amount; plus

(b) the amount worked out for the asset under section 70535 on the basis that the asset’s *market value is reduced by the available amount

the one or more liabilities are not taken into account under subsection 70570(1)

Note: Paragraph 70535(1)(c) allocates the allocable cost amount (as reduced by the tax cost setting amounts of retained cost base assets) among the joining entity’s reset cost base assets.

 (4) If the set consists only of one or more *retained cost base assets and one or more liabilities, this section does not affect their treatment.

Note: This is because the tax cost setting amount for a retained cost base asset is worked out without regard to the allocable cost amount.

 (5) In any other case:

 (a) first, work out the available amount under paragraph (3)(a); and

 (b) next, work out the consequences under this table.

 

Treatment of linked assets and liabilities: all other cases

Item

In this case:

This is the result for the one or more assets in the set:

This is the result for the one or more liabilities in the set:

1

there is no *retained cost base asset in the set, and the total of the respective *market values (at the joining time) of the assets in the set is less than or equal to the available amount

the *tax cost setting amount of each of the assets is that asset’s market value at the joining time (and none of them is taken into account under paragraph 70535(1)(c))

only the difference (if any) is taken into account under subsection 70570(1)

2

there is no *retained cost base asset in the set, and the total of the respective *market values (at the joining time) of the assets in the set is greater than the available amount

the *tax cost setting amount of each of the assets is the sum of:

(a) a share of the available amount that is proportionate to that asset’s market value at the joining time; and

(b) the amount worked out for the asset under section 70535 on the basis that the asset’s market value at the joining time is reduced by the share referred to in paragraph (a)

none is taken into account under subsection 70570(1)

3

there are one or more *retained cost base assets in the set, and the total of their respective *tax cost setting amounts is greater than or equal to the available amount

this section does not affect the treatment of the one or more assets in the set

this section does not affect the treatment of the one or more liabilities in the set

4

there are one or more *retained cost base assets in the set, and the total (the retained cost base total) of their respective *tax cost setting amounts is less than the available amount

the one or more retained cost base assets are not taken into account under paragraph 70535(1)(b);

the *tax cost setting amount of each remaining asset in the set is worked out by applying item 1 or 2, as appropriate, of this table on the basis that:

(a) the available amount is reduced by the retained cost base total; and

(b) the one or more retained cost base assets are otherwise ignored

the available amount is reduced by the retained cost base total

Note 1: Paragraph 70535(1)(b) reduces the allocable cost amount by the tax cost setting amounts of retained cost base assets. Item 4 of the table in this subsection excludes the application of paragraph 70535(1)(b) to retained cost base assets in the set; this in turn may affect the application of CGT event L3.

Note 2: Paragraph 70535(1)(c) then allocates the reduced allocable cost amount among the joining entity’s reset cost base assets.

 (6) In applying subsections (3), (4) and (5) of this section, disregard an asset covered by subsection 70535(2) (assets that do not have a tax cost setting amount).

 (7) This section does not affect the application of sections 70540, 70545 and 70547 (which adjust the tax cost setting amount for a reset cost base asset).

How to work out the allocable cost amount

70560  What is the joined group’s allocable cost amount for the joining entity?

  Work out the joined group’s allocable cost amount for the joining entity in this way:

 

Working out the joined group’s allocable cost amount for the joining entity

Step

What the step requires

Purpose of the step

1

Start with the step 1 amount worked out under section 70565, which is about the cost of *membership interests in the joining entity held by *members of the joined group

To ensure that the allocable cost amount includes the cost of *acquiring the membership interests

2

Add to the result of step 1 the step 2 amount worked out under section 70570, which is about the value of the joining entity’s liabilities

To ensure that the joining entity’s liabilities at the joining time, which are part of the joined group’s cost of acquiring the joining entity, are reflected in the allocable cost amount

3

Add to the result of step 2 the step 3 amount worked out under:

(a) section 70590, which is about undistributed, taxed profits accruing to the joined group before the joining time; or

(b) if the joining entity is a trust (and not a *corporate tax entity)—section 71325, which is about undistributed, realised profits accruing to the joined group before the joining time that could be distributed tax free

To increase the allocable cost amount:

(a) to reflect the undistributed, taxed profits and so prevent double taxation; or

(b) if the joining entity is a trust—to reflect the undistributed, realised profits that could be distributed tax free

3A

For each step 3A amount (if any) under section 70593 (which is about prejoining time rollovers):

(a) if the step 3A amount is a *deferred rollover loss—add to the result of step 3 (as affected by any previous application of this step) the step 3A amount; or

(b) if the step 3A amount is a *deferred rollover gain—subtract from the result of step 3 (as affected by any previous application of this step) the step 3A amount

To adjust for certain rollovers before the joining time affecting deferred gains and losses

4

Subtract from the result of step 3A the step 4 amount worked out under section 70595, which is about prejoining time distributions out of certain profits

To prevent the allocable cost amount reflecting return of part of the amount paid to *acquire the *membership interests in the joining entity

5

Subtract from the result of step 4 the step 5 amount worked out under section 705100, which is about certain losses accruing to the joined group before the joining time

To prevent:

(a) a double benefit arising from the losses; and

(b) losses that cannot be transferred to the *head company, or are cancelled by the head company, under Subdivision 707A being reinstated in an unrealised form or reducing unrealised gains.

6

Subtract from the result of step 5 the step 6 amount worked out under section 705110, which is about losses that the joining entity transferred to the *head company under Subdivision 707A

To stop the joined group getting benefits both through higher *tax cost setting amounts for the joining entity’s assets and through losses transferred to the head company

7

Subtract from the result of step 6 the step 7 amount worked out under section 705115, which is about certain deductions to which the *head company is entitled

To stop the joined group getting benefits both through the *tax cost of the joining entity’s assets being set and through certain tax deductions of the joining entity being inherited by the head company

8

If the remaining amount is positive, it is the joined group’s allocable cost amount. Otherwise the joined group’s allocable cost amount is nil.

 

Note: The head company may be taken to have made a capital gain, depending on the amount remaining after applying step 3A: see CGT event L2.

70562  No double counting of amounts in allocable cost amount

 (1) The object of this section is to prevent a particular amount from being taken into account more than once in calculating the *allocable cost amount for the joining entity, in order to promote the object of this Subdivision set out in section 70510.

 (2) Subsection (3) applies if, apart from this section, 2 or more provisions of this Act operate with the result of altering:

 (a) the *allocable cost amount for the joining entity; or

 (b) the allocable cost amount for another entity that becomes a *subsidiary member of the group at the joining time;

because of a particular economic attribute of the joining entity (see subsection (6)).

 (3) Only one of those alterations is to be made, as follows:

 (a) if the *head company of the group makes a choice in accordance with subsections (4) and (5)—the alteration specified in the choice is to be made;

 (b) otherwise—the alteration that is most appropriate (in the light of the object of this Subdivision) is to be made.

 (4) A choice mentioned in paragraph (3)(a) must be made:

 (a) by the day the *head company of the group lodges its *income tax return for the income year in which the joining time occurs; or

 (b) within a further time allowed by the Commissioner.

 (5) A choice mentioned in paragraph (3)(a) must be made in writing.

 (6) The economic attributes of the joining entity mentioned in subsection (2) include the following:

 (a) the joining entity’s retained profits;

 (b) the joining entity’s distributions of profits to other entities;

 (c) the joining entity’s realised and unrealised losses;

 (d) the joining entity’s deductions;

 (e) the joining entity’s accounting liabilities (within the meaning of subsection 70570(1));

 (f) consideration received by the joining entity for issuing *membership interests in itself.

70565  Cost of membership interests in the joining entity—step 1 in working out allocable cost amount

 (1) For the purposes of step 1 in the table in section 70560, the step 1 amount is the sum of the following amounts for each *membership interest that *members of the joined group hold in the joining entity at the joining time:

Note: If the joining entity is a trust, the step 1 amount may be increased by section 71320 for settled capital that could be distributed tax free in respect of discretionary interests in the trust.

 

Working out the step 1 amount

Item

If the market value of the membership interest is...

The amount is...

1

equal to or greater than its *cost base

its cost base

2

less than its *cost base but greater than its *reduced cost base

its *market value

3

less than or equal to its *reduced cost base

its reduced cost base

Note: Under section 716855, if membership interests are preCGT assets that have been subject to certain rollovers, the cost base and reduced cost base are worked out in the same way as if they were postCGT assets.

No indexation of cost base of preCGT membership interests

 (2) If the *membership interest is a *preCGT asset, in working out its *cost base for the purposes of subsection (1) no element is indexed.

Adjustment if value shifting or loss transfer provision could apply

 (3) If, on the assumption that a *CGT event had happened just before the joining time in relation to the *membership interest, the *cost base or the *reduced cost base of the membership interest would have been changed by a provision of this Act, then the cost base or reduced cost base of the membership interest that is to be used in subsection (1) of this section is instead:

 (a) the cost base as it would have been so changed; or

 (b) the reduced cost base, as it would have been so changed, but ignoring the amount of any reduction resulting from the application of former subsection 160ZK(5) of the Income Tax Assessment Act 1936.

Note: For example, a change in the cost base or reduced cost base may be required under provisions that apply where a loss transfer or value shift involving the joining entity has occurred.

 (3AA) If, on the assumption that:

 (a) the *members of the joined group had, just before the joining time, *disposed of their *membership interest in the joining entity; and

 (b) the consideration received by the members for the disposal were equal to the *market value of the membership interest at that time;

they would have made a *capital loss that section 727615 would have reduced (because of an indirect value shift), then the *reduced cost base of the membership interest that is to be used in subsection (1) of this section is reduced by the amount of that reduction.

Reduction if section 165115ZD could apply

 (3A) If, on the assumption that:

 (a) the *members of the joined group had, just before the joining time, *disposed of their *membership interest in the joining entity; and

 (b) the consideration received by the members for the disposal were equal to the *market value of the membership interest at that time;

the *reduced cost base of the membership interest would have been reduced as a result of the operation of section 165115ZD of this Act or the Income Tax (Transitional Provisions) Act 1997, then the reduced cost base of the membership interest that is to be used in subsection (1) of this section is reduced by the amount of that reduction.

Certain provisions not to apply after joining time

 (4) Also, if a provision mentioned in subsection (3), (3AA) or (3A) would, because of events that happened before the joining time, apply to a *CGT event or a *realisation event that happens after the joining time in relation to the *members’ *membership interests in the joining entity, the provision does not so apply.

Reduction in cost base under subsection 11055(7) to be added back

 (5) If, in working out the *reduced cost base of the *membership interest for the purposes of subsection (1), a reduction has taken place under subsection 11055(7) (about certain distributions of preacquisition profits), the reduced cost base is increased by the amount of that reduction.

Reduction in reduced cost base under subsection 165115ZA(3) to be added back

 (5A) If:

 (a) in working out the *reduced cost base of the *membership interest for the purposes of subsection (1), a reduction has taken place under subsection 165115ZA(3) (about alterations in ownership or control of loss companies); and

 (b) the reduction is to some extent attributable to so much of an amount that was taken into account both in working out the amount of the reduction and in working out:

 (i) the step 5 amount under section 705100; or

 (ii) the step 6 amount under section 705110;

the reduced cost base is, to the extent mentioned in paragraph (b), increased by:

 (c) if subparagraph (b)(i) applies—the amount of that reduction; or

 (d) if subparagraph (b)(ii) applies—the amount of that reduction multiplied by the *corporate tax rate.

 (5B) For the purposes of working out the *cost base or *reduced cost base of a *membership interest under subsection (1), if:

 (a) either or both of the following things happen after the joining time:

 (i) money is paid, or becomes required to be paid, in respect of *acquiring the membership interest;

 (ii) property is given, or becomes required to be given, in respect of acquiring the membership interest; and

 (b) because the thing happened after the joining time, it was not taken into account in working out the first element of the cost base or reduced cost base of the membership interest;

Note: This would be the case if the money was only to be paid etc. if a contingency happened after the joining time.

the thing is nevertheless so taken into account, and taken always to have been so taken into account.

Nonmembership equity interests

 (6) For the purposes of this section, if at the joining time a *member of the joined group holds a *nonmembership equity interest in the joining entity, that nonmembership equity interest is treated as if it were a *membership interest in the joining entity.

70570  Liabilities of the joining entity—step 2 in working out allocable cost amount

 (1) For the purposes of step 2 in the table in section 70560, the step 2 amount is worked out by adding up the amounts of each thing (an accounting liability) that, in accordance with the joining entity’s *accounting principles for tax cost setting, is a liability of the joining entity at the joining time.

Note: Certain liabilities of a life insurance company are worked out under Subdivision 713L: see section 713520.

Where liability valued differently for joined group

 (1A) However, if, in accordance with the *accounting principles, the amount of an accounting liability of the joining entity would be different when it became an accounting liability of the joined group, the different amount is treated as the amount of the liability.

Note: Liabilities that the joining entity owes to members of the joined group would not be excluded under subsection (1) or (1A) even though the standards or statements require that they be eliminated in consolidated accounts of a parent entity and its subsidiaries.

Exclusion where transfer of accounting liability

 (2) An amount is not to be added for an accounting liability that arises because of the joining entity’s ownership of an asset if, on *disposal of the asset, the accounting liability will transfer to the new owner.

Example: A liability to rehabilitate a mine site, where, under legislation or a licence, the liability will be transferred to the new owner on disposal of the mine.

Note: Adjustments reducing or increasing the amount under this section are made by sections 70575 to 70585.

Joining entity’s accounting principles for tax cost setting

 (3) The joining entity’s accounting principles for tax cost setting are the *accounting principles that the entity would use if it were to prepare its financial statements just before the joining time.

70575  Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount

Reduction for future deduction

 (1) If some or all of an accounting liability will result in a deduction to the *head company, the amount to be added for the accounting liability under subsection 70570(1) is reduced by the following amount:

where:

doublecounting adjustment means the amount of any reduction that has already occurred in the accounting liability under subsection 70570(1) to take account of the future availability of the deduction.

Reduction for intragroup liabilities

 (2) If the amount of an accounting liability of the joining entity that is owed to a *member of the joined group is more than the amount applicable under the following table, the amount to be added for the accounting liability under subsection 70570(1) instead equals the amount applicable under the table.

 

Amount applicable

Item

If the market value of the member’s asset constituted by the accounting liability is...

The amount applicable is...

1

equal to or greater than the asset’s *cost base

the asset’s cost base

2

less than the asset’s *cost base but greater than its *reduced cost base

the asset’s *market value

3

less than or equal to the asset’s *reduced cost base

the asset’s reduced cost base

Application of subsections 70565(2), (3), (3AA) and (3A)

 (3) Subsections 70565(2), (3), (3AA) and (3A) apply in relation to references in subsection (2) of this section to an asset’s *cost base or *reduced cost base in a corresponding way to that in which they apply in relation to references in the table in subsection 70565(1) to a *membership interest’s cost base or reduced cost base.

Application of subsection 70565(4)

 (4) Subsection 70565(4) applies in relation to assets mentioned in subsection (2) of this section in a corresponding way to that in which it applies in relation to members’ *membership interests.

Reduction in reduced cost base under subsection 165115ZA(3) to be added back

 (5) If:

 (a) in working out the *reduced cost base of a *member’s asset for the purposes of subsection (2), a reduction has taken place under subsection 165115ZA(3) (about alterations in ownership or control of loss companies); and

 (b) the reduction is to some extent attributable to so much of an amount that was taken into account both in working out the amount of the reduction and in working out:

 (i) the step 5 amount under section 705100; or

 (ii) the step 6 amount under section 705110;

the reduced cost base is, to the extent mentioned in paragraph (b), increased by:

 (c) if subparagraph (b)(i) applies—the amount of that reduction; or

 (d) if subparagraph (b)(ii) applies—the amount of that reduction multiplied by the *corporate tax rate.

70580  Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount

Adjustment for unrealised gains and losses

 (1) If:

 (a) for income tax purposes, an accounting liability, or a change in the amount of an accounting liability, (other than one owed to a *member of the joined group) is taken into account at a later time than is the case in accordance with the joining entity’s *accounting principles for tax cost setting; and

Example: Accrued employee leave entitlements or foreign exchange gains and losses.

 (b) assuming that, for income tax purposes the accounting liability or change were taken into account at the same time as is the case in accordance with those standards or statements, the joined group’s allocable cost amount would be different;

Note: The difference would arise because subsection 70570(1) includes income tax liabilities and steps 3 and 5 of the table in section 70560 are affected by the time at which changes in liabilities are taken into account for income tax purposes.

then the amount to be added under subsection 70570(1) for the accounting liability is:

 (c) if the difference is an increase—increased by the amount of the increase; and

 (d) if the difference is a decrease—decreased by the amount of the decrease.

Use of reliable estimate

 (2) In working out for the purposes of subsection (1) an amount at a particular time or in respect of a particular period, use the most reliable basis for estimation that is available.

Example: The amount of a change in liability for employee leave entitlements over a period.

70585  Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount

Increase in step 2 amount for employee share interests

 (1) If any *membership interest (an employee share interest) in the joining entity needed to be disregarded under section 70335 in order for the joining entity to be a *whollyowned subsidiary of the *head company at the joining time, the step 2 amount worked out under section 70570 is increased by the sum of the *market values of those interests, reduced in each case by the reduction amount (if any) worked out under subsection (2) of this section.

Reduction amount

 (2) There is a reduction amount if the *market value of the employee share interest at the time it was *acquired by the employee is more than the consideration paid or given for its acquisition. The reduction amount is worked out by multiplying the market value of the employee share interest at that time by the factor worked out using the formula:

where:

market value of all membership interests means the *market value of all *membership interests in the joining entity just before the employee share interest was *acquired.

market value of head company’s membership interests means the *market value, just before the employee share interest was *acquired, of any *membership interests that the *head company held, directly or indirectly in the joining entity, continuously from that time until the joining time.

Increase to cover certain nonmembership equity interests and certain equity interests

 (3) The step 2 amount worked out under section 70570 is increased by:

 (a) the amount that would be the balance of the joining entity’s *nonshare capital account, assuming that:

 (i) if the joining entity is not a company—the joining entity were a company; and

 (ii) each *nonmembership equity interest (if any) in the joining entity held at the joining time by a person other than a *member of the joined group were a *nonshare equity interest in the joining entity; and

 (iii) the nonshare equity interests (if any) mentioned in subparagraph (ii) were the only nonshare equity interests in the joining entity; and

 (b) the *market value of each thing that, in accordance with the joining entity’s *accounting principles for tax cost setting, is equity in the joining entity at the joining time, where the thing is also a *debt interest.

Increase to cover ADI restructure preference share interests

 (4) If any *share in the joining entity needed to be disregarded under section 70337 in order for the joining entity to be a *whollyowned subsidiary of the *head company at the joining time, the step 2 amount worked out under section 70570 is increased by the sum of the *market values of those shares.

70590  Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount

 (1) For the purposes of step 3 in the table in section 70560, the step 3 amount is worked out in accordance with this section unless the joining entity is a trust that is not a *corporate tax entity at the joining time.

Note: If the joining entity is such a trust, the step 3 amount is instead worked out in accordance with section 71325.

Undistributed profits

 (2) First work out the undistributed profits of the joining entity at the joining time. These are the amounts that, in accordance with the joining entity’s *accounting principles for tax cost setting, are retained profits of the joining entity.

 (2A) However, if a loss that did not accrue to the joined group before the joining time (subsection (8) states what it means for a loss to accrue to the joined group before the joining time) would be taken into account in working out the undistributed profits, the loss is not so taken into account.

Extent to which tax paid on undistributed profits

 (3) Then work out how much of the undistributed profits does not exceed the amount worked out using the following formula as at the joining time:

where:

applicable grossup rate means the joining entity’s *corporate tax grossup rate for the income year that ends, or, if section 70130 applies, for the income year that is taken by subsection (3) of that section to end, at the joining time.

Assumptions for purposes of subsection (3)

 (4) The assumptions are that the joining entity’s franking account balance at the end of the income year that ends, or, if section 70130 applies, of the income year that is taken by subsection (3) of that section to end, at the joining time had been adjusted to take account of franking credits or franking debits that would arise if the following were paid just before the joining time:

 (a) the income tax, or refund of income tax, on the joining entity’s taxable income for that income year; and

 (b) any income tax, or refund of income tax, that has not yet been paid (regardless of whether it has become payable or due for payment) on the joining entity’s taxable income for any earlier income year, other than one excluded by subsection (5).

Exclusion of certain income years where previous membership of a consolidated group

 (5) If the joining entity was previously a *subsidiary member of a *consolidated group, any income year earlier than the one that started, or, if section 70130 applies, the one that is taken by subsection (3) of that section to have started, when the joining entity ceased to be a subsidiary member of that group is excluded for the purposes of paragraph (4)(b) of this section.

Undistributed profits must have accrued to joined group

 (6) Next, work out the extent to which the undistributed profits that satisfy the requirements of subsection (3) accrued to the joined group before the joining time (subsection (7) states what it means for a profit to accrue to the joined group before the joining time). The result is the step 3 amount.

Profit accruing to the joined group before the joining time

 (7) A profit accrued to the joined group before the joining time if, on the following assumptions:

 (a) that it was distributed to holders of *membership interests as it accrued; and

 (b) that entities interposed between the *head company and the joining entity successively distributed any of it immediately after receiving it;

it would have been received by the entity that is the head company at the joining time, in respect of membership interests that it held continuously until that time either directly or indirectly through interposed entities.

Note: If an entity interposed between the head company and the joining entity is a nonfixed trust, this subsection may involve determining how a power of appointment would have been exercised. Section 71350 lists matters to have regard to in determining this.

Loss accruing to the joined group before the joining time

 (8) A loss accrued to the joined group before the joining time if and to the extent that, assuming that as it arose it were instead a profit that was accruing, a distribution of that profit would have been a distribution made to the joined group out of profits that accrued to the joined group before the joining time.

Use of reliable estimates

 (9) In working out:

 (a) for the purposes of subsection (4), the amount of income tax, or refund of income tax, on the joining entity’s taxable income for a particular income year and the extent to which it has not yet been paid; or

 (b) for the purposes of subsection (7), the amount of a profit that accrued to the joined group during a particular period; or

 (c) for the purposes of subsection (8), the amount of a loss that accrued to the joined group during a particular period;

use the most reliable basis for estimation that is available.

 (10) Without limiting paragraph (9)(b), a way in which, for the purposes of subsection (7), the amount of a profit that accrued to the joined group during a particular period may be worked out is by:

 (a) assuming that profits of income years were distributed in order from the most recent to the earliest; and

 (b) assuming that, for any income year for which distributions were paid out of profits in accordance with paragraph (a), they were, to the extent they were not *franked distributions, paid out of profits of that income year that were not subject to income tax before they were paid out of such profits that were subject to income tax.

70593  If prejoining time rollover from foreign resident company or head company—step 3A in working out allocable cost amount

When there is a step 3A amount

 (1) For the purposes of step 3A in the table in section 70560, there is a step 3A amount if:

 (a) before the joining time:

 (i) there was a rollover under Subdivision 126B (a Subdivision 126B rollover) in relation to a *CGT event that happened in relation to an asset (the rollover asset); or

 (ii) former section 160ZZO of the Income Tax Assessment Act 1936 applied in relation to a disposal (a section 160ZZO rollover) of an asset (also the rollover asset); and

 (aa) at the joining time, as a result of the Subdivision 126B rollover or the section 160ZZO rollover, the rollover asset has:

 (i) a *deferred rollover gain; or

 (ii) a *deferred rollover loss; and

 (b) the originating company in relation to the Subdivision 126B rollover, or the transferor in relation to the section 160ZZO rollover:

 (i) was a foreign resident; or

 (ii) is the *head company in relation to the joined group; and

 (c) the recipient company in relation to the Subdivision 126B rollover, or the transferee in relation to the section 160ZZO rollover:

 (i) was an Australian resident; and

 (ii) is a *spread entity in relation to the joined group; and

 (d) if the recipient company was previously a *subsidiary member of another consolidated group—the conditions in section 104182 were not satisfied at any time in relation to the other group between the Subdivision 126B rollover, or the section 160ZZO rollover, and the joining time; and

 (e) the rollover asset is not a *preCGT asset at the joining time; and

 (f) the rollover asset becomes that of the head company of the joined group because subsection 7011(1) (the single entity rule) applies when the joining entity becomes a *subsidiary member of the group.

 (2) The step 3A amount is the amount of the *deferred rollover gain or the *deferred rollover loss mentioned in paragraph (1)(aa).

70595  Prejoining time distributions out of certain profits—step 4 in working out allocable cost amount

  For the purposes of step 4 in the table in section 70560, the step 4 amount is the sum of all distributions made by the joining entity before the joining time that:

 (a) the *head company receives directly, or would receive indirectly if entities interposed between the head company and the joining entity successively distributed any distribution they received immediately after receiving it; and

 (b) were made out of profits:

 (i) that did not accrue to the joined group before the joining time (see subsection 70590(7)); or

 (ii) that accrued to the joined group before the joining time and recouped losses of any *sort that accrued to the joined group before that time (see subsection 70590(8)).

Note: As well as subsection 70590(7), paragraph 70590(9)(b) and subsection 70590(10) are relevant to working out whether or not profits accrued to the joined group before the joining time.

705100  Losses accruing to joined group before joining time—step 5 in working out allocable cost amount

 (1) For the purposes of step 5 in the table in section 70560, the step 5 amount is the sum of all losses of any *sort of the joining entity that:

 (a) had not been *utilised by the joining entity for the income year in which the joining time occurred or any earlier income year; and

 (b) accrued to the joined group before the joining time (see subsection 70590(8)).

 (2) However, a loss is not to be taken into account under subsection (1) to the extent that it reduced the undistributed profits comprising the step 3 amount in the table in section 70560.

705105  Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount

  If:

 (a) a *membership interest that a *member of the joined group held in the joining entity at the joining time was taken under this Act to have been *acquired by the member for its *market value at a particular time (the market value time); or

 (b) the *cost base and *reduced cost base of a membership interest that a member of the joined group held in the joining entity at the joining time were, before that time, changed on one or more occasions by this Act so that they equalled the market value of the membership interest at a particular time (the last of which times is also the market value time);

then, for the purpose of sections 70590, 70595, 705100 and 71325, the *head company is taken not to have held that membership interest, either directly or indirectly, before the market value time.

705110  If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount

 (1) For the purposes of step 6 in the table in section 70560, the step 6 amount is worked out by multiplying the sum of the losses mentioned in subsection (2) by the *corporate tax rate.

 (2) The losses are the joining entity’s losses of any *sort that:

 (a) were not *utilised by the joining entity for the income year in which the joining time occurred or any earlier income year; and

 (b) did not accrue to the joined group before the joining time (see subsection 70590(8)); and

 (c) are transferred to the *head company under Subdivision 707A; and

 (d) are not cancelled under section 707145.

705115  If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount

 (1) For the purposes of step 7 in the table in section 70560, the step 7 amount is worked out using the following formula:

where:

acquired deductions means all deductions covered by subsection (2) that are not owned deductions.

owned deductions means the sum of all deductions for which the following requirements are satisfied:

 (a) the deduction is covered by subsection (2);

 (b) assuming the expenditure that gave rise to the deduction were instead a profit that accrued at the time the expenditure was incurred, a distribution of that profit would have been a distribution made to the joined group out of profits that accrued to the joined group before the joining time (see subsection 70590(7)).

 (2) This subsection covers any deduction to which the *head company becomes entitled under section 7015 as a result of the joining entity becoming a *subsidiary member of the joined group, other than a deduction for expenditure:

 (a) that is, forms part of or reduces, the cost of an asset of the joining entity that becomes an asset of the head company because subsection 7011(1) (the single entity rule) applies; or

 (b) to which section 11040 (about expenditure on assets acquired before 7.30 pm on 13 May 1997) applies; or

 (c) to the extent that the expenditure reduced the undistributed profits comprising the step 3 amount in the table in section 70560.

 (3) Subsection (2) does not cover a deduction under section 4315 (which relates to *undeducted construction expenditure) if the joining entity *acquired the asset to which the deduction relates at or before 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997.

How to work out a preCGT factor for assets of joining entity

705125  PreCGT proportion for joining entity

Object

 (1) Because intragroup *membership interests in the joining entity are disregarded under subsection 7011(1) (the single entity rule), the object of this section is to provide a mechanism to ensure that the benefit of the preCGT status of those interests is not lost. That mechanism involves:

 (a) working out the proportion (measured by market value) of the membership interests in the joining entity that have preCGT status; and

 (b) if the joining entity later ceases being a member of the group, attaching preCGT status to that proportion of membership interests in it (see section 71165), subject to integrity rules (see section 71170).

How to work out preCGT proportion

 (2) The preCGT proportion is the amount worked out by dividing:

 (a) the sum of the *market value of each *membership interest in the joining entity that is:

 (i) held by a *member of the group at the joining time; and

 (ii) is a *preCGT asset;

by:

 (b) the sum of the market value of each membership interest in the joining entity that is held by a member of the group at the joining time.

Modification if joining entity is a trust

 (4) If the joining entity is a trust, a *membership interest in it is not taken into account under subsection (2) unless the membership interest is either a unit or an interest in the trust.

Subdivision 705BCase of group formation

Guide to Subdivision 705B

705130  What this Subdivision is about

When a consolidated group comes into existence, the tax cost setting amount for the assets of each entity that becomes a subsidiary member is worked out by modifying the rules in Subdivision 705A, so that the amount reflects the cost to the group of acquiring the entity.

Table of sections

Application and object

705135 Application and object of this Subdivision

Modified application of Subdivision 705A

705140 Subdivision 705A has effect with modifications

705145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members

705147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members

705155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests

705160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members

705163 Modified application of section 70557

Application and object

705135  Application and object of this Subdivision

Application

 (1) This Subdivision has effect for the head company core purposes set out in subsection 7011(2) if one or more entities become *subsidiary members of a *consolidated group at the time (the formation time) it comes into existence as a consolidated group.

Note: This is the first exception to Subdivision 705A: see paragraph 70515(a).

Object

 (2) The object of this Subdivision is to modify the rules in Subdivision 705A (which basically determine the tax cost setting amount for assets of an entity joining an existing *consolidated group) so that they have effect, and take account of different circumstances that apply, when a consolidated group comes into existence.

Note: The main circumstance is where one of the entities has membership interests in another. In such a case, the order in which the rules in Subdivision 705A are applied will affect the tax cost setting amounts for the assets of the entities.

Modified application of Subdivision 705A

705140  Subdivision 705A has effect with modifications

 (1) Subdivision 705A has effect in relation to each entity becoming a *subsidiary member of the *consolidated group at the formation time in the same way as that Subdivision has effect in relation to an entity becoming a subsidiary member of a consolidated group in circumstances covered by that Subdivision.

 (2) However, that effect of Subdivision 705A is subject to modifications set out in this Subdivision.

705145  Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members

Object

 (1) The object of this section is to ensure that where, on becoming *subsidiary members, entities hold assets consisting of *membership interests in other subsidiary members, the *head company’s cost of becoming the holder of the assets of all of the entities that become subsidiary members correctly reflects the group’s cost of acquiring the entities.

Tax cost setting amounts to be worked out from top down

 (2) If, on becoming *subsidiary members, entities hold *membership interests in any other entities that become subsidiary members, the *tax cost setting amounts for the assets of entities holding membership interests must be worked out before the tax cost setting amounts for the assets of the entities in which the membership interests are held.

Note: The tax cost setting amount in respect of assets of any subsidiary member in which the head company, but no other subsidiary member, holds membership interests can be worked out in any order in relation to the calculations for other subsidiary members.

Tax cost setting amount for higher entity’s membership interests to be used in working out lower entity’s tax cost setting amount

 (3) The tax cost setting amount worked out for assets of an entity mentioned in subsection (2) consisting of *membership interests in another such entity is to be used as the amount for those interests under subsection 70565(1) (step 1 of allocable cost amount) in working out the tax cost setting amount for assets of that other entity.

Note 1: Subsection 70565(1) adds together amounts worked out in accordance with section 70565 representing the cost of the membership interests that each member of the group holds in the entity. If any of those membership interests is held by another subsidiary member, subsection (3) above will replace the amount otherwise applicable with the tax cost setting amount that will have been worked out for the interests in accordance with subsection (2) above.

Note 2: The tax cost setting amount worked out for the membership interests has no relevance other than for the purpose mentioned in subsection (3). This is because, under the single entity principle, intra group membership interests are ignored while entities are members of the group. If an entity ceases to be a member, section 70115 and Division 711 set the tax cost of membership interests in the entity at that time.

Value shifting etc. provisions not to apply to later CGT events involving membership interests

 (4) However, despite subsection (3), subsection 70565(4) (which prevents the later operation of value shifting etc. provisions) still applies to the *membership interests.

Nonmembership equity interests

 (5) For the purposes of this section, if, on becoming a *subsidiary member, an entity holds a *nonmembership equity interest in another entity that becomes a subsidiary member at the same time, that nonmembership equity interest is treated as if it were a *membership interest in that other entity.

705147  Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members

Object

 (1) The object of this section is to modify the effect that section 70593 (step 3A of allocable cost amount) has in accordance with this Subdivision so that it takes account of *membership interests that entities that become *subsidiary members hold in other such entities.

Apportionment of step 3A amount among first level interposed entities

 (2) If:

 (a) under section 70593, in its application in accordance with this Subdivision, there is a step 3A amount for the purpose of working out the group’s *allocable cost amount for an entity (the subject entity) that becomes a *subsidiary member of the group at the formation time; and

 (b) at that time one or more entities (the first level entities), that become subsidiary members of the group and in which the *head company holds *membership interests, are interposed between the head company and the subject entity;

then the step 3A amount is apportioned among the first level entities and the subject entity on the following basis:

 (c) each first level entity has the following proportion of the step 3A amount:

  where:

  market value of all membership interests in subject entity means the *market value, at the formation time, of all *membership interests in the subject entity that are held by entities that become *members of the group at that time.

  market value of first level entity’s direct and indirect membership interests in subject entity means so much of the *market value of all membership interests in the subject entity (as defined above) as is attributable to *membership interests that the first level entity holds directly, or indirectly through other interposed entities that become *subsidiary members of the group at the formation time; and

 (d) the subject entity has the remainder of the step 3A amount.

Membership interests in subsidiary members of group

 (3) In applying section 70593 for the purposes of this Subdivision, disregard paragraph 70593(1)(f) if:

 (a) the rollover asset mentioned in that section is a *membership interest in an entity that becomes a *subsidiary member at the formation time; and

 (b) the rollover asset is not held at that time by the entity that becomes the *head company of the group.

Note: The step 3A amount is worked out under section 70593.

705155  Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests

Object

 (1) The object of this section is to ensure that, in working out the group’s *allocable cost amount for entities that become *subsidiary members of the group at the formation time, the reduction under step 4 in the table in section 70560 (about preformation time distributions out of certain profits) is made only for profits that have been effectively distributed to the *head company in respect of its direct *membership interests in the entities. This ensures consistency with the ordering rule in section 705145.

When section applies

 (2) This section applies to a distribution (the subject distribution) to the extent that the following conditions are satisfied:

 (a) the distribution is made by an entity (the subject entity) that becomes a *subsidiary member of the group at the formation time;

 (b) in working out the group’s *allocable cost amount for the subject entity there would, apart from this section, be a reduction under step 4 in the table in section 70560 for the distribution.

Step 4 reduction only if subject distribution is made to head company etc.

 (3) There is no reduction as mentioned in paragraph (2)(b) for the subject distribution unless:

 (a) the subject distribution is made to the *head company of the group; or

 (b) the reduction is in accordance with subsection (5).

Step 4 reduction for effective distribution to head company

 (4) If:

 (a) at the formation time, the *head company of the group has a direct *membership interest in the subject entity; and

 (b) the head company acquired the membership interest directly from another entity, or indirectly as a result of one or more acquisitions from other entities, where:

 (i) former section 160ZZ0 of the Income Tax Assessment Act 1936 applied to each acquisition; or

 (ii) there was a rollover under Subdivision 126B for each acquisition;

  or a combination of these happened; and

 (c) while it held the membership interest, the entity, or one of the entities, mentioned in paragraph (b) (the recipient of the further distribution) received a distribution (the further distribution) of some of the subject distribution from the subject entity;

the consequences in subsections (5) and (6) apply.

Reduction for further distribution that remains with recipient

 (5) If:

 (a) the following happen:

 (i) by the formation time, any of the further distribution (the eligible reduction amount) had not again been distributed by the recipient of the further distribution;

 (ii) the recipient of the further distribution does not become a *subsidiary member of the group at the formation time; or

 (b) the following happen:

 (i) by the formation time, any of the further distribution (the eligible reduction amount) had been distributed by the recipient of the further distribution to another entity directly, or indirectly though successive distributions by interposed entities;

 (ii) that other entity does not become a subsidiary member of the group at the formation time; or

 (c) both of the above paragraphs apply;

then, in working out the group’s *allocable cost amount for the subject entity, the reduction under step 4 in the table in section 70560 for the subject distribution only takes place to the extent that it equals the sum of all eligible reduction amounts.

Step 1 reduced cost base adjustment to reverse effect of reduction for further distribution

 (6) Also, if former subsection 160ZK(5) of the Income Tax Assessment Act 1936 or subsection 11055(7) of this Act applied to the further distribution, then for the purposes of step 1 in the table in section 70560 in working out the group’s *allocable cost amount for the subject entity:

 (a) the reference in subsection 70565(3) to a reduction resulting from the application of former subsection 160ZK(5) of the Income Tax Assessment Act 1936; and

 (b) the reference in subsection 70565(5) to a reduction that has taken place under subsection 11055(7);

include a reference to the reduction in the *reduced cost base of the membership interest in the subject entity resulting from the application of former subsection 160ZK(5) of the Income Tax Assessment Act 1936, or subsection 11055(7) of this Act, to the further distribution.

705160  Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members

Object

 (1) The object of this section is to prevent a distortion under section 70535 in the allocation of *allocable cost amount to an entity that becomes a *subsidiary member of the group where that entity has direct or indirect *membership interests in another entity that has certain profits or tax losses when it becomes a subsidiary member.

Adjustment to allocation of allocable cost amount where direct interest in entity with profits/losses

 (2) If:

 (a) an entity becomes a *subsidiary member of the group at the formation time; and

 (b) the entity has *membership interests in a second entity that becomes a subsidiary member of the group at that time; and

 (c) in working out the group’s *allocable cost amount for the second entity:

 (i) an amount is required to be added (the second entity’s profit/loss adjustment amount) under step 3 in the table in section 70560 (about profits accruing before becoming a subsidiary member of the group); or

 (ii) an amount is required to be subtracted (also the second entity’s profit/loss adjustment amount) under step 5 in the table in section 70560 (about losses accruing before becoming a subsidiary member of the group);

then, for the purposes of working out under section 70535 the *tax cost setting amount for the assets of the first entity, the *market value of the first entity’s membership interests in the second entity is reduced (in a subparagraph (c)(i) case) or increased (in a subparagraph (c)(ii) case) by the first entity’s interest in the second entity’s profit/loss adjustment amount (see subsection (3)).

First entity’s interest in second entity’s profit/loss adjustment amount

 (3) The first entity’s interest in the second entity’s profit/loss adjustment amount is worked out using the formula:

Adjustment to allocation of allocable cost amount for indirect interest in entity with profits/losses

 (4) If:

 (a) an entity becomes a *subsidiary member of the group at the formation time; and

 (b) the entity has *membership interests in a second entity that becomes a subsidiary member of the group at that time; and

 (c) the second entity has, directly or indirectly through one or more interposed entities that become subsidiary members of the group at the formation time, membership interests in a third entity that becomes a subsidiary member of the group at that time; and

 (d) in working out the group’s *allocable cost amount for the third entity:

 (i) an amount is required to be added (the third entity’s profit/loss adjustment amount) under step 3 in the table in section 70560 (about profits accruing before becoming a subsidiary member of the group); or

 (ii) an amount is required to be subtracted (also the third entity’s profit/loss adjustment amount) under step 5 in the table in section 70560 (about losses accruing before becoming a subsidiary member of the group);

then, for the purposes of working out under section 70535 the *tax cost setting amount for the assets of the first entity, the *market value of the first entity’s membership interests in the second entity is reduced (in a subparagraph (d)(i) case) or increased (in a subparagraph (d)(ii) case) by the first entity’s interest in the third entity’s profit/loss adjustment amount (see subsection (5)).

First entity’s interest in third entity’s profit/loss adjustment amount

 (5) The first entity’s interest in the third entity’s profit/loss adjustment amount is worked out using the formula:

where:

market value of first entity’s membership interests in third entity held through second entity means the *market value of all *membership interests in the third entity that the first entity holds indirectly through the second entity (including through that entity and one or more other entities that become *subsidiary members of the group and are interposed between the second entity and the third entity).

705163  Modified application of section 70557

Object

 (1) The object of this section is to ensure that, in working out *tax cost setting amounts for *trading stock, *depreciating assets, *registered emissions units or *revenue assets of entities that become *subsidiary members of the group at the formation time, section 70557 (about loss of preCGT status of certain *membership interests) only applies if the *membership interests held directly by the *head company of the group are affected.

Modified application of section 70557—basic modification

 (2) For the purposes of applying section 70557 in accordance with this Subdivision, a reference in that section to a *membership interest that a *member of the joined group holds in the joining entity at the joining time is taken to be a reference to a *membership interest that the *head company of the *consolidated group holds directly in an entity becoming a *subsidiary member at the formation time.

Modified application of section 70557—additional modifications where section 705145 applies

 (3) Also, if an entity (the first entity) that becomes a *subsidiary member holds a *membership interest (the subject membership interest) in another entity (the second entity) that becomes a subsidiary member, section 70557 (as modified in accordance with subsection (2)) is to be applied in relation to the subject membership interest as follows.

 (4) First work out whether there would be a reduction under that section in the *tax cost setting amount for the subject membership interest that is used as mentioned in subsection 705145(3) (the subsection 705145(3) tax cost setting amount) if:

 (a) the subject membership interest, if it is not a revenue etc. asset of the first entity, were taken to be such an asset; and

 (b) paragraphs 70557(2)(c) and (d) and subsection 70557(7) did not apply to the subject membership interest.

 (5) Next, if there would be such a reduction (whose amount is the notional section 70557 reduction amount):

 (a) apply section 70557 to reduce the *tax cost setting amount for any revenue etc. asset of the second entity; and

 (b) if the second entity holds a *membership interest in another entity that becomes a *subsidiary member—apply section 70557 in relation to that interest in accordance with subsection (3) of this section;

and for those purposes:

 (c) the subject membership interest is taken to be a membership interest that the *head company of the group holds directly in the second entity at the formation time; and

 (d) the requirements of paragraphs 70557(2)(a) and (b) are taken to be satisfied in relation to the subject membership interest; and

 (e) the subject membership interest is taken to have a *cost base and *reduced cost base equal to the subsection 705145(3) tax cost setting amount; and

 (f) the subject membership interest is taken to have a loss of preCGT status adjustment amount equal to the notional section 70557 reduction amount.

Note: If the head company actually held any membership interests in the second entity, or if other entities becoming subsidiary members held membership interests in the second entity to which this subsection also applied, those membership interests would also be taken into account in working out the reduction under paragraph (a) and in applying paragraph (b).

Section 70557 not to apply where membership interests effectively acquired on normal market basis

 (6) If:

 (a) apart from this subsection, subsection 70557(6) would apply in accordance with this Subdivision to the revenue etc. assets of an entity (the subject entity) that becomes a *subsidiary member of the group at the formation time; and

 (b) at the formation time, the *head company of the group holds all of the *membership interests in the subject entity; and

 (c) subsection 70557(6) would apply because a circumstance covered by subsection 70557(4) (about loss of preCGT status because Division 149 etc. applied) existed; and

 (d) the application of Division 149 of this Act, or the provision of the Income Tax Assessment Act 1936, as mentioned in paragraph 70557(4)(b) of this Act happened because the entity that became the *head company of the group (the potential head entity) *acquired all of the *membership interests in the other entity mentioned in that paragraph directly or indirectly from another entity (the vendor); and

 (e) at the time of the acquisition, the potential head entity did not control (for value shifting purposes) the vendor, and viceversa, and another entity did not control (for value shifting purposes) the potential head entity and the vendor; and

 (f) the acquisition, or each of the acquisitions, mentioned in subsection 70557(4) was a *same asset rollover or was one to which any of former sections 160ZZN to 160ZZOC, 160ZZPA and 160ZZPJ of the Income Tax Assessment Act 1936 applied;

then subsection 70557(6) does not apply as mentioned in paragraph (a) of this subsection.

Subdivision 705CCase where a consolidated group is acquired by another

Guide to Subdivision 705C

705170  What this Subdivision is about

When a consolidated group is acquired by another consolidated group, modifications are made to the operation of Division 701 (the core rules) and Subdivision 705A (tax cost setting amount where a single entity joins a consolidated group) basically to ensure that the tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former.

Table of sections

Application and object

705175 Application and object of this Subdivision

Modified application of Division 701 in relation to acquired group etc.

705180 Modifications of Division 701

Modified application of Subdivision 705A in relation to acquiring group

705185 Subdivision 705A has effect with modifications

Modifications of Subdivision 705A for the purposes of this Subdivision

705195 Modified application of subsection 70565(6)

705200 Modified application of section 70585

Application and object

705175  Application and object of this Subdivision

Application

 (1) This Subdivision applies if all of the *members of a *consolidated group (the acquired group) become members of another consolidated group (the acquiring group) at a particular time (the acquisition time) as a result of the *acquisition of *membership interests in the *head company of the acquired group.

Object

 (2) The object of this Subdivision is:

 (a) to modify the rules in Division 701 (the core rules) to complement the treatment of the acquired group as a single entity that applied before the acquisition time; and

 (b) to modify Subdivision 705A (which basically determines the tax cost setting amount for assets of an entity joining a consolidated group) to ensure that the *tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former.

Modified application of Division 701 in relation to acquired group etc.

705180  Modifications of Division 701

Certain provisions of Division 701 not to apply

 (1) If, because an entity ceases to be a *subsidiary member of the acquired group when this Subdivision applies, a provision of Division 701 (other than section 70125) would otherwise apply, in relation to the acquired group for the head company core purposes set out in subsection 7011(2) or for the entity core purposes set out in subsection 7011(3), the provision does not so apply.

Modified application of section 7015

 (2) Section 7015 (the entry history rule) applies in relation to the acquiring group for the head company core purposes set out in subsection 7011(2) as if entities that are or have been the *subsidiary members of the acquired group were or had been parts of the *head company of the acquired group.

Modified application of section 70125

 (3) The application of section 70125 (which ensures taxneutral consequences for a head company ceasing to hold assets when an entity leaves a group), in relation to the acquired group for the head company core purposes set out in subsection 7011(2) and for the entity core purposes set out in subsection 7011(3), is modified as follows:

 (a) the reference in subsection (4) of that section to the end of the income year is taken to be a reference to the end of the income year that ends or, if subsection 70130(3) as modified by subsection (4) of this section applies, of the income year that is taken to end, when the entity ceases to be a *subsidiary member of the acquired group;

 (b) the section applies (as modified by paragraph (a) of this subsection) to the entity that is the *head company of the acquired group ceasing to be a *member of that group in the same way as it applies to an entity that is a subsidiary member of that group ceasing to be a subsidiary member.

Modified application of section 70130

 (4) If the acquired group only exists for part of the income year, section 70130 (about an entity not being a subsidiary member of a group for a whole income year) applies in relation to the acquired group for the head company core purposes in the same way as it applies to work out the taxable income, tax payable on that taxable income and loss of each *sort for an entity for a nonmembership period.

Modified application of Subdivision 705A in relation to acquiring group

705185  Subdivision 705A has effect with modifications

 (1) Subdivision 705A has effect in relation to the acquiring group for the head company core purposes set out in subsection 7011(2) as if:

 (a) the only *member of the acquired group that is a joining entity of the acquiring group were the entity that, just before the acquisition time, was the *head company of the acquired group; and

 (b) the operation of this Part for the head company core purposes in relation to the head company and the entities that were *subsidiary members of the acquired group continued to have effect for the purposes of Subdivision 705A.

Note 1: This means that for Subdivision 705A purposes the subsidiary members of the acquired group are treated as part of the head company of that group, and as a result their assets (other than e.g. internal membership interests) have their tax costs set at the acquisition time.

Note 2: It also means e.g. that for Subdivision 705A purposes the terminating values of the assets of those subsidiary members are worked out as if the assets were those of the head company at the acquisition time, and hence will be based (if applicable) on the tax cost setting amounts for assets that were set at the time entities became subsidiary members of the acquired group.

 (2) However, that effect of Subdivision 705A is subject to modifications set out in this Subdivision.

Note: The modifications of Subdivision 705A made in this Subdivision constitute the second exception to Subdivision 705A: see paragraph 70515(b).

Modifications of Subdivision 705A for the purposes of this Subdivision

705195  Modified application of subsection 70565(6)

Object

 (1) The object of this section is to ensure that certain *nonmembership equity interests held by *members of the acquiring group that are part of the cost of acquiring the acquired group are taken into account in working out the acquiring group’s *allocable cost amount for the acquired group.

Nonmembership equity interests

 (2) Subsection 70565(6) has effect as if it also treated as a *membership interest in the *head company of the acquired group a *nonmembership equity interest in a *subsidiary member of the acquired group, where that interest was held at the acquisition time by a *member of the acquiring group.

705200  Modified application of section 70585

Object

 (1) The object of this section is to ensure that if any of the following are not held by *members of either group:

 (a) certain employee share interests in *subsidiary members of the acquired group;

 (b) certain *nonmembership equity interests in subsidiary members of the acquired group;

 (c) certain preference share interests in subsidiary members of the acquired group;

and are therefore part of the cost of acquiring the acquired group, they increase the acquiring group’s *allocable cost amount for the acquired group.

Increase for certain membership interests in subsidiary members of acquired group

 (2) Subsections 70585(1), (2) and (4) have effect as if a *membership interest in a *subsidiary member of the acquired group were a membership interest in the *head company of that group.

Nonmembership equity interests

 (3) Paragraph 70585(3)(a) has effect as if it also increased the step 2 amount worked out under section 70570 by the amount that would be the sum of the balances of the *nonshare capital accounts of the *subsidiary members of the acquired group, assuming that:

 (a) for a subsidiary member that is not a company—the subsidiary member were a company; and

 (b) each *nonmembership equity interest (if any) in a subsidiary member held at the acquisition time by a person other than a *member of the acquiring group or acquired group were a *nonshare equity interest in the subsidiary member; and

 (c) the nonshare equity interests (if any) mentioned in paragraph (b) were the only nonshare equity interests in the subsidiary member.

Subdivision 705DWhere multiple entities are linked by membership interests

Guide to Subdivision 705D

705210  What this Subdivision is about

When entities that are linked by membership interests join a consolidated group, the tax cost setting amount for the assets of each entity that becomes a subsidiary member is worked out by modifying the rules in Subdivision 705A, so that the amount reflects the cost to the group of acquiring the entities.

Table of sections

Application and object

705215 Application and object of this Subdivision

Modified application of Subdivision 705A

705220 Subdivision 705A has effect with modifications

705225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities

705227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities

705230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests

705235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities

705240 Modified application of section 70557

Application and object

705215  Application and object of this Subdivision

Application

 (1) This Subdivision has effect for the head company core purposes set out in subsection 7011(2) if:

 (a) 2 or more entities (each of which is a linked entity) become members of a *consolidated group at the same time as a result of an event that happens in relation to one of them; and

 (b) the case is not covered by Subdivision 705C.

Note: This is the third exception to Subdivision 705A: see paragraph 70515(c). In order for this Subdivision to have effect, one of the entities would need to hold directly or indirectly, just before the joining time, membership interests in all of the other entities.

Example: Entities A and B are not members of a consolidated group, but members of such a group, together with entity A, jointly hold all the membership interests in entity B. Members of the group then acquire all the membership interests in entity A and as a result of this event both entities, which are linked by the membership interests that one holds in the other, become members of the group.

Object

 (2) The object of this Subdivision is to modify the rules in Subdivision 705A (which basically determine the tax cost setting amount for assets of an entity joining an existing consolidated group) so that they take account of the different circumstances that apply where linked entities join.

Modified application of Subdivision 705A

705220  Subdivision 705A has effect with modifications

 (1) Subdivision 705A has effect in relation to each linked entity becoming a *subsidiary member of the *consolidated group in the same way as that Subdivision operates in relation to an entity becoming a subsidiary member of a consolidated group in circumstances covered by that Subdivision.

 (2) However, that effect of Subdivision 705A is subject to modifications set out in this Subdivision.

705225  Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities

Object

 (1) The object of this section is to ensure that where, on becoming *subsidiary members, linked entities hold assets consisting of *membership interests in other linked entities, the *head company’s cost of becoming the holder of the assets of all of the linked entities correctly reflects the group’s cost of acquiring the linked entities.

Tax cost setting amounts to be worked out from top down

 (2) The *tax cost setting amounts for the assets of linked entities holding *membership interests must be worked out before the tax cost setting amounts for the assets of the linked entities in which the membership interests are held.

Note: The tax cost setting amount in respect of assets of any linked entity in which members of the group, but no linked entity, hold membership interests can be worked out in any order in relation to the calculations for other linked entities.

Tax cost setting amount for higher linked entity’s membership interests to be used in working out lower linked entity’s tax cost setting amount

 (3) The *tax cost setting amount worked out for assets of a linked entity mentioned in subsection (2) consisting of *membership interests in another such entity is to be used as the amount for those interests under subsection 70565(1) (step 1 of allocable cost amount) in working out the tax cost setting amount for assets of that other linked entity.

Note 1: Subsection 70565(1) adds together amounts worked out in accordance with section 70565 representing the cost of the membership interests that each member of the group holds in the linked entity. If any of those membership interests is held by another linked entity, subsection (3) of this section will replace the amount otherwise applicable with the tax cost setting amount that will have been worked out for the interests in accordance with subsection (2) of this section.

Note 2: The tax cost setting amount worked out for the membership interests has no relevance other than for the purpose mentioned in subsection (3) of this subsection. This is because, under the single entity principle, intra group membership interests are ignored while entities are members of the group. If an entity ceases to be a member, section 70115 and Division 711 set the tax cost of membership interests in the entity at that time.

Value shifting etc. provisions not to apply to later CGT events involving membership interests

 (4) However, despite subsection (3), subsection 70565(4) (which prevents the later operation of value shifting etc. provisions) still applies to the *membership interests.

Nonmembership equity interests

 (5) For the purposes of this section, if, on becoming a *subsidiary member, a linked entity holds a *nonmembership equity interest in another linked entity, that interest is treated as if it were a *membership interest in that other linked entity.

705227  Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities

Object

 (1) The object of this section is to modify the effect that section 70593 (step 3A of allocable cost amount) has in accordance with this Subdivision so that it takes account of *membership interests that linked entities hold in other linked entities at the time (the linked entity joining time) when the linked entities become *subsidiary members of the group.

Apportionment of step 3A amount among first level interposed entities

 (2) If:

 (a) under section 70593, in its application in accordance with this Subdivision, there is a step 3A amount for the purpose of working out the group’s *allocable cost amount for a particular linked entity (the subject entity); and

 (b) at the linked entity joining time, one or more of the linked entities (the first level entities) in which the *head company holds *membership interests are interposed between the head company and the subject entity;

then the step 3A amount is apportioned among the first level entities and the subject entity on the following basis:

 (c) each first level entity has the following proportion of the step 3A amount:

  where:

  market value of all membership interests in subject entity means the *market value, at the linked entity joining time, of all *membership interests in the subject entity that are held by entities that become *members of the group at that time.

  market value of first level entity’s direct and indirect membership interests in subject entity means so much of the *market value of all membership interests in the subject entity (as defined above) as is attributable to *membership interests that the first level entity holds directly, or indirectly through other linked entities; and

 (d) the subject entity has the remainder of the step 3A amount.

Membership interests in subsidiary members of group

 (3) In applying section 70593 for the purposes of this Subdivision, disregard paragraph 70593(1)(f) if:

 (a) the rollover asset mentioned in that section is a *membership interest in an entity that becomes a *subsidiary member at the linked entity joining time; and

 (b) the rollover asset is not held at that time by the entity that becomes the *head company of the group.

Note: The step 3A amount is worked out under section 70593.

705230  Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests

Object

 (1) The object of this section is to ensure that, in working out the group’s *allocable cost amount for the linked entities, the reduction under step 4 in the table in section 70560 (about preformation time distributions out of certain profits) is made only for profits that have been effectively distributed to the *head company in respect of its direct *membership interests in the entities. This ensures consistency with the ordering rule in section 705225.

When section applies

 (2) This section applies to a distribution to the extent that the following conditions are satisfied:

 (a) the distribution is made by a linked entity;

 (b) in working out the group’s *allocable cost amount for the linked entity there would, apart from this section, be a reduction under step 4 in the table in section 70560 for the distribution.

Step 4 reduction only if subject distribution is made to head company

 (3) There is no reduction as mentioned in subsection (2) for the distribution unless it is made to the *head company of the group.

705235  Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities

Object

 (1) The object of this section is to prevent a distortion under section 70535 in the allocation of *allocable cost amount to a linked entity where that entity has direct or indirect *membership interests in another linked entity that has certain profits or tax losses.

Adjustment to allocation of allocable cost amount where direct interest in linked entity with profits/losses

 (2) If:

 (a) a linked entity has *membership interests in a second linked entity; and

 (b) in working out the group’s *allocable cost amount for the second linked entity:

 (i) an amount is required to be added (the second linked entity’s profit/loss adjustment amount) under step 3 in the table in section 70560 (about profits accruing before becoming a subsidiary member of the group); or

 (ii) an amount is required to be subtracted (also the second linked entity’s profit/loss adjustment amount) under step 5 in the table in section 70560 (about losses accruing before becoming a subsidiary member of the group);

then, for the purposes of working out under section 70535 the *tax cost setting amount for the assets of the first linked entity, the *market value of the first linked entity’s membership interests in the second linked entity is reduced (in a subparagraph (b)(i) case) or increased (in a subparagraph (b)(ii) case) by the first linked entity’s interest in the second linked entity’s profit/loss adjustment amount (see subsection (3)).

First linked entity’s interest in second linked entity’s profit/loss adjustment amount

 (3) The first linked entity’s interest in the second linked entity’s profit/loss adjustment amount is worked out using the formula:

Adjustment to allocation of allocable cost amount for indirect interest in linked entity with profits/losses

 (4) If:

 (a) a linked entity has *membership interests in a second linked entity; and

 (b) the second linked entity has, directly or indirectly through one or more interposed linked entities, membership interests in a third linked entity; and

 (c) in working out the group’s *allocable cost amount for the third linked entity:

 (i) an amount is required to be added (the third linked entity’s profit/loss adjustment amount) under step 3 in the table in section 70560 (about profits accruing before becoming a subsidiary member of the group); or

 (ii) an amount is required to be subtracted (also the third linked entity’s profit/loss adjustment amount) under step 5 in the table in section 70560 (about losses accruing before becoming a subsidiary member of the group);

then, for the purposes of working out under section 70535 the *tax cost setting amount for the assets of the first linked entity, the *market value of the first linked entity’s membership interests in the second linked entity is reduced (in a subparagraph (c)(i) case) or increased (in a subparagraph (c)(ii) case) by the first linked entity’s interest in the third linked entity’s profit/loss adjustment amount (see subsection (5)).

First linked entity’s interest in third linked entity’s profit/loss adjustment amount

 (5) The first linked entity’s interest in the third linked entity’s profit/loss adjustment amount is worked out using the formula:

where:

market value of first linked entity’s membership interests in third linked entity held through second linked entity means the *market value of all *membership interests in the third linked entity that the first linked entity holds indirectly through the second linked entity (including through that entity and one or more other linked entities that are interposed between the second linked entity and the third linked entity).

705240  Modified application of section 70557

Object

 (1) The object of this section is to ensure that, in working out *tax cost setting amounts for *trading stock, *depreciating assets, *registered emissions units or *revenue assets of the linked entities, section 70557 (about loss of preCGT status of certain membership interests) only applies if the *membership interests held directly by the *head company of the group are affected.

Modified application of section 70557—basic modification

 (2) For the purposes of applying section 70557 in accordance with this Subdivision, a reference in that section to a *membership interest that a *member of the joined group holds in the joining entity at the joining time is taken to be a reference to a membership interest that the *head company of the *consolidated group holds directly in a linked entity at the time the linked entity becomes a *subsidiary member.

Modified application of section 70557—additional modifications where section 705225 applies

 (3) Also, if a linked entity (the first linked entity) holds a *membership interest (the subject membership interest) in another linked entity (the second linked entity), section 70557 (as modified in accordance with subsection (2)) is to be applied in relation to the subject membership interest as follows.

 (4) First work out whether there would be a reduction under that section in the *tax cost setting amount for the subject membership interest that is used as mentioned in subsection 705225(3) (the subsection 705225(3) tax cost setting amount) if:

 (a) the subject membership interest, if it is not a revenue etc. asset of the first linked entity, were taken to be such an asset; and

 (b) paragraphs 70557(2)(c) and (d) and subsection 70557(7) did not apply to the subject membership interest.

 (5) Next, if there would be such a reduction (whose amount is the notional section 70557 reduction amount):

 (a) apply section 70557 to reduce the *tax cost setting amount for any revenue etc. asset of the second linked entity; and

 (b) if the second linked entity holds a *membership interest in another linked entity—apply section 70557 in relation to that interest in accordance with subsection (3) of this section;

and for those purposes:

 (c) the subject membership interest is taken to be a membership interest that the *head company of the group holds directly in the second linked entity; and

 (d) the requirements of paragraphs 70557(2)(a) and (b) are taken to be satisfied in relation to the subject membership interest; and

 (e) the subject membership interest is taken to have a *cost base and *reduced cost base equal to the subsection 705225(3) tax cost setting amount; and

 (f) the subject membership interest is taken to have a loss of preCGT status adjustment amount equal to the notional section 70557 reduction amount.

Note: If the head company actually held any membership interests in the second linked entity, or if other linked entities held membership interests in the second linked entity to which this subsection also applied, those membership interests would also be taken into account in working out the reduction under paragraph (a) and in applying paragraph (b).

Subdivision 705EAdjustments for errors etc.

Guide to Subdivision 705E

705300  What this Subdivision is about

Errors in making tax cost setting amount calculations are reversed by means of an immediate capital gain or loss if it would be unreasonable to require the calculations to be redone.

Table of sections

Operative provisions

705305 Object of this Subdivision

705310 Operation of Part IVA of the Income Tax Assessment Act 1936

705315 Errors that attract special adjustment action

705320 Tax cost setting amounts taken to be correct

Operative provisions

705305  Object of this Subdivision

  The object of this Subdivision is to avoid the time and expense involved in correcting errors affecting *tax cost setting amount calculations. This is done by providing for *capital gains or *capital losses to reverse the errors.

705310  Operation of Part IVA of the Income Tax Assessment Act 1936

  To avoid doubt, this Subdivision does not limit the operation of Part IVA of the Income Tax Assessment Act 1936.

705315  Errors that attract special adjustment action

 (1) Section 705320 (about later adjustments to correct *tax cost setting amount calculation errors) applies if the conditions in this section are satisfied.

Tax cost setting amount taken into account

 (2) The first condition is that the *head company of a *consolidated group worked out a *tax cost setting amount, in purported compliance with this Division, for an asset of an entity that becomes a *subsidiary member of the group that is an asset of a kind referred to in section 70535 as a reset cost base asset.

Error in calculation

 (3) The second condition is that:

 (a) the *head company made one or more errors in working out the *tax cost setting amount; and

 (b) those errors caused the tax cost setting amount to differ from its correct amount.

If the errors caused the tax cost setting amount to be more, the difference is an overstated amount. If the errors caused the tax cost setting amount to be less, the difference is an understated amount.

Unreasonable to require recalculation

 (4) The third condition is that, having regard to the following factors:

 (a) the net size of the errors compared to the size of the *allocable cost amount for the joining entity;

 (b) the number of *tax cost setting amounts that would have to be recalculated, and the difficulty of making the recalculations;

 (c) the number of adjustments, in assessments that could be amended and in future *income tax returns, that would be necessary to correct the errors;

 (d) the difficulty in obtaining any necessary information;

it is not reasonable to require a recalculation of the amounts involved.

Exception where error due to fraud or evasion

 (5) However, the conditions in this section are not satisfied if the errors were to any extent due to fraud or evasion.

Requirement to notify

 (6) The *head company of the *consolidated group must, as soon as practicable after becoming aware that it made one or more errors in working out the *tax cost setting amount, notify the Commissioner in the *approved form:

 (a) that it had made the errors; and

 (b) of the amount of the overstated amount or understated amount.

705320  Tax cost setting amounts taken to be correct

 (1) For the purposes of this Act (other than this Subdivision) and for the purposes of the Taxation Administration Act 1953, any *tax cost setting amounts that were worked out by the *head company, so far as they were due to the errors, are taken to have been correct if the conditions in section 705315 are satisfied.

Note 1: If the conditions in section 705315 are satisfied, CGT event L6 happens (see section 104525).

Note 2: Subsection (1) means that the Commissioner cannot amend any assessments necessary to correct the errors, and that (except as mentioned in subsection (2)) no offences or administrative penalties arise in respect of the errors.

 (2) Subsection (1) does not apply for the purposes of determining whether there is an offence against section 8N of the Taxation Administration Act 1953, or an administrative penalty under section 28475 or 284145 in Schedule 1 to that Act, in relation to statements made before the Commissioner became aware of the errors.

Note 1: Section 8N of the Taxation Administration Act 1953 deals with false or misleading statements. Sections 28475 and 284145 in Schedule 1 to that Act set out the circumstances in which an entity is liable for an administrative penalty.

Note 2: The offence and administrative penalty provisions however apply on a modified basis—see subsection 8W(1C) of the Taxation Administration Act 1953, and subsections 28480(2) and 284150(2) in Schedule 1 to that Act.

Division 707Losses for head companies when entities become members etc.

Table of Subdivisions

707A Transfer of losses to head company

707B Can a transferred loss be utilised?

707C Amount of transferred losses that can be utilised

707D Special rules about losses

Subdivision 707ATransfer of losses to head company

Guide to Subdivision 707A

707100  What this Subdivision is about

A loss made by an entity before the time it becomes a member of a consolidated group is transferred to the head company of the group at that time if the entity could have utilised the loss had the entity not become a member of the group.

Table of sections

707105 Who can utilise the loss?

Objects

707110 Objects of this Subdivision

Application

707115 What losses this Subdivision applies to

Transfer of loss from joining entity to head company

707120 Transfer of loss from joining entity to head company

707125 Modified same business test for companies’ post1999 losses

707130 Modified pattern of distributions test

707135 Transferring loss transferred to joining entity because same business test was passed

Effect of transfer of loss

707140 Effect of transfer of loss

Cancelling the transfer of the loss

707145 Cancelling the transfer of the loss

What happens if the loss is not transferred?

707150 Loss cannot be utilised for income year ending after the joining time

707105  Who can utilise the loss?

 (1) If the loss is transferred, the head company is treated for income years ending after the transfer as having made the loss, so the head company can utilise the loss for those income years to the extent permitted by:

 (a) the general rules (outside this Part) about an entity utilising a loss it has made; and

 (b) the special rules about transferred losses in the other Subdivisions of this Division that supplement and modify those general rules.

Note: If the entity from which the loss was transferred became a subsidiary member of the consolidated group, the entity cannot utilise the loss for those income years because of section 7011 (single entity rule) and section 707140.

 (2) If the loss is not transferred, then, for an income year ending after the time the entity became a member of the consolidated group, the loss cannot be utilised by any entity.

Note: The loss will not be transferred if the entity would not have been able to utilise it or if the transfer is cancelled under section 707145.

Objects

707110  Objects of this Subdivision

  The main objects of this Subdivision are:

 (a) to provide for the transfer of a loss from an entity (the joining entity) becoming a *member of a *consolidated group to the *head company of the group (so the head company may be able to *utilise it), if the joining entity could have utilised the loss if it had not become a member of the group; and

 (b) to prevent the utilisation by any entity of a loss made by the joining entity, if the joining entity could not have utilised the loss if it had not become a member of the group.

Application

707115  What losses this Subdivision applies to

  This Subdivision applies to a loss of any *sort if:

 (a) an entity (the joining entity) becomes a *member of a *consolidated group (the joined group) at a time (the joining time) in an income year (the joining year); and

 (b) the loss was made by the joining entity for an income year ending before the joining time.

Note 1: If the joining entity had a loss transferred to it by a previous operation of this Subdivision (when the entity was the head company of a consolidated group), this Subdivision operates later as if the joining entity had made the loss. See section 707140.

Note 2: Section 707405 may affect the income year for which the joining entity is treated as having made the loss, if the joining entity made the loss and the loss is referable to part of an income year.

Transfer of loss from joining entity to head company

707120  Transfer of loss from joining entity to head company

Transfer of loss from joining entity to head company

 (1) Subject to subsection (1A), the loss is transferred at the joining time from the joining entity to the *head company of the joined group (even if they are the same entity).

 (1A) The loss is transferred under subsection (1) only to the extent (if any) that the loss could have been *utilised by the joining entity for an income year consisting of the *trial year if:

 (a) at the joining time, the joining entity had not become a *member of the joined group (but had been a *whollyowned subsidiary of the *head company if the joining entity is not the head company); and

 (b) the amount of the loss that could be utilised for the trial year were not limited by the joining entity’s income or gains for the trial year.

What is the trial year?

 (2) The trial year is the period:

 (a) starting at the latest of these times:

 (i) the time 12 months before the joining time;

 (ii) the time the joining entity came into existence;

 (iii) the time the joining entity last ceased to be a *subsidiary member of a *consolidated group, if the joining entity had been a member of a consolidated group before the joining time but was not a *member of a consolidated group just before the joining time; and

 (b) ending just after the joining time.

Same business test involving trial year

 (3) When working out whether the joining entity carried on the same business throughout the *trial year (or a period including the trial year) as it carried on at a particular time, assume that the entity carried on at and just after the joining time the same business that it carried on just before the joining time.

Transfer of loss for income year overlapping trial year

 (4) If the loss was made by the joining entity for an income year all or part of which occurs in the *trial year, the transfer of the loss under subsection (1) is not prevented by the fact that the loss was made for that income year.

Designated infrastructure project entities

 (5) Despite subsection (1A), the loss is transferred under subsection (1) to the full extent if:

 (a) the loss is a *tax loss; and

 (b) the joining entity is a *designated infrastructure project entity:

 (i) at a time in the *loss year; and

 (ii) just before the joining time.

707125  Modified same business test for companies’ post1999 losses

 (1) This section operates if:

 (a) the joining entity made the loss for an income year starting after 30 June 1999; and

 (b) section 16513 or subsection 16515(2) or (3) or 1665(5) or (6) is relevant to working out (under section 707120) whether the loss is transferred from the joining entity.

 (2) Work out whether the loss is transferred on the basis that section 16513 required the joining entity to satisfy the *same business test for:

 (a) the period (the same business test period) consisting of:

 (i) the *trial year; and

 (ii) the income year that included the *test time worked out for section 16513 for the joining entity (disregarding paragraph (b) of this subsection), if that income year started before the trial year; and

 (b) the time (the test time) just before the end of the income year for which the loss was made by the joining entity.

 (3) Work out whether the loss is transferred on the basis that:

 (a) subsection 16515(2) specified that the period (the same business test period) for the *same business test consisted of:

 (i) the *trial year; and

 (ii) the income year in which the person began to control, or became able to control, the voting power in the company, if that income year started before the trial year; and

 (b) subsection 16515(3) required the same business test to be applied to the company’s business immediately before the time (the test time) just before the end of the income year for which the loss was made by the joining entity.

 (4) If Subdivision 166A would apply to the joining entity for an income year consisting of the *trial year, work out whether the loss is transferred on the basis that:

 (a) subsection 1665(5) treated the joining entity as having satisfied the condition in section 16513 if the joining entity satisfied the *same business test for the period (the same business test period) consisting of:

 (i) the trial year; and

 (ii) the income year described in subsection (5) of this section, if that income year started before the trial year; and

 (b) subsection 1665(6) required the same business test to be applied to the *business that the joining entity carried on at the time (the test time) just before the end of the income year for which the loss was made by the joining entity.

Note: Subdivision 166A applies to widely held companies and eligible Division 166 companies unless they choose that Subdivision 165A apply to them without the modifications made by Subdivision 166A.

 (5) For the purposes of subparagraph (4)(a)(ii), the income year is:

 (a) the income year in which occurred the first time mentioned in subsection 1665(6); or

 (b) the income year of the joining entity containing the time at which the joining entity is taken under subsection 707210(5) to fail to meet the condition in section 16512, if that subsection is relevant to working out whether the joining entity can *utilise the loss.

Note 1: Section 707205 affects the start of the test period if the joining entity made the loss under a previous operation of this Subdivision.

Note 2: Section 707210 is about whether a company can utilise certain losses transferred to it under this Subdivision from a company.

 (6) Subsection (4) of this section has effect despite subsection 707210(6).

Note: Subsection 707210(6) modifies section 1665 for working out whether a company can utilise certain losses transferred to it under this Subdivision from a company.

707130  Modified pattern of distributions test

 (1) This section operates for the purpose of working out (under section 707120) whether the loss is transferred from the joining entity, if section 26720 in Schedule 2F to the Income Tax Assessment Act 1936 is relevant for that purpose.

Note 1: That section is relevant if the joining entity has been a nonfixed trust at any time in the period from the start of the income year in which the entity made the loss until the time it became a subsidiary member of the joined group (and was not an excepted trust at all times in the period).

Note 2: That section prevents an entity from utilising a tax loss unless the entity meets the conditions in subsection 26730(2) (if applicable) and section 26735 in that Schedule by passing the pattern of distributions test for certain income years.

 (2) Section 26730 in that Schedule has effect as if the income year mentioned in that section were the joining year, and not the *trial year.

Note: Section 26730 in that Schedule requires the joining entity to pass the pattern of distributions test for the income year mentioned in that section if that entity distributed income or capital in that income year or within 2 months after the end of that income year.

 (3) Section 26735 in that Schedule has effect as if the reference in that section to an earlier income year were to an income year earlier than the joining year.

 (4) Disregard each distribution (if any) of income or capital (within the meaning of that Schedule) made by the joining entity after the joining time, so far as it was made from an amount of the entity’s income or capital attributable to a time after the joining time, in working out:

 (a) whether section 26730 in that Schedule requires the joining entity to pass the pattern of distributions test (as defined in that Schedule); and

 (b) whether the joining entity passes that test as required by section 26730 or 26735 in that Schedule.

Note: Disregarding that percentage of a distribution may affect a test year distribution of income or a test year distribution of capital, as those terms are defined in section 26965 in that Schedule, and thus affect whether the joining entity passes the pattern of distributions test under section 26960 in that Schedule.

707135  Transferring loss transferred to joining entity because same business test was passed

 (1) This section operates if the loss had been transferred to the joining entity (by a previous operation of this Subdivision) because the entity from which the loss was transferred carried on during a particular period the same business as it carried on at a particular time.

 (2) The loss is not transferred from the joining entity to the *head company of the joined group (despite section 707120), unless the joining entity satisfies the *same business test for:

 (a) the *trial year (the same business test period); and

 (b) the time (the test time) just before the end of the income year in which the loss was transferred to the joining entity.

Effect of transfer of loss

707140  Effect of transfer of loss

 (1) To the extent that the loss is transferred under section 707120 from the joining entity to the *head company of the joined group, this Act operates (except so far as the contrary intention appears) for the purposes of income years ending after the transfer as if:

 (a) the head company had made the loss for the income year in which the transfer occurs; and

 (b) the joining entity had not made the loss for the income year for which the joining entity actually made the loss.

Head company may utilise loss for income year of transfer

 (2) The *head company is not prevented from *utilising the loss for the income year in which the transfer occurs merely because this Act operates as if the head company had made the loss (to the extent of the transfer) for that year.

Debt forgiveness in income year for which loss is made

 (3) If a debt of the *head company of the joined group is *forgiven in the income year in which the transfer occurs, sections 245115 and 245130 operate as if the head company had made the loss for an earlier income year.

Note: This subsection has the effect that the loss may be reduced in accordance with one of those subsections by applying the total net forgiven amount for the income year in which the transfer occurs.

Cancelling the transfer of the loss

707145  Cancelling the transfer of the loss

 (1) The *head company of the joined group may choose to cancel the transfer of the loss.

 (2) If the *head company of the joined group does so, this Act (except this section) operates for all income years ending after the transfer as if it had not occurred under section 707120.

 (3) The choice cannot be revoked.

What happens if the loss is not transferred?

707150  Loss cannot be utilised for income year ending after the joining time

  To the extent that the loss is not transferred under section 707120 from the joining entity to the *head company of the joined group, the loss cannot be *utilised by any entity for an income year ending after the joining time.

Subdivision 707BCan a transferred loss be utilised?

Guide to Subdivision 707B

707200  What this Subdivision is about

This Subdivision modifies rules about a company maintaining the same ownership to be able to utilise a loss transferred to it under Subdivision 707A, and specifies what things happening before the transfer are to be taken into account in working out whether the company can utilise the loss.

Table of sections

Operative provisions

707205 Modified period for test for maintaining same ownership

707210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier

Operative provisions

707205  Modified period for test for maintaining same ownership

 (1) This section modifies Divisions 165, 166 and 167 for the purposes of working out whether a company can *utilise a loss of any *sort that it made because of a transfer under Subdivision 707A.

 (2) Subdivision 165A and Divisions 166 and 167 operate for those purposes as if the *loss year started at the time of the transfer.

Note 1: This means that the ownership test period defined by subsection 16512(1) and the test period defined by subsection 1665(2) start at the time of the transfer.

Note 2: Without this section, those periods would start at the start of the income year in which the transfer occurred, so events occurring before the transfer (such as changes in holdings of voting power, rights to dividends or rights to capital) could affect whether the company could utilise the tax loss or net capital loss.

707210  Utilisation of certain losses transferred from a company depends on company that made the losses earlier

 (1) This section has effect for the purposes of working out whether a company (the latest transferee) can *utilise for an income year a loss it made because of a *COT transfer from a company (the latest transferor).

 (1A) A transfer of a loss under Subdivision 707A from a company to a company is a COT transfer of the loss if the transfer occurs because:

 (a) the transferor meets the conditions in section 16512; and

 (b) the conditions in one or more of paragraphs 16515(1)(a), (b) and (c) do not exist in relation to the transferor.

Meeting conditions in section 16512

 (2) The latest transferee is taken to meet the conditions in section 16512 for the income year in relation to the loss if and only if the company (the test company) described in subsection (3) would have met those conditions for the income year had the circumstances described in subsection (4) existed.

Note 1: The latest transferee and the test company may be the same company.

Note 2: Section 707405 may affect the income year for which the test company is treated as having made the loss, if the loss is referable to part of an income year.

 (3) The test company is the first company to make the loss. However, if:

 (a) the loss was made by the latest transferor because of one or more earlier transfers of the loss under Subdivision 707A from a company to a company; and

 (b) one or more of those earlier transfers was not a *COT transfer;

the test company is the company to which the loss was transferred in the most recent transfer described in paragraph (b).

 (4) The circumstances are that:

 (a) the test company was not treated by Subdivision 707A for the income year as not having made the loss; and

 (b) if the test company made the loss apart from that Subdivision and transferred the loss to itself under that Subdivision—the test company was not treated by that Subdivision for the income year as having made the loss for the income year in which the transfer occurred; and

 (c) nothing happened, after the time the loss was transferred from the test company to the *head company of a *consolidated group, to *membership interests or voting power:

 (i) in an entity that was at that time a *subsidiary member of the group; or

 (ii) in an entity that was at that time interposed between the test company and the head company;

  that would affect whether the test company would meet the conditions in section 16512 for the income year; and

 (d) if the loss has later been transferred under that Subdivision to the head company of another consolidated group—nothing happened, after the time of the later transfer, to membership interests or voting power:

 (i) in the later transferor; or

 (ii) in an entity that was at that time interposed between the later transferor and the head company;

  that would affect whether the test company would meet the conditions in section 16512 for the income year.

Failing to meet conditions in section 16512

 (5) The latest transferee is taken to fail to meet a condition in section 16512 only at:

 (a) the first time the test company would have failed to meet the condition had the circumstances described in subsection (4) existed; or

 (b) the test time described in subsection 1665(6) for the test company, if Division 166 is relevant to working out whether the test company could have *utilised the loss had the circumstances described in subsection (4) existed.

Same business test applying to latest transferee under Division 166

 (6) If subsection 1665(5) affects whether the latest transferee can *utilise the loss for the income year because the latest transferee is a *widely held company or an *eligible Division 166 company, or both, during the year, subsection 1665(6) operates as if it required the *same business test to be applied to the *business the latest transferee carried on just before the time described in subsection (5) of this section.

If the test company made the loss because of a transfer

 (7) If the test company made the loss because of a transfer under Subdivision 707A from another entity, Divisions 165 and 166 operate in relation to the test company for the purposes of subsection (2) as if the test company’s *loss year started at the time of the transfer.

Subdivision 707CAmount of transferred losses that can be utilised

Guide to Subdivision 707C

707300  What this Subdivision is about

Losses transferred to the head company of a consolidated group under Subdivision 707A can be utilised for an income year only against a fraction of the income or gains remaining after the company has utilised other losses and deductions.

 Note: This Subdivision does not apply if the joining entity is a designated infrastructure project entity just before the transfer and the head company is a designated infrastructure project entity just after the transfer: see section 41545.

Table of sections

Object

707305 Object of this Subdivision

How much of a transferred loss can be utilised?

707310 How much of a transferred loss can be utilised?

707315 What is a bundle of losses?

707320 What is the available fraction for a bundle of losses?

707325 Modified market value of an entity becoming a member of a consolidated group

707330 Losses transferred from former head company

707335 Limit on utilising transferred losses if circumstances change during income year

707340 Utilising transferred losses while exempt income remains

707345 Other provisions are subject to this Subdivision

Object

707305  Object of this Subdivision

 (1) The main object of this Subdivision is to limit, in a way that gives effect to the principles in subsections (2) and (3), the amount of losses transferred under Subdivision 707A that can be *utilised for an income year by the transferee.

 (2) One principle is that the transferee is to *utilise the transferred losses for an income year only to the extent to which it has income or gains for the income year remaining after reduction by its other losses and deductions.

 (3) The other principle is that the amount of a transferred loss that the transferee can *utilise is to reflect the amount of the loss that the transferor could have *utilised for the income year if the transferor of the loss (whether the original maker of the loss or not) had not become a *member of a *consolidated group at the time of the transfer.

 (4) To give effect to those principles, this Subdivision operates on the assumption that, if each transferor of a loss to the transferee had not become a *member of a *consolidated group at the time of the transfer:

 (a) all the transferors of transferred losses to the transferee would have made income or gains for the year whose total did not exceed the transferee’s income or gains for the year remaining after reduction by its other losses and deductions; and

 (b) a particular transferor’s income or gains for the year would have equalled a fraction of the transferee’s income or gains for the year remaining after reduction by its other losses and deductions.

 (5) The fraction is worked out by reference to the transferor’s *market value at the time of the transfer (on the assumption that market value reflects capacity to generate income or gains in future).

How much of a transferred loss can be utilised?

707310  How much of a transferred loss can be utilised?

 (1) This section limits the amount of losses in a particular *bundle of losses transferred under Subdivision 707A that can be *utilised by the transferee. The limit is set by reference to the *available fraction for the bundle.

Note: Section 707335 of this Act and section 707350 of the Income Tax (Transitional Provisions) Act 1997 set different limits on utilising losses in a bundle of losses in certain circumstances.

Basic rule

 (2) The transferee cannot *utilise more of the losses in the *bundle than the transferee would have been able to utilise (apart from this section) under the conditions in subsections (3), (4) and (5).

 (3) The first condition is that the only amount of the transferee’s *ordinary income, *statutory income or gains (if any) of a kind described in column 1 of an item of the table for the income year is the *available fraction of the amount worked out as described in column 2 of the item having regard to:

 (a) the transferee’s *ordinary income, *statutory income or gains for the income year apart from this section; and

 (b) the transferee’s deductions for the income year and losses, except losses transferred to the transferee under Subdivision 707A.

 

Income and gains

Column 1
The transferee’s ordinary income, statutory income or gains of this kind:

Column 2
Are worked out by reference to this amount:

1 *Capital gains

The result of:

(a) step 2 of the method statement in subsection 1025(1); or

(b) step 3 of the method statement in section 165111;

(as appropriate) for the transferee and the income year

3 *Exempt film income

The transferee’s *net exempt film income for the income year remaining after deduction of the transferee’s *film losses (if any)

4 *Assessable film income

The transferee’s *net assessable film income for the income year remaining after deduction of the transferee’s *film losses (if any)

5 *Exempt income other than *exempt film income

The amount of the transferee’s *net exempt income for the income year that would have remained after deducting from it the transferee’s *tax losses (if any), assuming the amount of that income were what it would have been had the transferee not had *exempt film income for the year

6 Assessable income that is not attributable to *capital gains and is not *assessable film income

The amount (if any) that would have been the transferee’s taxable income (if any) for the income year if the transferee had not had for the income year:

(a) any *net capital gain; or

(b) any *net assessable film income;

reduced by the amount (the transferee’s grossedup franking offset amount) worked out in accordance with paragraph (3A)(c)

 (3A) For the purposes of subsection (3):

 (a) the transferee’s *tax losses to which paragraph (b) of, or the table in, that subsection applies are to be worked out on the assumption that the transferee chooses to deduct under subsection 3617(2) all of the tax losses and that subsection 3617(5) does not apply to that choice; and

 (b) except as mentioned in paragraph (a) of this subsection, amounts worked out as described in column 2 of an item of the table in subsection (3) are to be worked out making the same choices as the transferee actually makes in working out its taxable income as stated in its *income tax return for the income year; and

 (c) the transferee’s grossedup franking offset amount mentioned in column 2 of item 6 in the table is the amount worked out using the formula:

 

  where:

  franking offsets means the total amount of *tax offsets to which the transferee is entitled for the income year under Division 207 and Subdivision 210H (except those that are subject to the refundable tax offset rules because of section 6725).

 (4) The second condition is that once the amounts of the transferee’s income or gains have been worked out under subsection (3) they are not reduced by:

 (a) deductions, or losses, other than losses in the *bundle; or

 (b) taxes or expenses described in subsection 375805(4) (which is about *net exempt film income).

Note: One of the effects of subsection (4) is that, for working out how much of a film loss in the bundle can be deducted from the transferee’s net exempt film income or net assessable film income:

(a) the transferee’s net exempt film income will be the same as its exempt film income worked out under subsection (3); and

(b) the transferee’s net assessable film income will be the same as its assessable film income worked out under subsection (3).

 (5) The third condition is that once the amounts of the transferee’s *exempt income have been worked out under subsection (3), assume that the transferee had no losses, outgoings or taxes described in subsection 3620(1) (which is about *net exempt income), in working out how much of a *tax loss in the *bundle can be deducted from the transferee’s net exempt income.

707315  What is a bundle of losses?

 (1) A bundle of losses comes into existence at the time (the initial transfer time) a loss of any *sort that has not previously been transferred under Subdivision 707A is transferred under that Subdivision from an entity (the real lossmaker) to the *head company of a *consolidated group (the joined group).

 (2) At the initial transfer time, the bundle consists of every loss (regardless of its *sort) that:

 (a) is transferred at that time under that Subdivision from the real lossmaker to the *head company of the joined group; and

 (b) has not been transferred under that Subdivision before that time.

Note: For certain purposes, section 707327 of the Income Tax (Transitional Provisions) Act 1997 treats the bundle as including certain other losses too.

 (3) The bundle still exists at a later time if it includes at that later time at least one loss of any *sort that could be *utilised or otherwise reduced by an entity for an income year ending after that time (even if one or more losses have ceased to be included in the bundle before that later time).

Note: A bundle continues to exist even if the losses in it are transferred again under Subdivision 707A after the initial transfer time.

 (4) A loss ceases to be included in a *bundle at the first time for which it is true that the loss cannot be *utilised or otherwise reduced by any entity for an income year ending after that time.

 (5) If, had a loss been made by a company as assumed under a provision of Division 170, the loss would have been transferred under Subdivision 707A, this Subdivision and other provisions that relate to or may affect the *available fractions for one or more *bundles of losses (including sections 707140 and 719325) operate as if the transfer had occurred.

Note: Section 707140 provides for a choice to cancel a transfer under Subdivision 707A. Section 719325 provides for a choice to cancel all losses in certain bundles of losses. A choice under one of those sections may result in a bundle not coming into existence, or not being in existence after a certain time.

 (6) To avoid doubt, a choice under section 707145 or 719325, as it operates because of subsection (5) of this section, relating to the loss does not affect or prevent:

 (a) a transfer of the loss that would have occurred under Subdivision 707A as described in another application of that subsection involving a different company; or

 (b) *utilisation of the loss by the company that actually made the loss and is different from the company assumed under Division 170 to have made the loss.

Note: Therefore a choice under section 707145 or 719325, as operating because of subsection (5) of this section, will be able to cause only one bundle not to exist, and will not affect the existence of other bundles that are treated as existing because of other operations of that subsection.

707320  What is the available fraction for a bundle of losses?

 (1) The available fraction for a *bundle of losses at a time is:

where:

transferee’s adjusted market value at the initial transfer time means the amount that would be the *market value, at the initial transfer time, of the transferee to which the losses in the *bundle were transferred at that time if:

 (a) the transferee did not have a loss of any *sort for an income year ending before that time; and

 (b) the balance of the transferee’s *franking account were nil at that time.

Note: The value for the transferee will be worked out on the basis that subsidiary members of the consolidated group headed by the transferee are part of the transferee, because of section 7011 (the single entity rule).

 (2) However, if an event described in an item of the table happens, the available fraction for the *bundle is reduced or maintained just after the event by multiplying it by the factor identified in the item:

 

Factors affecting the available fraction

Item

Event

Factor

1

One or more losses in the *bundle are transferred for the second or subsequent time

The lesser of 1 and this fraction:

2

At the same time as the losses in the *bundle were most recently transferred, losses in one or more other bundles were transferred from the same transferor to the same transferee, and the losses in the bundle or one of the other bundles had not been transferred before

The result of dividing the lesser of:

(a) the available fraction (apart from this subsection) for the bundle of losses that had not been transferred before; and

(b) 1;

by the sum of the available fractions for all the bundles (apart from this item applying to transfers at the time)

3

The company to which the losses in the *bundle were most recently transferred has transferred to it at a later time losses in one or more other bundles

4

There is an increase in the *market value of the company to which the losses in the *bundle were most recently transferred, because of an event described in subsection 707325(4) (but not covered by subsection 707325(5))

5

The available fractions (apart from this item) for all the *bundles of losses most recently made by the company that most recently made the losses in the bundle total more than 1.000

 (3) If the transfer under Subdivision 707A of one or more losses in a *bundle causes events described in 2 or more items of the table in subsection (2) to happen and require calculations of the available fraction for that bundle and for one or more other bundles:

 (a) make the calculations required by those items in the order in which the items appear in the table; and

 (b) take account of the results of a calculation under an earlier item in making a calculation under a later item.

 (4) For a *bundle of losses:

 (a) subject to paragraph (b)—the available fraction is worked out to 3 decimal places, rounding up if the fourth decimal place is 5 or more; or

 (b) if the available fraction worked out under paragraph (a) is 0.000 and, if it were worked out to more decimal places, it would include one or more nonzero digits—the available fraction is worked out to the number of decimal places that includes the first or only such digit, rounding up if the next decimal place is 5 or more.

Examples: For 0.000328, the available fraction is 0.0003. For 0.000086, the available fraction is 0.00009.

 (4A) Subsections (1) and (2) have effect subject to subsection (4).

 (5) If, apart from this subsection, the available fraction for a *bundle of losses would need to be worked out by dividing a number by 0, work out the available fraction by dividing the number by 1.

 (6) The available fraction for a *bundle of losses is 0 if, apart from this subsection, it would be negative.

707325  Modified market value of an entity becoming a member of a consolidated group

Basic rule

 (1) The modified market value of an entity that becomes a *member of a *consolidated group at a particular time is the amount that would be the *market value of the entity at that time if:

 (a) the entity had no loss of any *sort for any income year, and the balance of its *franking account at that time were nil; and

 (b) the *subsidiary members of the group at that time were separate entities and not just parts of the *head company of the group; and

 (c) the entity’s market value did not include an amount attributable (directly or indirectly) to a *membership interest in a member of the group (other than the entity):

 (i) that is a *corporate tax entity; or

 (ii) that transferred a loss under Subdivision 707A to the head company of the group at or before that time; and

 (d) the contribution to the entity’s market value made by a trust (other than one that is a member described in paragraph (c)) were limited to the amount attributable to the entity’s *fixed entitlements (if any) at that time to income or capital of the trust that is not attributable (directly or indirectly) to a membership interest in such a member.

Note 1: Section 707330 affects the modified market value of an entity that becomes a subsidiary member of the consolidated group, if the entity was the head company of another consolidated group just beforehand.

Note 2: Section 707325 of the Income Tax (Transitional Provisions) Act 1997 provides for an entity’s modified market value to be increased in certain circumstances for the purposes of working out the available fraction for a bundle of losses transferred from the entity.

Rule to prevent inflation of modified market value

 (2) However, if:

 (a) one or more of the events described in subsection (4) occurred in the 4 years before the time; and

 (b) the amount worked out under subsection (1) exceeds what it would have been if none of those events had occurred;

the modified market value of the entity at the time is the amount worked out under subsection (1), reduced by the amount worked out under subsection (3).

 (3) The amount of the reduction is the lesser of:

 (a) the excess described in paragraph (2)(b); and

 (b) the total increase in the *market value of the entity that occurred immediately after each event mentioned in paragraph (2)(a) because of the event.

 (4) These are the events:

 (a) an injection of capital into the entity or an entity that was an *associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the injection;

 (b) a transaction that:

 (i) did not take place at *arm’s length; and

 (ii) involved the entity or an entity that was an associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the transaction.

 (5) For the purposes of paragraph (2)(a), disregard an injection of capital if, and only if, it is made:

 (a) into a *listed public company through a *dividend reinvestment *scheme involving the issue of a *share in the company to an entity that held a share in the company before the injection; or

 (b) in association with the acquisition of a *share in a company in relation to which the conditions in subsection 70335(5) are met; or

 (c) in association with the acquisition of a *share, in a body corporate, in relation to which the conditions in subsection 70337(4) are met.

Note 1: Section 70335 of this Act deals with shares acquired under arrangements for employee shareholdings.

Note 2: Section 70337 of this Act deals with certain preference shares following an ADI restructure.

707330  Losses transferred from former head company

 (1) This section has effect for working out the *available fraction for a *bundle of losses if:

 (a) an entity (the exhead company) becomes a *subsidiary member of a *consolidated group (the bigger group) at a time (the joining time); and

 (b) just before the joining time the exhead company was the *head company of another consolidated group (the old group); and

 (c) at the joining time the losses are transferred under Subdivision 707A from the exhead company to the head company of the bigger group.

 (2) Work out the exhead company’s *modified market value or *market value as if each *member of the bigger group that had been a *subsidiary member of the old group just before the joining time were a part of the exhead company, and not a separate member of the bigger group, when the transfer occurred.

 (3) Also, work out the exhead company’s *modified market value as if each *subsidiary member of the old group had been a part of the exhead company while it was a subsidiary member of the old group.

707335  Limit on utilising transferred losses if circumstances change during income year

 (1) This section limits the amount of losses in a particular *bundle of losses transferred under Subdivision 707A that can be *utilised by the transferee for an income year if:

 (a) the losses in the bundle are transferred to the transferee after the start of the income year; or

 (b) the value of the *available fraction for the bundle changes at a time within the period (the transferee’s lossholding period) described in subsection (2).

 (2) The transferee’s lossholding period:

 (a) starts at the start of the income year or, if the losses in the *bundle were transferred to the transferee from another entity during the income year, at the time of the transfer; and

 (b) ends when one of these events occurs:

 (i) the income year ends;

 (ii) the transferee becomes a *subsidiary member of a *consolidated group.

 (3) The transferee cannot *utilise for the income year more of the losses than is reasonable having regard to:

 (a) the method in section 707310 for working out the maximum amount of the losses the transferee could utilise for the income year (apart from this section); and

 (b) the number of days in the transferee’s lossholding period; and

 (c) the value or values of the *available fraction for the *bundle during the transferee’s lossholding period; and

 (d) the number of days in the transferee’s lossholding period for which the available fraction for the bundle has a particular value; and

 (e) the principle that, if the transferee transferred the losses to itself under Subdivision 707A after the start of the income year, the amount of the losses it can utilise for the income year should be worked out as if:

 (i) the losses had been included in the bundle from the start of the income year; and

 (ii) the available fraction for the bundle had been 1 from the start of the income year until the time of the transfer; and

 (f) any other relevant matters.

 (4) Section 707310 has effect subject to this section.

707340  Utilising transferred losses while exempt income remains

Transferred film losses and net exempt film income

 (1) If:

 (a) the transferee of *film losses in a *bundle of losses has deducted from its *net exempt film income for an income year an amount of those losses that:

 (i) is equal to the amount of *exempt film income worked out under subsection 707310(3) for the transferee and the bundle; or

 (ii) if section 707335 affects the transferee’s utilisation of losses in the bundle—is reasonable, having regard to that section; and

 (b) the transferee still has net exempt film income for the year and film losses remaining in the bundle;

the fact the transferee still has net exempt film income does not stop it deducting film losses remaining in the bundle from its *net assessable film income for the year.

Transferred tax losses and net exempt income

 (2) If:

 (a) the transferee of *tax losses (other than *film losses) in a *bundle of losses has deducted from its *net exempt income for an income year an amount of its tax losses (other than film losses) in the bundle that:

 (i) is equal to the amount of *exempt income worked out under subsection 707310(3) for the transferee and the bundle; or

 (ii) if section 707335 affects the transferee’s utilisation of losses in the bundle—is reasonable, having regard to that section; and

 (b) the transferee still has net exempt income for the year and tax losses (other than film losses) remaining in the bundle;

the fact the transferee still has net exempt income does not stop it deducting tax losses (other than film losses) remaining in the bundle from its assessable income for the year.

Limit on deduction

 (3) This section does not allow the deduction for an income year of an amount of losses in a *bundle so as to exceed the limit set by section 707310 or 707335 on *utilisation for the year of losses of that *sort in the bundle.

707345  Other provisions are subject to this Subdivision

  The rules in this Subdivision are additional to the provisions of this Act about *utilising losses that are outside this Subdivision. Those provisions have effect subject to this Subdivision.

Subdivision 707DSpecial rules about losses

Table of sections

707400 Head company’s business before and after consolidation not compared

707410 Exit history rule does not treat entity as having made a loss

707415 Application of losses with nil available fraction for certain purposes

707400  Head company’s business before and after consolidation not compared

 (1) If:

 (a) the *same business test applies to a company that becomes a *head company of a *consolidated group at a time; and

 (b) apart from this section, the same business test period would start before that time and end after it;

the same business test period starts at that time (and ends when it would end apart from this section), for the purposes of that application of the same business test.

 (2) Subsection (1) does not apply for the purposes of working out whether the company can transfer to itself a loss under section 707120.

707410  Exit history rule does not treat entity as having made a loss

 (1) To avoid doubt, if the *head company of a *consolidated group makes a loss of a particular *sort and an entity ceases to be a *subsidiary member of the group, the entity is not taken because of section 70140 (the exit history rule):

 (a) to have made the loss; or

 (b) to have made another loss of the same sort because of the circumstances that caused the head company to make the loss.

 (2) It does not matter whether the *head company makes the loss because of a transfer under Subdivision 707A (whether from the entity or another entity) or because of another provision.

707415  Application of losses with nil available fraction for certain purposes

 (1) Subsection (2) applies if:

 (a) an entity (the joining entity) becomes a *member of a *consolidated group at a time (the joining time); and

 (b) a *tax loss or a *net capital loss was transferred from the joining entity to the *head company of the group at the joining time under Subdivision 707A; and

 (c) that loss is included in a *bundle of losses for which the *available fraction is 0.

 (2) The *head company can choose to apply the loss as shown in the table:

 

Item

If ...

the head company can choose to apply the loss in reduction of ...

for the purposes of ...

1

(a) the joining entity owed a debt just before the joining time to an entity that was not a *member of the group at the joining time; and

(b) the loss is wholly or partly attributable to the debt; and

(c) Subdivision 245E (about applying the total net forgiven amount to reduce other amounts) applies in relation to the debt (or another debt that is reasonably connected to the debt) because the debt is *forgiven after the joining time

the *total net forgiven amount

applying that total net forgiven amount in accordance with sections 245115, 245130, 245145 and 245175

2

(a) the joining entity owed a *limited recourse debt just before the joining time to an entity that was not a *member of the group at the joining time; and

(b) Division 243 applies in relation to the debt; and

(c) the loss is wholly or partly attributable to a deduction mentioned in paragraph 24315(1)(c) for an income year ending before the joining time

the deduction

working out the excess referred to in subsection 24335(1).

3

(a) the joining entity ceases to be a *subsidiary member of the group at a time (the leaving time) after the joining time; and

(b) the entity’s liabilities at the leaving time are the same as, or are reasonably connected to, the liabilities that it had at the joining time

the amount remaining mentioned in paragraph
104520(1)(b)