Contents
Chapter 3—Specialist liability rules
Part 3‑80—Roll‑overs applying to assets generally
Division 615—Roll‑overs for business restructures
Guide to Division 615 1
615‑1 What this Division is about
Subdivision 615‑A—Choosing to obtain roll‑overs
615‑5 Disposing of interests in one entity for shares in a company
615‑10 Redeeming or cancelling interests in one entity for shares in a company
Subdivision 615‑B—Further requirements for choosing to obtain roll‑overs
615‑15 Interposed company must own all the original interests
615‑20 Requirements relating to your interests in the original entity
615‑25 Requirements relating to the interposed company
615‑30 Interposed company must make a particular choice
615‑35 ADI restructures—disregard certain preference shares
Subdivision 615‑C—Consequences of roll‑overs
615‑40 CGT consequences
615‑45 Additional consequences—deferral of profit or loss
615‑50 Trading stock
615‑55 Revenue assets
615‑60 Disregard CGT exemption for trading stock
Subdivision 615‑D—Consequences for the interposed company
615‑65 Consequences for the interposed company
Division 620—Assets of wound‑up corporation passing to corporation with not significantly different ownership
Subdivision 620‑A—Corporations covered by Subdivision 124‑I
Guide to Subdivision 620‑A
620‑5 What this Subdivision is about
Application and object of this Subdivision
620‑10 Application
620‑15 Object
CGT consequences
620‑20 Disregard body’s capital gains and losses from CGT assets
620‑25 Cost base and pre‑CGT status of CGT asset for company
Consequences for depreciating assets
620‑30 Roll‑over relief for balancing adjustment events
Consequences for trading stock
620‑40 Body taken to have sold trading stock to company
Consequences for revenue assets
620‑50 Body taken to have sold revenue assets to company
Part 3‑90—Consolidated groups
Division 700—Guide and objects
Guide
700‑1 What this Part is about
700‑5 Overview of this Part
Objects
700‑10 Objects of this Part
Division 701—Core rules
Common rule
701‑1 Single entity rule
Head company rules
701‑5 Entry history rule
701‑10 Cost to head company of assets of joining entity
701‑15 Cost to head company of membership interests in entity that leaves group
701‑20 Cost to head company of assets consisting of certain liabilities owed by entity that leaves group
701‑25 Tax‑neutral consequence for head company of ceasing to hold assets when entity leaves group
Entity rules
701‑30 Where entity not subsidiary member for whole of income year
701‑35 Tax‑neutral consequence for entity of ceasing to hold assets when it joins group
701‑40 Exit history rule
701‑45 Cost of assets consisting of liabilities owed to entity by members of the group
701‑50 Cost of certain membership interests of which entity becomes holder on leaving group
Supporting provisions
701‑55 Setting the tax cost of an asset
701‑56 Application of subsection 701‑55(6)
701‑58 Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule
701‑60 Tax cost setting amount
701‑60A Tax cost setting amount for asset emerging when entity leaves group
701‑61 Assets in relation to Division 230 financial arrangement—head company’s assessable income or deduction
701‑63 Right to future income and WIP amount asset
701‑65 Net income and losses for trusts and partnerships
701‑67 Assets in this Part are CGT assets, etc.
Exceptions
701‑70 Adjustments to taxable income where identities of parties to arrangement merge on joining group
701‑75 Adjustments to taxable income where identities of parties to arrangement re‑emerge on leaving group
701‑80 Accelerated depreciation
701‑85 Other exceptions etc. to the rules
Division 703—Consolidated groups and their members
Guide to Division 703 54
703‑1 What this Division is about
Basic concepts
703‑5 What is a consolidated group?
703‑10 What is a consolidatable group?
703‑15 Members of a consolidated group or consolidatable group
703‑20 Certain entities that cannot be members of a consolidated group or consolidatable group
703‑25 Australian residence requirements for trusts
703‑30 When is one entity a wholly‑owned subsidiary of another?
703‑33 Transfer time for sale of shares in company
703‑35 Treating entities as wholly‑owned subsidiaries by disregarding employee shares
703‑37 Disregarding certain preference shares following an ADI restructure
703‑40 Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries
703‑45 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
703‑50 Choice to consolidate a consolidatable group
Consolidated group created when MEC group ceases to exist
703‑55 Creating consolidated groups from certain MEC groups
Notice of events affecting consolidated group
703‑58 Notice of choice to consolidate
703‑60 Notice of events affecting consolidated group
Effects of choice to continue group after shelf company becomes new head company
703‑65 Application
703‑70 Consolidated group continues in existence with interposed company as head company and original entity as a subsidiary member
703‑75 Interposed company treated as substituted for original entity at all times before the completion time
703‑80 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 75
705‑1 What this Division is about
Subdivision 705‑A—Basic case: a single entity joining an existing consolidated group
Guide to Subdivision 705‑A
705‑5 What this Subdivision is about
Application and object
705‑10 Application and object of this Subdivision
705‑15 Cases where this Subdivision does not have effect
Tax cost setting amount for assets that joining entity brings into joined group
705‑20 Tax cost setting amount worked out under this Subdivision
705‑25 Tax cost setting amount for retained cost base assets
705‑27 Reduction in tax cost setting amount that exceeds market value of certain retained cost base assets
705‑30 What is the joining entity’s terminating value for an asset?
705‑35 Tax cost setting amount for reset cost base assets
705‑40 Tax cost setting amount for reset cost base assets held on revenue account etc.
705‑45 Reduction in tax cost setting amount for accelerated depreciation assets
705‑47 Reduction in tax cost setting amount for some privatised assets
705‑55 Order of application of sections 705‑40, 705‑45 and 705‑47
705‑56 Modification for tax cost setting in relation to finance leases
705‑57 Adjustment to tax cost setting amount where loss of pre‑CGT status of membership interests in joining entity
705‑58 Assets and liabilities not set off against each other
705‑59 Exception: treatment of linked assets and liabilities
How to work out the allocable cost amount
705‑60 What is the joined group’s allocable cost amount for the joining entity?
705‑62 No double counting of amounts in allocable cost amount
705‑65 Cost of membership interests in the joining entity—step 1 in working out allocable cost amount
705‑70 Liabilities of the joining entity—step 2 in working out allocable cost amount
705‑75 Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount
705‑76 Liability arising from transfer or assignment of securitised assets
705‑80 Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount
705‑85 Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount
705‑90 Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount
705‑93 If pre‑joining time roll‑over from foreign resident company or head company—step 3A in working out allocable cost amount
705‑95 Pre‑joining time distributions out of certain profits—step 4 in working out allocable cost amount
705‑100 Losses accruing to joined group before joining time—step 5 in working out allocable cost amount
705‑105 Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount
705‑110 If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount
705‑115 If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount
How to work out a pre‑CGT factor for assets of joining entity
705‑125 Pre‑CGT proportion for joining entity
Subdivision 705‑B—Case of group formation
Guide to Subdivision 705‑B
705‑130 What this Subdivision is about
Application and object
705‑135 Application and object of this Subdivision
Modified application of Subdivision 705‑A
705‑140 Subdivision 705‑A has effect with modifications
705‑145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members
705‑147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members
705‑155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests
705‑160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members
705‑163 Modified application of section 705‑57
Subdivision 705‑C—Case where a consolidated group is acquired by another
Guide to Subdivision 705‑C
705‑170 What this Subdivision is about
Application and object
705‑175 Application and object of this Subdivision
Modified application of Division 701 in relation to acquired group etc.
705‑180 Modifications of Division 701
Modified application of Subdivision 705‑A in relation to acquiring group
705‑185 Subdivision 705‑A has effect with modifications
Modifications of Subdivision 705‑A for the purposes of this Subdivision
705‑195 Modified application of subsection 705‑65(6)
705‑200 Modified application of section 705‑85
Subdivision 705‑D—Where multiple entities are linked by membership interests
Guide to Subdivision 705‑D
705‑210 What this Subdivision is about
Application and object
705‑215 Application and object of this Subdivision
Modified application of Subdivision 705‑A
705‑220 Subdivision 705‑A has effect with modifications
705‑225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities
705‑227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities
705‑230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests
705‑235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities
705‑240 Modified application of section 705‑57
Subdivision 705‑E—Adjustments for errors etc.
Guide to Subdivision 705‑E
705‑300 What this Subdivision is about
Operative provisions
705‑305 Object of this Subdivision
705‑310 Operation of Part IVA of the Income Tax Assessment Act 1936
705‑315 Errors that attract special adjustment action
705‑320 Tax cost setting amounts taken to be correct
Division 707—Losses for head companies when entities become members etc.
Subdivision 707‑A—Transfer of losses to head company
Guide to Subdivision 707‑A
707‑100 What this Subdivision is about
707‑105 Who can utilise the loss?
Objects
707‑110 Objects of this Subdivision
Application
707‑115 What losses this Subdivision applies to
Transfer of loss from joining entity to head company
707‑120 Transfer of loss from joining entity to head company
707‑125 Modified business continuity test for companies’ post‑1999 losses
707‑130 Modified pattern of distributions test
707‑135 Transferring loss transferred to joining entity because business continuity test was satisfied
Effect of transfer of loss
707‑140 Effect of transfer of loss
Cancelling the transfer of the loss
707‑145 Cancelling the transfer of the loss
What happens if the loss is not transferred?
707‑150 Loss cannot be utilised for income year ending after the joining time
Subdivision 707‑B—Can a transferred loss be utilised?
Guide to Subdivision 707‑B
707‑200 What this Subdivision is about
Operative provisions
707‑205 Modified period for test for maintaining same ownership
707‑210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier
Subdivision 707‑C—Amount of transferred losses that can be utilised
Guide to Subdivision 707‑C
707‑300 What this Subdivision is about
Object
707‑305 Object of this Subdivision
How much of a transferred loss can be utilised?
707‑310 How much of a transferred loss can be utilised?
707‑315 What is a bundle of losses?
707‑320 What is the available fraction for a bundle of losses?
707‑325 Modified market value of an entity becoming a member of a consolidated group
707‑330 Losses transferred from former head company
707‑335 Limit on utilising transferred losses if circumstances change during income year
707‑340 Utilising transferred losses while exempt income remains
707‑345 Other provisions are subject to this Subdivision
Subdivision 707‑D—Special rules about losses
707‑400 Head company’s business before and after consolidation not compared
707‑410 Exit history rule does not treat entity as having made a loss
707‑415 Application of losses with nil available fraction for certain purposes
Division 709—Other rules applying when entities become subsidiary members etc.
Subdivision 709‑A—Franking accounts
Guide to Subdivision 709‑A
709‑50 What this Subdivision is about
Object
709‑55 Object of this Subdivision
Treatment of franking accounts at joining time
709‑60 Nil balance franking account for joining entity
Treatment of subsidiary member’s franking account
709‑65 Subsidiary member’s franking account does not operate
Treatment of head company’s franking account
709‑70 Credits arising in head company’s franking account
709‑75 Debits arising in head company’s franking account
Franking distributions by subsidiary member
709‑80 Subsidiary member’s distributions on employee shares and certain preference shares taken to be distributions by the head company
709‑85 Non‑share distributions by subsidiary members taken to be distributions by head company
709‑90 Subsidiary member’s distributions to foreign resident taken to be distributions by head company
Payment of group liability by former subsidiary member
709‑95 Payment of group liability by former subsidiary member
709‑100 Refund of income tax to former subsidiary member
Subdivision 709‑B—Imputation issues
Guide to Subdivision 709‑B
709‑150 What this Subdivision is about
Operative provisions
709‑155 Testing consolidated groups
709‑160 Subsidiary member is exempting entity
709‑165 Subsidiary member is former exempting entity
709‑170 Head company and subsidiary are exempting entities
709‑175 Head company is former exempting entity
Subdivision 709‑C—Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group
Guide to Subdivision 709‑C
709‑180 What this Subdivision is about
709‑185 Joining entity’s excess franking deficit tax offsets transferred to head company
709‑190 Exit history rule not to treat leaving entity as having a franking deficit tax offset excess
Subdivision 709‑D—Deducting bad debts
Guide to Subdivision 709‑D
709‑200 What this Subdivision is about
Application and object
709‑205 Application of this Subdivision
709‑210 Object of this Subdivision
Limit on deduction of bad debt
709‑215 Limit on deduction of bad debt
Extension of Subdivision to debt/equity swap loss
709‑220 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 711 218
711‑1 What this Division is about
Application and object of this Division
711‑5 Application and object of this Division
Tax cost setting amount for membership interests etc.
711‑10 Tax cost setting amount worked out under this Division
711‑15 Tax cost setting amount where no multiple exit
711‑20 What is the old group’s allocable cost amount for the leaving entity?
711‑25 Terminating values of the leaving entity’s assets—step 1 in working out allocable cost amount
711‑30 What is the head company’s terminating value for an asset?
711‑35 If head company becomes entitled to certain deductions—step 2 in working out allocable cost amount
711‑40 Liabilities owed to the leaving entity by members of the old group—step 3 in working out allocable cost amount
711‑45 Liabilities etc. owed by the leaving entity—step 4 in working out allocable cost amount
711‑46 Liability arising from transfer or assignment of securitised assets
711‑55 Tax cost setting amount for membership interests where multiple exit
711‑65 Membership interests treated as having been acquired before 20 September 1985
711‑70 Additional integrity rule if membership interests treated as having been acquired before 20 September 1985 under section 711‑65—application of Division 149 to head company
711‑75 Additional integrity rule if membership interests treated as having been acquired before 20 September 1985 under section 711‑65—application of CGT event K6
Division 713—Rules for particular kinds of entities
Subdivision 713‑A—Trusts
Working out a joined group’s allocable cost amount for a joining trust
713‑20 Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests
713‑25 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 non‑fixed trust
713‑50 Factors to consider
Subdivision 713‑C—Some unit trusts treated like head companies of consolidated groups
Guide to Subdivision 713‑C
713‑120 What this Subdivision is about
Object of this Subdivision
713‑125 Object of this Subdivision
Choice to form a consolidated group
713‑130 Choosing to form a consolidated group
Effects of choice
713‑135 Effects of choice
713‑140 Modifications of the applied law
Subdivision 713‑E—Partnerships
Guide to Subdivision 713‑E
713‑200 What this Subdivision is about
Objects
713‑205 Objects of this Subdivision
Partnership cost setting interests etc.
713‑210 Partnership cost setting interests
713‑215 Terminating value for partnership cost setting interest
Setting tax cost of partnership cost setting interests
713‑220 Set tax cost of partnership cost setting interests if partner joins consolidated group
713‑225 Tax cost setting amount for partnership cost setting interest
Special rules where partnership joins consolidated group
713‑235 Partnership joins group—set tax cost of partnership assets
713‑240 Partnership joins group—tax cost setting amount for partnership asset
Special rules where partnership leaves consolidated group
713‑250 Partnership leaves group—standard provisions modified
713‑255 Partnership leaves group—tax cost setting amount for partnership cost setting interests
713‑260 Partnership leaves group—tax cost setting amount for assets consisting of being owed certain liabilities
713‑265 Partnership leaves group—adjustments to allocable cost amount of partner who also leaves group
Subdivision 713‑L—Life insurance companies
Guide to Subdivision 713‑L
713‑500 What this Subdivision is about
General modifications for life insurance companies
713‑505 Head company treated as a life insurance company
713‑510 Certain subsidiaries of life insurance companies cannot be members of consolidated group
713‑510A Disregard single entity rule in working out certain amounts in respect of life insurance company
Life insurance companies’ liabilities on joining consolidated group
713‑511 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
713‑515 Certain assets taken to be retained cost base assets where life insurance company joins group
713‑520 Valuing certain liabilities where life insurance company joins group
713‑525 Obligation to value certain assets and liabilities at joining time
Losses of life insurance companies joining consolidated group
713‑530 Treatment of certain losses of life insurance company
Losses of life insurance companies’ subsidiaries joining consolidated group
713‑535 Losses of entities whose membership interests are complying superannuation assets of life insurance company
713‑540 Losses of entities whose membership interests are segregated exempt assets of life insurance company
Imputation rules for life insurance companies joining consolidated group
713‑545 Treatment of franking surplus in franking account of life insurance subsidiary joining group
713‑550 Treatment of head company’s franking account after joining
Liabilities for life insurance companies leaving consolidated group
713‑565 Treatment of certain liabilities for income year when life insurance company leaves consolidated group
Losses for life insurance companies leaving consolidated group
713‑570 Certain losses transferred to leaving company
Tax cost setting rules for life insurance companies leaving consolidated group
713‑575 Terminating value of certain assets where life insurance company leaves group
713‑580 Valuing certain liabilities where life insurance company leaves group
713‑585 Obligation to value certain assets and liabilities at leaving time
Subdivision 713‑M—General insurance companies
Guide to Subdivision 713‑M
713‑700 What this Subdivision is about
Tax cost setting rules for general insurance companies joining consolidated group
713‑705 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
713‑710 Treatment of liabilities and reserves for income year when general insurance company joins or leaves group
713‑715 If general insurance company joins consolidated group
713‑720 If general insurance company leaves consolidated group
713‑725 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 715‑A—Treatment of unrealised losses existing when ownership or control of a company changes before or during consolidation
Object
715‑15 Object of this Subdivision
Effect on Subdivision 165‑CC of a company becoming a member of a consolidated group
715‑25 Subdivision 165‑CC stops applying to earlier changeover time
715‑30 Meaning of 165‑CC tagged asset
715‑35 Meaning of final RUNL
165‑CC tagged assets that affect tax cost setting amounts
715‑50 Step 1 amount is reduced if membership interest in subsidiary member is 165‑CC tagged asset and business continuity test is failed
715‑55 Step 2 amount is affected if liability of subsidiary member is 165‑CC tagged asset of another group member and business continuity test is failed
165‑CC tagged assets that form loss denial pools of head company when consolidated group is formed
715‑60 Assets that the head company already owns
715‑70 Assets of subsidiary member that become those of head company
How Subdivision 165‑CC applies to consolidated groups
715‑75 Extension of single entity rule and entry history rule
Effect on Subdivision 165‑CC of entity leaving consolidated group
715‑80 Application of sections 715‑85 to 715‑110
715‑85 First changeover time for leaving company at or after leaving time
715‑90 How business continuity test applies if leaving time is changeover time for leaving company
715‑95 If ownership and control of leaving entity have not changed since head company’s last changeover time
715‑100 First choice: adjustable values of leaving assets reduced to nil
715‑105 Second choice: head company’s final RUNL applied in reducing adjustable values of leaving assets that are loss assets
715‑110 Third choice: loss denial pool of leaving entity created
Effect of assets in loss denial pool of head company becoming assets of leaving entity
715‑120 What happens
715‑125 First choice: adjustable values of leaving assets reduced to nil
715‑130 Second choice: pool’s loss denial balance applied in reducing adjustable values of leaving assets that are loss assets
715‑135 Third choice: loss denial pool of leaving entity created
Effect of first and second choices on various kinds of assets
715‑145 Effect of choice on adjustable value of leaving asset
General provisions about loss denial pools
715‑155 When asset leaves pool
715‑160 How loss denial balance is applied to losses realised on assets in pool
715‑165 When pool ceases to exist
Choices under this Subdivision
715‑175 When choice must be made
715‑180 Head company to notify leaving entity of choice
715‑185 Leaving entity may choose to cancel loss denial pool by reducing adjustable values of assets in the pool
Subdivision 715‑B—How Subdivision 165‑CD applies to consolidated groups and leaving entities
How Subdivision 165‑CD applies to consolidated groups
715‑215 Extension of single entity rule and entry history rule
715‑225 Working out adjusted unrealised loss using individual asset method
715‑230 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715‑H
How Subdivision 165‑CD applies to leaving entity that is a company
715‑240 Application of sections 715‑245 to 715‑260
715‑245 If ownership or control of leaving entity has altered since head company’s last alteration time or formation of group
715‑250 If head company has had an alteration time but ownership and control of leaving entity have not altered since
715‑255 Consequences if leaving entity is a loss company at the leaving time
715‑260 If neither of sections 715‑245 and 715‑250 applies
715‑265 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 165‑CD applies to leaving entity that is a trust
715‑270 Subdivision 165‑CD applies
Subdivision 715‑C—Common rules for the purposes of Subdivisions 715‑A and 715‑B
715‑290 Additional assumptions to be made when using reference time
Subdivision 715‑D—Treatment of company’s deferred losses under Subdivision 170‑D on joining a consolidated group
Key terminology
715‑310 What is a 170‑D deferred loss, and when it revives
Deferred loss on 165‑CC tagged asset
715‑355 Head company’s own deferred losses at formation time
715‑360 Deferred losses brought in by subsidiary member
715‑365 How loss denial balance is applied when 170‑D deferred loss revives
Subdivision 715‑E—Interactions with Division 775 (Foreign currency gains and losses)
715‑370 Cost setting—reference time for determining currency exchange rate effect
Subdivision 715‑F—Interactions with Division 230 (financial arrangements)
715‑375 Cost setting on joining—amount of liability that is Division 230 financial arrangement
715‑378 Cost setting on joining—head company’s right to receive or obligation to provide payment
715‑379 Cost setting on leaving—amount of intragroup liability that is Division 230 financial arrangement
715‑379A Cost setting on leaving—head company’s or leaving entity’s right to receive or obligation to provide payment
715‑380 Exit history rule not to affect certain matters related to Division 230 financial arrangements
715‑385 Exit history rule and elective methods applying to Division 230 financial arrangements
Subdivision 715‑G—How value shifting rules apply to a consolidated group
715‑410 Extension of single entity rule and entry history rule
715‑450 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715‑H
Subdivision 715‑H—Cancelling loss on realisation event for direct or indirect interest in a member of a consolidated group
715‑610 Cancellation of loss
715‑615 Exception for interests in entity leaving consolidated group
715‑620 Exception if loss attributable to certain matters
Subdivision 715‑J—Entry history rule and choices
Head company’s choice overriding entry history rule
715‑660 Head company’s choice overriding entry history rule
Choices head company can make ignoring entry history rule to override inconsistencies
715‑665 Head company’s choice to override inconsistency
Choices with ongoing effect
715‑670 Ongoing effect of choices made by entities before joining group
715‑675 Head company adopting choice with ongoing effect
Subdivision 715‑K—Exit history rule and choices
Choices leaving entity can make ignoring exit history rule
715‑700 Choices leaving entity can make ignoring exit history rule
Choices leaving entity can make ignoring exit history rule to overcome inconsistencies
715‑705 Choices leaving entity can make ignoring exit history rule to overcome inconsistencies
Subdivision 715‑U—Effect on conduit foreign income
715‑875 Extension of single entity rule and entry history rule
715‑880 No CFI for leaving entity
Subdivision 715‑V—Entity ceasing to be exempt from income tax on becoming subsidiary member of consolidated group
715‑900 Transition time taken to be just before joining time
Subdivision 715‑W—Effect on arrangements where CGT roll‑overs are obtained
715‑910 Effect on restructures—original entity becomes a subsidiary member
715‑915 Effect on restructures—original entity is a head company
715‑920 Effect on restructures—original entity is a head company that becomes a subsidiary member of another group
715‑925 Effect on restructures—original entity ceases being a subsidiary member
Division 716—Miscellaneous special rules
Subdivision 716‑A—Assessable income and deductions spread over several membership or non‑membership periods
Guide to Subdivision 716‑A
716‑1 What this Division is about
Operative provisions
716‑15 Assessable income spread over 2 or more income years
716‑25 Deductions spread over 2 or more income years
716‑70 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
716‑75 Application
716‑80 Head company’s assessable income and deductions
716‑85 Entity’s assessable income and deductions for a non‑membership period
716‑90 Entity’s share of assessable income or deductions of partnership or trust
716‑95 Special rule if not all partnership or trust’s assessable income or deductions taken into account in working out amount
716‑100 Spreading period
Subdivision 716‑E—Tax cost setting for exploration and prospecting assets
716‑300 Prime cost method of working out decline in value
Subdivision 716‑G—Low‑value and software development pools
Assets in joining entity’s low‑value pool
716‑330 Head company’s deductions for decline in value of assets in joining entity’s low‑value pool
Entity leaving group with asset allocated to head company’s low‑value pool
716‑335 Entity leaving group with asset allocated to head company’s low‑value pool
Depreciating assets arising from expenditure in joining entity’s software development pool
716‑340 Depreciating assets arising from expenditure in joining entity’s software development pool
Software development pools if entity leaves consolidated group
716‑345 Head company taken not to have incurred expenditure
Subdivision 716‑S—Miscellaneous consequences of tax cost setting
716‑400 Tax cost setting and bad debts
716‑440 Membership interests in joining entity not subject to CGT under Division 855—foreign entity ceasing to hold interests
Subdivision 716‑V—Research and Development
716‑500 Head company bound by agreements binding on subsidiary members
716‑505 History for entitlement to tax offset: joining entity
716‑510 History for entitlement to tax offset: leaving entity
Subdivision 716‑Z—Other
716‑800 Allocating amounts to periods if head company and subsidiary member have different income years
716‑850 Grossing up threshold amounts for periods of less than 365 days
716‑855 Working out the cost base or reduced cost base of a pre‑CGT asset after certain roll‑overs
716‑860 CGT event straddling joining or leaving time
Division 717—International tax rules
Subdivision 717‑A—Foreign income tax offsets
717‑1 What this Subdivision is about
Object
717‑5 Object of this Subdivision
Foreign income tax on amounts in head company’s assessable income
717‑10 Head company taken to be liable for subsidiary member’s foreign income tax
Subdivision 717‑D—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: entry rules
Guide to Subdivision 717‑D
717‑200 What this Subdivision is about
Object
717‑205 Object of this Subdivision
Transfers
717‑210 Attribution surpluses
717‑220 FIF surpluses
717‑227 Deferred attribution credits
Subdivision 717‑E—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: exit rules
Guide to Subdivision 717‑E
717‑235 What this Subdivision is about
Object
717‑240 Object of this Subdivision
Transfers
717‑245 Attribution surpluses
717‑255 FIF surpluses
717‑262 Deferred attribution credits
Subdivision 717‑O—Offshore banking units
Guide to Subdivision 717‑O
717‑700 What this Subdivision is about
717‑705 Object of this Subdivision
717‑710 Head company treated as OBU
Division 719—MEC groups
Subdivision 719‑A—Modified application of Part 3‑90 to MEC groups
719‑2 Modified application of Part 3‑90 to MEC groups
Subdivision 719‑B—MEC groups and their members
719‑4 What this Subdivision is about
Basic concepts
719‑5 What is a MEC group?
719‑10 What is a potential MEC group?
719‑15 What is an eligible tier‑1 company?
719‑20 What is a top company and a tier‑1 company?
719‑25 Head company, subsidiary members and members of a MEC group
719‑30 Treating entities as wholly‑owned subsidiaries by disregarding employee shares
719‑35 Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries
719‑40 Special conversion event—potential MEC group
719‑45 Application of sections 703‑20 and 703‑25
Choice to consolidate a potential MEC group
719‑50 Eligible tier‑1 companies may choose to consolidate a potential MEC group
719‑55 When choice starts to have effect
Provisional head company
719‑60 Appointment of provisional head company
719‑65 Qualifications for the provisional head company of a MEC group
719‑70 Income year of new provisional head company to be the same as that of former provisional head company
Head company
719‑75 Head company
Notice of events affecting group
719‑76 Notice of choice to consolidate
719‑77 Notice in relation to new eligible tier‑1 members etc.
719‑78 Notice of special conversion event
719‑79 Notice of appointment of provisional head company after formation of group
719‑80 Notice of events affecting MEC group
Effects of change of head company
719‑85 Application
719‑90 New head company treated as substituted for old head company at all times before the transition time
719‑95 No consequences of old head company becoming, and new head company ceasing to be, subsidiary member of the group
Subdivision 719‑BA—Group conversions involving MEC groups
719‑120 Application
719‑125 Head company of new group retains history of head company of old group
719‑130 Provisions of this Part not to apply to conversion
719‑135 Provisions of this Part applying to conversion despite section 719‑130
719‑140 Other provisions of this Part not applying to conversion
Subdivision 719‑C—MEC group cost setting rules: joining cases
Guide to Subdivision 719‑C
719‑150 What this Subdivision is about
Application and object
719‑155 Object of this Subdivision
Modified application of tax cost setting rules for joining
719‑160 Tax cost setting rules for joining have effect with modifications
719‑165 Trading stock value and registered emissions unit value not set for assets of eligible tier‑1 companies
719‑170 Modified effect of subsections 705‑175(1) and 705‑185(1)
Subdivision 719‑F—Losses
Guide to Subdivision 719‑F
719‑250 What this Subdivision is about
Maintaining the same ownership to be able to utilise loss
719‑255 Special rules
719‑260 Special test for utilising a loss because a company maintains the same owners
719‑265 What is the test company?
719‑270 Assumptions about the test company having made the loss for an income year
719‑275 Assumptions about nothing happening to affect direct and indirect ownership of the test company
719‑280 Assumptions about the test company failing to meet the conditions in section 165‑12
Business continuity test and change of head company
719‑285 Business continuity test and change of head company
Bundles of losses and their available fractions
719‑300 Application
719‑305 Subdivision 707‑C affects utilisation of losses made by ongoing head company while it was head company
719‑310 Adjustment of available fractions for bundles of losses previously transferred to ongoing head company
719‑315 Further adjustment of available fractions for all bundles
719‑320 Limit on utilising losses other than the prior group losses
719‑325 Cancellation of all losses in a bundle
Subdivision 719‑H—Imputation issues
719‑425 Guide to Subdivision 719‑H
Operative provisions
719‑430 Transfer of franking account balance on cessation event
719‑435 Distributions by subsidiary members of MEC group taken to be distributions by head company
Subdivision 719‑I—Bad debts
Guide to Subdivision 719‑I
719‑450 What this Subdivision is about
Maintaining the same ownership to be able to deduct bad debt
719‑455 Special test for deducting a bad debt because a company maintains the same owners
719‑460 Assumptions about nothing happening to affect direct and indirect ownership of the test company
719‑465 Assumptions about the test company failing to meet the conditions in section 165‑123
Subdivision 719‑J—MEC group cost setting rules: leaving cases
Guide to Subdivision 719‑J
719‑500 What this Subdivision is about
719‑505 Application and object of this Subdivision
719‑510 Modified operation of paragraphs 711‑15(1)(b) and (c)
Subdivision 719‑K—MEC group cost setting rules: pooling cases
Guide to Subdivision 719‑K
719‑550 What this Subdivision is about
719‑555 Application and object of this Subdivision
719‑560 Pooled interests
719‑565 Setting cost of reset interests
719‑570 Cost setting amount
Subdivision 719‑T—Interactions between this Part and other areas of the income tax law: special rules for MEC groups
How Subdivision 165‑CC applies to MEC groups
719‑700 Changeover times under section 165‑115C or 165‑115D
719‑705 Additional changeover times for head company of MEC group
How Subdivision 165‑CD applies to MEC groups
719‑720 Alteration times under section 165‑115L or 165‑115M
719‑725 Additional alteration times for head company of MEC group
719‑730 Some alteration times only affect interests in top company
719‑735 Some alteration times affect only pooled interests
719‑740 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
719‑755 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
719‑775 Cancellation of loss
719‑780 Exception for pooled interests in eligible tier‑1 companies
719‑785 Exception for interests in top company
719‑790 Exception for interests in entity leaving MEC group
719‑795 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 721 476
721‑1 What this Division is about
Object
721‑5 Object of this Division
When this Division operates
721‑10 When this Division operates
Joint and several liability of contributing member
721‑15 Head company and contributing members jointly and severally liable to pay group liability
721‑17 Notice of joint and several liability for general interest charge
721‑20 Limit on liability where group first comes into existence
Tax sharing agreements
721‑25 When a group liability is covered by a tax sharing agreement
721‑30 TSA contributing members liable for contribution amounts
721‑32 Notice of general interest charge liability under TSA
721‑35 When a TSA contributing member has left the group clear of the group liability
721‑40 TSA liability and group liability are linked
701‑67 Assets in this Part are CGT assets, etc.
Exceptions
701‑70 Adjustments to taxable income where identities of parties to arrangement merge on joining group
701‑75 Adjustments to taxable income where identities of parties to arrangement re‑emerge on leaving group
701‑80 Accelerated depreciation
701‑85 Other exceptions etc. to the rules
Common rule
701‑1 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
701‑5 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 701‑10 and tax loss history is affected by Division 707).
Note 3: Section 165‑212E overrides this rule for the purposes of the business continuity test.
701‑10 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 701‑1(1) (the single entity rule) did not apply.
Note: See subsection 705‑35(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.
701‑15 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 713‑E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership.
701‑20 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 701‑1(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 713‑E 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.
701‑25 Tax‑neutral 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 701‑1(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 tax‑neutral 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 70‑45 to value the trading stock at that time.
Setting value of registered emissions unit at tax‑neutral 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
701‑30 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 non‑membership period) during which the entity is not a subsidiary member of any *consolidated group.
Tax position of each non‑membership period to be worked out
(3) For every non‑membership 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 non‑membership 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 non‑membership period (if any); and
(c) so that each relevant item is either:
(i) allocated to only one of the non‑membership 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 716‑A (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 701‑40 (Exit history rule); and
• Subdivision 716‑A (about assessable income and deductions spread over several membership or non‑membership periods); and
• section 716‑850 (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 non‑membership 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 non‑membership 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 non‑membership period loss of that sort for the non‑membership 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 non‑membership period loss.
Utilisation and transfer of non‑membership 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 non‑membership period loss of that sort for any non‑membership period as if the non‑membership 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 205‑70 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 205‑70(1)(c) (about excess franking deficit tax offsets) for the current income year only if it has such an excess for the non‑membership 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 non‑membership period.
701‑35 Tax‑neutral 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 tax‑neutral 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 701‑30 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 70‑45 to value the trading stock at that time.
Setting value of registered emissions unit at tax‑neutral 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 701‑30 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 701A‑7 of the Income Tax (Transitional Provisions) Act 1997.
701‑40 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 701‑1(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 701‑1(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 701‑5 (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 701‑5 (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 701‑45).
701‑45 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 701‑1(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 701‑40 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 701‑30 (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 713‑E 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.
701‑50 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 713‑E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership.
Supporting provisions
701‑55 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 40‑A to 40‑D, sections 40‑425 to 40‑445 and Subdivisions 328‑D and 355‑E 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 40‑95(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 40‑95(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 70‑E) 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 3‑1 or 3‑3 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 230‑C (fair value method), Subdivision 230‑D (foreign exchange retranslation method) or Subdivision 230‑F (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 230‑230, 230‑280 or 230‑420) 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 25‑95 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 8‑1, 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 716‑S.
701‑56 Application of subsection 701‑55(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 701‑1(1) (the single entity rule) did not apply.
(1A) Subsection (2) applies only to the extent necessary for the purposes of subsection 701‑55(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 701‑5 (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 701‑55(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 40‑F (Primary production depreciating assets);
(b) Subdivision 40‑G (Capital expenditure of primary producers and other landholders);
(c) Subdivision 40‑H (Capital expenditure that is immediately deductible);
(d) Subdivision 40‑I (Capital expenditure that is deductible over time);
(e) Subdivision 40‑J (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).
701‑58 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 701‑1(1) (the single entity rule), the entity held the asset at the joining time; and
(c) taking into account the operation of subsection 701‑1(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 701‑55(2), (3) (3A),, (4), (5), (5A), (5C), (5D) and (6) in relation to the asset at and after the joining time.
701‑60 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 701‑10 (Cost to head company of assets of joining entity) | the amount worked out in accordance with Division 705 |
2 | section 701‑15 (Cost to head company of membership interests in entity that leaves group) | the amount worked out in accordance with section 711‑15 or 711‑55 |
3 | section 701‑20 (Cost to head company of assets consisting of certain liabilities owed by entity that leaves group) | the *market value of the asset |
3A | section 701‑45 (Cost of assets consisting of liabilities owed to entity by members of the group) | the amount worked out in accordance with section 701‑60A |
4 | section 701‑50 (Cost of certain membership interests of which entity becomes holder on leaving group) | the amount worked out in accordance with section 711‑55 |
Note 1: The tax cost setting amount of certain interests in partnership assets is worked out under Subdivision 713‑E.
Note 2: The tax cost setting amount of certain assets of a life insurance company is worked out under Subdivision 713‑L.
701‑60A Tax cost setting amount for asset emerging when entity leaves group
(1) This section applies for the purpose of working out the *tax cost setting amount of an asset if:
(a) an entity (the leaving entity) ceases to be a *subsidiary member of a *consolidated group (the old group) at a time (the leaving time); and
(b) the asset’s tax cost is set under section 701‑45 because it consists of a liability (the corresponding liability) owed to the leaving entity.
(2) The *tax cost setting amount is:
(a) unless subsection (3) or (4) applies—the *market value of the asset at the leaving time; or
(b) if subsection (3) applies—nil; or
(c) if subsection (4) applies—the least of the following amounts:
(i) the tax cost setting amount mentioned in paragraph (4)(c);
(ii) if the *head company of the old group was entitled to a deduction in respect of the asset for an income year ending on or before the leaving time—the tax cost setting amount mentioned in paragraph (4)(c) reduced by the amount of the deduction;
(iii) the market value of the asset at the leaving time.
(3) This subsection applies if:
(a) the corresponding liability is not a debt; and
(b) either:
(i) at the time the corresponding liability arose, the entity to whom the corresponding liability was owed and the entity owing the corresponding liability were both *members of the old group; or
(ii) if subparagraph (i) does not apply—after the time the corresponding liability arose, a member of the old group *acquired the asset or started to have the corresponding liability.
(4) This subsection applies if:
(a) the corresponding liability is not a debt; and
(b) at the time the corresponding liability arose, the entity to whom the corresponding liability was owed and the entity owing the corresponding liability were not both members of the old group; and
(c) the *tax cost of the asset was set under section 701‑10 at the time an entity became a *subsidiary member of the old group, at the asset’s *tax cost setting amount (whether or not section 701‑58 applied in relation to the setting of that tax cost).
701‑61 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 701‑55(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 701‑55(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 701‑55(5A) occurs; and
(b) each of the 3 subsequent income years.
701‑63 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 25‑95(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.
701‑65 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 701‑30(3) requires non‑membership 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.
701‑67 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
701‑70 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 701‑1(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 701‑30 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.
Pre‑joining time proportion of total arrangement deductions
(4) The amount is worked out using the formula:
where:
pre‑joining 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.
Pre‑joining time proportion of total arrangement assessable income
(6) The amount is worked out using the formula:
where:
pre‑joining 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 701‑30 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.
701‑75 Adjustments to taxable income where identities of parties to arrangement re‑emerge 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 701‑70(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 701‑1(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 701‑30 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.
Post‑leaving time proportion of total arrangement deductions
(4) The amount is worked out using the formula:
where:
post‑leaving 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).
Post‑leaving time proportion of total arrangement assessable income
(6) The amount is worked out using the formula:
where:
post‑leaving 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.
701‑80 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 701‑1(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 701‑1(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 40‑10(3) or 40‑12(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 701‑10 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 701‑1(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 40‑70(1) or 40‑75(1) that includes the asset’s *effective life with the rate that would apply under subsection 42‑160(1) or 42‑165(1) of this Act if it had not been amended by the New Business Tax System (Capital Allowances) Act 2001.
701‑85 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 701‑5 would otherwise have.
Division 703—Consolidated groups and their members
Guide to Division 703
703‑1 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 wholly‑owned 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
703‑5 What is a consolidated group?
703‑10 What is a consolidatable group?
703‑15 Members of a consolidated group or consolidatable group
703‑20 Certain entities that cannot be members of a consolidated group or consolidatable group
703‑25 Australian residence requirements for trusts
703‑30 When is one entity a wholly‑owned subsidiary of another?
703‑33 Transfer time for sale of shares in company
703‑35 Treating entities as wholly‑owned subsidiaries by disregarding employee shares
703‑37 Disregarding certain preference shares following an ADI restructure
703‑40 Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries
703‑45 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
703‑50 Choice to consolidate a consolidatable group
Consolidated group created when MEC group ceases to exist
703‑55 Creating consolidated groups from certain MEC groups
Notice of events affecting consolidated group
703‑58 Notice of choice to consolidate
703‑60 Notice of events affecting consolidated group
Effects of choice to continue group after shelf company becomes new head company
703‑65 Application
703‑70 Consolidated group continues in existence with interposed company as head company and original entity as a subsidiary member
703‑75 Interposed company treated as substituted for original entity at all times before the completion time
703‑80 Effects on the original entity’s tax position
Basic concepts
703‑5 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 703‑50 as the day on and after which a *consolidatable group is taken to be consolidated; or
(b) as described in section 703‑55 (about creating a consolidated group from a *MEC group).
Note: The day specified in a choice under section 703‑50 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 615‑30(2) and section 703‑70.
(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.
703‑10 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.
703‑15 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 703‑20) 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 *wholly‑owned 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 703‑20); 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 non‑profit 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 703‑25, if it is a trust; or (c) be a partnership | The entity must be a *wholly‑owned subsidiary of the head company of the group and, if there are interposed between them any entities, the set of requirements in section 703‑45, section 701C‑10 of the Income Tax (Transitional Provisions) Act 1997 or section 701C‑15 of that Act must be met |
703‑20 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 *non‑complying approved deposit fund or a *non‑complying 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 713‑510.
703‑25 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 |
703‑30 When is one entity a wholly‑owned subsidiary of another?
(1) One entity (the subsidiary entity) is a wholly‑owned 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 wholly‑owned subsidiaries of the holding entity; or
(c) the holding entity and one or more wholly‑owned subsidiaries of the holding entity.
(2) An entity (other than the subsidiary entity) is a wholly‑owned subsidiary of the holding entity if, and only if:
(a) it is a wholly‑owned subsidiary of the holding entity; or
(b) it is a wholly‑owned subsidiary of a wholly‑owned 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 wholly‑owned 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 703‑35); or
(aa) ownership of certain preference shares following an ADI restructure (see section 703‑37); or
(b) interposed trusts that are not fixed trusts (see section 703‑40).
(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.
703‑33 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 703‑30(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.
703‑35 Treating entities as wholly‑owned 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 *wholly‑owned subsidiary of an entity (the holding entity) at the time.
(3) The entity must be one that would be a *wholly‑owned 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 83A‑105(1)(a) and (b) and subsection 83A‑105(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.
703‑37 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 (Transfer and 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 *wholly‑owned subsidiary of another body corporate (the holding body) at the time.
(3) The body corporate (the preference‑share issuing body) must be one that would be a *wholly‑owned subsidiary of the holding body at the time if the *shares in the preference share‑issuing body that are to be disregarded under subsection (4) did not exist.
(4) Disregard a *share in the preference‑share issuing body if:
(a) a restructure instrument under Part 4A of the Financial Sector (Transfer and Restructure) Act 1999 is in force in relation to a non‑operating 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 non‑operating holding company; and
(c) the preference share‑issuing 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.
703‑40 Treating entities held through non‑fixed trusts as wholly‑owned 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 *wholly‑owned subsidiary of the *head company if the test entity would have been a wholly‑owned subsidiary of the head company had the interposed trust been a *fixed trust and all its objects been beneficiaries.
703‑45 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 703‑15(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
703‑50 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: The head company of the group must give the Commissioner a notice in the approved form containing information about the group (see sections 703‑58 and 703‑60).
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
703‑55 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 tier‑1 company just before the time; and
(b) the MEC group ceases to exist only because the company ceases to be an eligible tier‑1 company; and
(c) the company is a *head company as defined in section 703‑15 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
703‑58 Notice of choice to consolidate
(1) If a *consolidated group comes into existence on the day specified in a choice under section 703‑50, 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.
703‑60 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 703‑50; and
(b) the event happens before the relevant notice is given to the Commissioner under section 703‑58 (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 703‑55(1) because a *MEC group ceased to exist at that time; and
(b) the *MEC group came into existence under paragraph 719‑5(1)(a) because a choice under section 719‑50 is made after that time; and
(c) the event happens before the relevant notice is given to the Commissioner under section 719‑76 (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
703‑65 Application
Sections 703‑70 to 703‑80 set out the effects if a company (the interposed company) chooses under subsection 615‑30(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 roll‑over under Division 615 on an exchange of shares in the head company of a consolidated group for shares in the interposed company.
703‑70 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 703‑5(2) because the company referred to in subsection 615‑30(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 703‑80 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 701‑10 of the tax cost of assets of the original entity that become assets of the interposed company because of subsection 701‑1(1) (the single entity rule).
(4) To avoid doubt, subsection (3) does not affect the application of subsection 701‑1(1) (the single entity rule).
703‑75 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 701‑1 (Single entity rule); or
(b) section 701‑5 (Entry history rule); or
(c) one or more previous applications of this section; or
(d) section 719‑90 (about the effects of a change of head company of a MEC group); or
(e) section 719‑125 (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 701‑40 (Exit history rule); and
(b) a provision of this Act to which section 701‑40 is subject because of section 701‑85 (about exceptions to the core rules in Division 701).
Note: An example of provisions covered by paragraph (b) of this subsection is Subdivision 717‑E (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).
703‑80 Effects on the original entity’s tax position
In applying section 701‑30 to the original entity for the income year that includes the completion time, disregard a non‑membership period that starts before the completion time.
Note 1: Section 701‑30 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 703‑75 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 703‑75 and this section, the only tax payable by the original entity for the income year arises because of the application of section 701‑30 to non‑membership periods in the income year after the completion time.
Division 705—Tax cost setting amount for assets where entities become subsidiary members of consolidated groups
Guide to Division 705
705‑1 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
705‑A Basic case: a single entity joining an existing consolidated group
705‑B Case of group formation
705‑C Case where a consolidated group is acquired by another
705‑D Where multiple entities are linked by membership interests
705‑E Adjustments for errors etc.
Subdivision 705‑A—Basic case: a single entity joining an existing consolidated group
Guide to Subdivision 705‑A
705‑5 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
705‑10 Application and object of this Subdivision
705‑15 Cases where this Subdivision does not have effect
Tax cost setting amount for assets that joining entity brings into joined group
705‑20 Tax cost setting amount worked out under this Subdivision
705‑25 Tax cost setting amount for retained cost base assets
705‑27 Reduction in tax cost setting amount that exceeds market value of certain retained cost base assets
705‑30 What is the joining entity’s terminating value for an asset?
705‑35 Tax cost setting amount for reset cost base assets
705‑40 Tax cost setting amount for reset cost base assets held on revenue account etc.
705‑45 Reduction in tax cost setting amount for accelerated depreciation assets
705‑47 Reduction in tax cost setting amount for some privatised assets
705‑55 Order of application of sections 705‑40, 705‑45 and 705‑47
705‑56 Modification for tax cost setting in relation to finance leases
705‑57 Adjustment to tax cost setting amount where loss of pre‑CGT status of membership interests in joining entity
705‑58 Assets and liabilities not set off against each other
705‑59 Exception: treatment of linked assets and liabilities
How to work out the allocable cost amount
705‑60 What is the joined group’s allocable cost amount for the joining entity?
705‑62 No double counting of amounts in allocable cost amount
705‑65 Cost of membership interests in the joining entity—step 1 in working out allocable cost amount
705‑70 Liabilities of the joining entity—step 2 in working out allocable cost amount
705‑75 Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount
705‑76 Liability arising from transfer or assignment of securitised assets
705‑80 Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount
705‑85 Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount
705‑90 Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount
705‑93 If pre‑joining time roll‑over from foreign resident company or head company—step 3A in working out allocable cost amount
705‑95 Pre‑joining time distributions out of certain profits—step 4 in working out allocable cost amount
705‑100 Losses accruing to joined group before joining time—step 5 in working out allocable cost amount
705‑105 Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount
705‑110 If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount
705‑115 If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount
How to work out a pre‑CGT factor for assets of joining entity
705‑125 Pre‑CGT proportion for joining entity
Application and object
705‑10 Application and object of this Subdivision
Application
(1) This Subdivision has effect, subject to section 705‑15, for the head company core purposes set out in subsection 701‑1(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.
705‑15 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 705‑B 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 705‑C 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 705‑D 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
705‑20 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 701‑60 (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.
705‑25 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 pre‑paid 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 701‑5 (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 250‑E 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 250‑E 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) or (e) 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); or
(e) a *depreciating asset that the joining entity *holds as a result of a *balancing adjustment event mentioned in paragraph 417‑30(2)(b).
Note 1: There are some additional retained cost base assets for a joining entity that is a life insurance company: see Subdivision 713‑L. 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 705‑56(3)(b)).
705‑27 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 705‑25(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 104‑510(1)(b)). The amount of the capital gain might be reduced to nil.
(2) If:
(a) the requirements in subsection 701‑58(1) (intra‑group 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 705‑75(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.
705‑30 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 250‑E applies
(3A) If an asset of the joining entity is a *financial arrangement to which Subdivision 250‑E 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 250‑E.
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).
705‑35 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 705‑60; 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 705‑59 may affect how this section applies. In particular, that section may exclude the application of paragraph 705‑35(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 701‑1(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.
705‑40 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.
705‑45 Reduction in tax cost setting amount for accelerated depreciation assets
(1) 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 40‑10(3) or 40‑12(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 701‑80.
Note 2: Unlike the position with a reduction in tax cost setting amount under section 705‑40, the amount of the reduction is not re‑allocated among other assets.
(2) If:
(a) an asset of the joining entity is a *depreciating asset to which Division 40 applies; and
(b) either of the following has applied before the joining entity became a *subsidiary member for the purposes of working out the asset’s decline in value under Division 40:
(i) section 40‑82;
(ii) Subdivision 40‑BA of the Income Tax (Transitional Provisions) Act 1997; and
(c) the asset’s *tax cost setting amount would be greater than the joining entity’s *terminating value for the asset;
the asset’s tax cost setting amount is reduced so that it equals the terminating value.
Note 1: The provisions referred to in paragraph (b) provide for an accelerated decline in value of certain assets.
Note 2: Unlike the position with a reduction in tax cost setting amount under section 705‑40, the amount of the reduction is not re‑allocated among other assets.
705‑47 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 tax‑exempt entities that become taxable);
(b) former Subdivision 57‑I, and Subdivision 57‑J, 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 tax‑exempt entities that become taxable);
(ii) former Subdivision 57‑I, and Subdivision 57‑J, 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 705‑40, the amount of the reduction is not re‑allocated among other assets.
Note 2: Former section 61A of, or former Subdivision 57‑I or Subdivision 57‑J 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, roll‑over relief or section 701‑40 (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 701‑40).
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 715‑900 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 pre‑joining 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 pre‑joining taxable period.
(5) Another condition for subsection (2) not to apply is that:
(a) for at least some of the pre‑joining 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 58‑5(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.
705‑55 Order of application of sections 705‑40, 705‑45 and 705‑47
If more than one of sections 705‑40, 705‑45 and 705‑47 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 705‑40;
(ii) second, section 705‑45;
(iii) third, section 705‑47.
705‑56 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 701‑10).
(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 701‑10).
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 705‑70(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 701‑10); and
(b) the liability that is the lessee’s obligation to make lease payments is taken into account under subsection 705‑70(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 705‑35(1)(b) or (c); and
(b) the asset’s *tax cost setting amount is taken to be nil.
705‑57 Adjustment to tax cost setting amount where loss of pre‑CGT 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 *pre‑CGT 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 *pre‑CGT 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 pre‑CGT asset exceeded (the excess being the loss of pre‑CGT status adjustment amount) its cost base or reduced cost base just before it stopped being a pre‑CGT 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 701‑1(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 705‑40, 705‑45 or 705‑47) exceeds the joining entity’s *terminating value for the asset.
Loss of pre‑CGT 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 *pre‑CGT asset while the *member held the membership interest.
Loss of pre‑CGT 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 *pre‑CGT 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 pre‑CGT 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 *pre‑CGT 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 705‑40, 705‑45 or 705‑47) is instead the amount that would apply if, in working out the step 1 amount in the table in section 705‑60, the *cost base and *reduced cost base of the *membership interest were reduced by the sum of the loss of pre‑CGT status adjustment amounts for the membership interest and all other membership interests that have loss of pre‑CGT 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.
705‑58 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 705‑59.
705‑59 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 set‑off is to be recognised in those statements.
(3) If the set consists only of one reset cost base asset for the purposes of section 705‑35, 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 705‑70(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 705‑35(1)(c)) | only the difference (if any) is taken into account under subsection 705‑70(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 705‑35 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 705‑70(1) |
Note: Paragraph 705‑35(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 705‑35(1)(c)) | only the difference (if any) is taken into account under subsection 705‑70(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 705‑35 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 705‑70(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 705‑35(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 705‑35(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 705‑35(1)(b) to retained cost base assets in the set; this in turn may affect the application of CGT event L3.
Note 2: Paragraph 705‑35(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 705‑35(2) (assets that do not have a tax cost setting amount).
(7) This section does not affect the application of sections 705‑40, 705‑45 and 705‑47 (which adjust the tax cost setting amount for a reset cost base asset).
How to work out the allocable cost amount
705‑60 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 705‑65, 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 705‑70, 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 705‑90, 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 713‑25, 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 705‑93 (which is about pre‑joining time roll‑overs): (a) if the step 3A amount is a *deferred roll‑over 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 roll‑over 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 roll‑overs 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 705‑95, which is about pre‑joining 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 705‑100, 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 707‑A 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 705‑110, which is about losses that the joining entity transferred to the *head company under Subdivision 707‑A | 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 705‑115, 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.
705‑62 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 705‑10.
(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 705‑70(1));
(f) consideration received by the joining entity for issuing *membership interests in itself.
705‑65 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 705‑60, 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 713‑20 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 716‑855, if membership interests are pre‑CGT assets that have been subject to certain roll‑overs, the cost base and reduced cost base are worked out in the same way as if they were post‑CGT assets.
No indexation of cost base of pre‑CGT membership interests
(2) If the *membership interest is a *pre‑CGT 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 727‑615 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 165‑115ZD 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 165‑115ZD 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 110‑55(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 110‑55(7) (about certain distributions of pre‑acquisition profits), the reduced cost base is increased by the amount of that reduction.
Reduction in reduced cost base under subsection 165‑115ZA(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 165‑115ZA(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 705‑100; or
(ii) the step 6 amount under section 705‑110;
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.
Non‑membership equity interests
(6) For the purposes of this section, if at the joining time a *member of the joined group holds a *non‑membership equity interest in the joining entity, that non‑membership equity interest is treated as if it were a *membership interest in the joining entity.
705‑70 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 705‑60, 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 713‑L: see section 713‑520.
Exclusion for deferred tax liability
(1B) An amount is not to be added for an accounting liability that is an amount recorded in a deferred tax liability account in accordance with the joining entity’s *accounting principles for tax cost setting.
(1C) Subsection (1B) does not apply to an accounting liability that relates to an asset mentioned in paragraph 713‑515(1)(a) or (b) (certain assets of life insurance company).
Exclusion for deductible liability
(1AA) Subsection (1AB) applies if:
(a) the accounting liability is covered by subsection (1AC); and
(b) assuming that the *head company had made a payment to discharge the accounting liability to the extent that it is covered under that subsection just after the joining time, that payment would result in an amount equal to all or part of the accounting liability being a deduction to the head company of the group.
(1AB) An amount is not to be added for the accounting liability under subsection (1) to the extent of that deduction.
(1AC) A liability is covered by this subsection except to the extent that:
(a) any of the following provisions apply in relation to the liability:
(i) section 713‑520 (certain liabilities etc. of life insurance company that joins a consolidated group);
(ii) section 715‑375 (accounting liabilities that are, or are part of, a Division 230 financial arrangement held by an entity that joins a consolidated group); or
(b) section 713‑515 (certain assets taken to be retained cost base assets where life insurance company joins a consolidated group) applies in relation to an asset to which the liability relates; or
(c) the liability is any of the following:
(i) the outstanding claims liability of a *general insurance company, or a private health insurer (within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015), under *general insurance policies;
(ii) the unearned premium liability of a general insurance company, or a private health insurer (within the meaning of that Act), under general insurance policies;
(iii) the unexpired risk liability of a general insurance company, or a private health insurer (within the meaning of that Act), under general insurance policies; or
(d) the liability arises under any of the following:
(i) a *retirement village residence contract;
(ii) a *retirement village services contract.
(1AD) To avoid doubt, for the purposes of paragraph (1AC)(c), section 713‑710 (certain liabilities, reserves, costs etc. of general insurance company that joins or leaves a consolidated group) does not affect the amount of the liability.
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 705‑75 to 705‑85.
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.
Exclusion of amounts for certain securitisation liabilities
(4) An amount is not to be added for an accounting liability of the joining entity under subsection (1) if the accounting liability is covered under section 705‑76 (securitisation liabilities).
705‑75 Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount
Reduction for future deduction
(1A) Subsection (1) applies to an accounting liability to the extent that it is a liability of a kind described in:
(a) paragraph 705‑70(1AC)(c); or
(b) paragraph 705‑70(1AC)(d).
(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 705‑70(1) is reduced by the following amount:
where:
double‑counting adjustment means the amount of any reduction that has already occurred in the accounting liability under subsection 705‑70(1) to take account of the future availability of the deduction.
Reduction for intra‑group 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 705‑70(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 705‑65(2), (3), (3AA) and (3A)
(3) Subsections 705‑65(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 705‑65(1) to a *membership interest’s cost base or reduced cost base.
Application of subsection 705‑65(4)
(4) Subsection 705‑65(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 165‑115ZA(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 165‑115ZA(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 705‑100; or
(ii) the step 6 amount under section 705‑110;
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.
705‑76 Liability arising from transfer or assignment of securitised assets
This section covers an accounting liability (the securitisation liability) if the following circumstances exist:
(b) in working out the step 2 amount mentioned in subsection 705‑70(1) in relation to the joining entity, an amount would be added under that subsection for the securitisation liability (disregarding subsection 705‑70(4));
(c) the joining entity transferred or equitably assigned one or more assets (the underlying securitised assets) to another entity before the joining time;
(d) the securitisation liability:
(i) arose from the transfer or equitable assignment of the underlying securitised assets; and
(ii) is a liability of the joining entity at the joining time (according to the joining entity’s *accounting principles for tax cost setting);
(e) the other entity was established for the purpose of securitising assets;
(f) the underlying securitised assets were securitised in accordance with that purpose before the joining time;
(g) at the joining time the *market value of the joining entity’s interest in the underlying securitised assets is nil, or is substantially less than the amount of the securitisation liability.
705‑80 Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount
Application
(1A) This section applies to an accounting liability to the extent that it is a liability of a kind described in:
(a) paragraph 705‑70(1AC)(c); or
(b) paragraph 705‑70(1AC)(d).
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
(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 705‑70(1) includes income tax liabilities and steps 3 and 5 of the table in section 705‑60 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 705‑70(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.
705‑85 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 703‑35 in order for the joining entity to be a *wholly‑owned subsidiary of the *head company at the joining time, the step 2 amount worked out under section 705‑70 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 non‑membership equity interests and certain equity interests
(3) The step 2 amount worked out under section 705‑70 is increased by:
(a) the amount that would be the balance of the joining entity’s *non‑share capital account, assuming that:
(i) if the joining entity is not a company—the joining entity were a company; and
(ii) each *non‑membership 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 *non‑share equity interest in the joining entity; and
(iii) the non‑share equity interests (if any) mentioned in subparagraph (ii) were the only non‑share 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 703‑37 in order for the joining entity to be a *wholly‑owned subsidiary of the *head company at the joining time, the step 2 amount worked out under section 705‑70 is increased by the sum of the *market values of those shares.
705‑90 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 705‑60, 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 713‑25.
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.
(2B) Also, if an amount is not added under subsection 705‑70(1) for an accounting liability to an extent because of subsection 705‑70(1AB), the accounting liability is not to be taken into account, to that extent, in working out the undistributed profits.
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 gross‑up rate means the joining entity’s *corporate tax gross‑up rate for the income year that ends, or, if section 701‑30 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 701‑30 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 701‑30 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 non‑fixed trust, this subsection may involve determining how a power of appointment would have been exercised. Section 713‑50 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.
705‑93 If pre‑joining time roll‑over 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 705‑60, there is a step 3A amount if:
(a) before the joining time:
(i) there was a roll‑over under Subdivision 126‑B (a Subdivision 126‑B roll‑over) in relation to a *CGT event that happened in relation to an asset (the roll‑over asset); or
(ii) former section 160ZZO of the Income Tax Assessment Act 1936 applied in relation to a disposal (a section 160ZZO roll‑over) of an asset (also the roll‑over asset); and
(aa) at the joining time, as a result of the Subdivision 126‑B roll‑over or the section 160ZZO roll‑over, the roll‑over asset has:
(i) a *deferred roll‑over gain; or
(ii) a *deferred roll‑over loss; and
(b) the originating company in relation to the Subdivision 126‑B roll‑over, or the transferor in relation to the section 160ZZO roll‑over:
(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 126‑B roll‑over, or the transferee in relation to the section 160ZZO roll‑over:
(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 104‑182 were not satisfied at any time in relation to the other group between the Subdivision 126‑B roll‑over, or the section 160ZZO roll‑over, and the joining time; and
(e) the roll‑over asset is not a *pre‑CGT asset at the joining time; and
(f) the roll‑over asset becomes that of the head company of the joined group because subsection 701‑1(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 roll‑over gain or the *deferred roll‑over loss mentioned in paragraph (1)(aa).
705‑95 Pre‑joining 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 705‑60, 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 705‑90(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 705‑90(8)).
Note: As well as subsection 705‑90(7), paragraph 705‑90(9)(b) and subsection 705‑90(10) are relevant to working out whether or not profits accrued to the joined group before the joining time.
705‑100 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 705‑60, 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 705‑90(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 705‑60.
705‑105 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 705‑90, 705‑95, 705‑100 and 713‑25, the *head company is taken not to have held that membership interest, either directly or indirectly, before the market value time.
705‑110 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 705‑60, 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 705‑90(8)); and
(c) are transferred to the *head company under Subdivision 707‑A; and
(d) are not cancelled under section 707‑145.
705‑115 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 705‑60, 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 705‑90(7)).
(2) This subsection covers any deduction to which the *head company becomes entitled under section 701‑5 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 701‑1(1) (the single entity rule) applies; or
(b) to which section 110‑40 (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 705‑60.
(3) Subsection (2) does not cover a deduction under section 43‑15 (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 pre‑CGT factor for assets of joining entity
705‑125 Pre‑CGT proportion for joining entity
Object
(1) Because intra‑group *membership interests in the joining entity are disregarded under subsection 701‑1(1) (the single entity rule), the object of this section is to provide a mechanism to ensure that the benefit of the pre‑CGT 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 pre‑CGT status; and
(b) if the joining entity later ceases being a member of the group, attaching pre‑CGT status to that proportion of membership interests in it (see section 711‑65), subject to integrity rules (see section 711‑70).
How to work out pre‑CGT proportion
(2) The pre‑CGT 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 *pre‑CGT 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 705‑B—Case of group formation
Guide to Subdivision 705‑B
705‑130 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 705‑A, so that the amount reflects the cost to the group of acquiring the entity.
Table of sections
Application and object
705‑135 Application and object of this Subdivision
Modified application of Subdivision 705‑A
705‑140 Subdivision 705‑A has effect with modifications
705‑145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members
705‑147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members
705‑155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests
705‑160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members
705‑163 Modified application of section 705‑57
Application and object
705‑135 Application and object of this Subdivision
Application
(1) This Subdivision has effect for the head company core purposes set out in subsection 701‑1(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 705‑A: see paragraph 705‑15(a).
Object
(2) The object of this Subdivision is to modify the rules in Subdivision 705‑A (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 705‑A are applied will affect the tax cost setting amounts for the assets of the entities.
Modified application of Subdivision 705‑A
705‑140 Subdivision 705‑A has effect with modifications
(1) Subdivision 705‑A 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 705‑A is subject to modifications set out in this Subdivision.
705‑145 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 705‑65(1) (step 1 of allocable cost amount) in working out the tax cost setting amount for assets of that other entity.
Note 1: Subsection 705‑65(1) adds together amounts worked out in accordance with section 705‑65 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 701‑15 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 705‑65(4) (which prevents the later operation of value shifting etc. provisions) still applies to the *membership interests.
Non‑membership equity interests
(5) For the purposes of this section, if, on becoming a *subsidiary member, an entity holds a *non‑membership equity interest in another entity that becomes a subsidiary member at the same time, that non‑membership equity interest is treated as if it were a *membership interest in that other entity.
705‑147 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 705‑93 (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 705‑93, 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 705‑93 for the purposes of this Subdivision, disregard paragraph 705‑93(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 705‑93.
705‑155 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 705‑60 (about pre‑formation 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 705‑145.
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 705‑60 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 roll‑over under Subdivision 126‑B 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 705‑60 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 110‑55(7) of this Act applied to the further distribution, then for the purposes of step 1 in the table in section 705‑60 in working out the group’s *allocable cost amount for the subject entity:
(a) the reference in subsection 705‑65(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 705‑65(5) to a reduction that has taken place under subsection 110‑55(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 110‑55(7) of this Act, to the further distribution.
705‑160 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 705‑35 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 705‑60 (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 705‑60 (about losses accruing before becoming a subsidiary member of the group);
then, for the purposes of working out under section 705‑35 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 705‑60 (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 705‑60 (about losses accruing before becoming a subsidiary member of the group);
then, for the purposes of working out under section 705‑35 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).
705‑163 Modified application of section 705‑57
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 705‑57 (about loss of pre‑CGT 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 705‑57—basic modification
(2) For the purposes of applying section 705‑57 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 705‑57—additional modifications where section 705‑145 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 705‑57 (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 705‑145(3) (the subsection 705‑145(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 705‑57(2)(c) and (d) and subsection 705‑57(7) did not apply to the subject membership interest.
(5) Next, if there would be such a reduction (whose amount is the notional section 705‑57 reduction amount):
(a) apply section 705‑57 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 705‑57 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 705‑57(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 705‑145(3) tax cost setting amount; and
(f) the subject membership interest is taken to have a loss of pre‑CGT status adjustment amount equal to the notional section 705‑57 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 705‑57 not to apply where membership interests effectively acquired on normal market basis
(6) If:
(a) apart from this subsection, subsection 705‑57(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 705‑57(6) would apply because a circumstance covered by subsection 705‑57(4) (about loss of pre‑CGT 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 705‑57(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 vice‑versa, 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 705‑57(4) was a *same asset roll‑over 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 705‑57(6) does not apply as mentioned in paragraph (a) of this subsection.
Subdivision 705‑C—Case where a consolidated group is acquired by another
Guide to Subdivision 705‑C
705‑170 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 705‑A (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
705‑175 Application and object of this Subdivision
Modified application of Division 701 in relation to acquired group etc.
705‑180 Modifications of Division 701
Modified application of Subdivision 705‑A in relation to acquiring group
705‑185 Subdivision 705‑A has effect with modifications
Modifications of Subdivision 705‑A for the purposes of this Subdivision
705‑195 Modified application of subsection 705‑65(6)
705‑200 Modified application of section 705‑85
Application and object
705‑175 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 705‑A (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.
705‑180 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 701‑25) would otherwise apply, in relation to the acquired group for the head company core purposes set out in subsection 701‑1(2) or for the entity core purposes set out in subsection 701‑1(3), the provision does not so apply.
Modified application of section 701‑5
(2) Section 701‑5 (the entry history rule) applies in relation to the acquiring group for the head company core purposes set out in subsection 701‑1(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 701‑25
(3) The application of section 701‑25 (which ensures tax‑neutral 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 701‑1(2) and for the entity core purposes set out in subsection 701‑1(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 701‑30(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 701‑30
(4) If the acquired group only exists for part of the income year, section 701‑30 (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 non‑membership period.
Modified application of Subdivision 705‑A in relation to acquiring group
705‑185 Subdivision 705‑A has effect with modifications
(1) Subdivision 705‑A has effect in relation to the acquiring group for the head company core purposes set out in subsection 701‑1(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 705‑A.
Note 1: This means that for Subdivision 705‑A 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 705‑A 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 705‑A is subject to modifications set out in this Subdivision.
Note: The modifications of Subdivision 705‑A made in this Subdivision constitute the second exception to Subdivision 705‑A: see paragraph 705‑15(b).
Modifications of Subdivision 705‑A for the purposes of this Subdivision
705‑195 Modified application of subsection 705‑65(6)
Object
(1) The object of this section is to ensure that certain *non‑membership 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.
Non‑membership equity interests
(2) Subsection 705‑65(6) has effect as if it also treated as a *membership interest in the *head company of the acquired group a *non‑membership 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.
705‑200 Modified application of section 705‑85
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 *non‑membership 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 705‑85(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.
Non‑membership equity interests
(3) Paragraph 705‑85(3)(a) has effect as if it also increased the step 2 amount worked out under section 705‑70 by the amount that would be the sum of the balances of the *non‑share 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 *non‑membership 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 *non‑share equity interest in the subsidiary member; and
(c) the non‑share equity interests (if any) mentioned in paragraph (b) were the only non‑share equity interests in the subsidiary member.
Subdivision 705‑D—Where multiple entities are linked by membership interests
Guide to Subdivision 705‑D
705‑210 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 705‑A, so that the amount reflects the cost to the group of acquiring the entities.
Table of sections
Application and object
705‑215 Application and object of this Subdivision
Modified application of Subdivision 705‑A
705‑220 Subdivision 705‑A has effect with modifications
705‑225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities
705‑227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities
705‑230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests
705‑235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities
705‑240 Modified application of section 705‑57
Application and object
705‑215 Application and object of this Subdivision
Application
(1) This Subdivision has effect for the head company core purposes set out in subsection 701‑1(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 705‑C.
Note: This is the third exception to Subdivision 705‑A: see paragraph 705‑15(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 705‑A (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 705‑A
705‑220 Subdivision 705‑A has effect with modifications
(1) Subdivision 705‑A 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 705‑A is subject to modifications set out in this Subdivision.
705‑225 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 705‑65(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 705‑65(1) adds together amounts worked out in accordance with section 705‑65 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 701‑15 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 705‑65(4) (which prevents the later operation of value shifting etc. provisions) still applies to the *membership interests.
Non‑membership equity interests
(5) For the purposes of this section, if, on becoming a *subsidiary member, a linked entity holds a *non‑membership equity interest in another linked entity, that interest is treated as if it were a *membership interest in that other linked entity.
705‑227 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 705‑93 (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 705‑93, 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 705‑93 for the purposes of this Subdivision, disregard paragraph 705‑93(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 705‑93.
705‑230 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 705‑60 (about pre‑formation 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 705‑225.
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 705‑60 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.
705‑235 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 705‑35 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 705‑60 (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 705‑60 (about losses accruing before becoming a subsidiary member of the group);
then, for the purposes of working out under section 705‑35 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 705‑60 (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 705‑60 (about losses accruing before becoming a subsidiary member of the group);
then, for the purposes of working out under section 705‑35 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).
705‑240 Modified application of section 705‑57
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 705‑57 (about loss of pre‑CGT 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 705‑57—basic modification
(2) For the purposes of applying section 705‑57 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 705‑57—additional modifications where section 705‑225 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 705‑57 (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 705‑225(3) (the subsection 705‑225(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 705‑57(2)(c) and (d) and subsection 705‑57(7) did not apply to the subject membership interest.
(5) Next, if there would be such a reduction (whose amount is the notional section 705‑57 reduction amount):
(a) apply section 705‑57 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 705‑57 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 705‑57(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 705‑225(3) tax cost setting amount; and
(f) the subject membership interest is taken to have a loss of pre‑CGT status adjustment amount equal to the notional section 705‑57 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 705‑E—Adjustments for errors etc.
Guide to Subdivision 705‑E
705‑300 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 re‑done.
Table of sections
Operative provisions
705‑305 Object of this Subdivision
705‑310 Operation of Part IVA of the Income Tax Assessment Act 1936
705‑315 Errors that attract special adjustment action
705‑320 Tax cost setting amounts taken to be correct
Operative provisions
705‑305 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.
705‑310 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.
705‑315 Errors that attract special adjustment action
(1) Section 705‑320 (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 705‑35 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.
705‑320 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 705‑315 are satisfied.
Note 1: If the conditions in section 705‑315 are satisfied, CGT event L6 happens (see section 104‑525).
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 284‑75 or 284‑145 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 284‑75 and 284‑145 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 284‑80(2) and 284‑150(2) in Schedule 1 to that Act.
Division 707—Losses for head companies when entities become members etc.
Table of Subdivisions
707‑A Transfer of losses to head company
707‑B Can a transferred loss be utilised?
707‑C Amount of transferred losses that can be utilised
707‑D Special rules about losses
Subdivision 707‑A—Transfer of losses to head company
Guide to Subdivision 707‑A
707‑100 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
707‑105 Who can utilise the loss?
Objects
707‑110 Objects of this Subdivision
Application
707‑115 What losses this Subdivision applies to
Transfer of loss from joining entity to head company
707‑120 Transfer of loss from joining entity to head company
707‑125 Modified business continuity test for companies’ post‑1999 losses
707‑130 Modified pattern of distributions test
707‑135 Transferring loss transferred to joining entity because business continuity test was satisfied
Effect of transfer of loss
707‑140 Effect of transfer of loss
Cancelling the transfer of the loss
707‑145 Cancelling the transfer of the loss
What happens if the loss is not transferred?
707‑150 Loss cannot be utilised for income year ending after the joining time
707‑105 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 701‑1 (single entity rule) and section 707‑140.
(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 707‑145.
Objects
707‑110 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
707‑115 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 707‑140.
Note 2: Section 707‑405 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
707‑120 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 *wholly‑owned 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.
Business continuity test involving trial year
(3) When working out whether the joining entity carried on, throughout the *trial year (or a period including the trial year):
(a) the same business as the business it carried on at a particular time; or
(b) a similar business to the business it carried on at that 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.
707‑125 Modified business continuity test for companies’ post‑1999 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 165‑13 or subsection 165‑15(2) or (3) or 166‑5(5) or (6) is relevant to working out (under section 707‑120) whether the loss is transferred from the joining entity.
(2) Work out whether the loss is transferred on the basis that section 165‑13 required the joining entity to satisfy the *business continuity test for:
(a) the period (the business continuity test period) consisting of:
(i) the *trial year; and
(ii) the income year that included the *test time worked out for section 165‑13 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 165‑15(2) specified that the period (the business continuity test period) for the *business continuity 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 165‑15(3) required the business continuity 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 166‑A 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 166‑5(5) treated the joining entity as having satisfied the condition in section 165‑13 if the joining entity satisfied the *business continuity test for the period (the business continuity 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 166‑5(6) required the business continuity 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 166‑A applies to widely held companies and eligible Division 166 companies unless they choose that Subdivision 165‑A apply to them without the modifications made by Subdivision 166‑A.
(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 166‑5(6); or
(b) the income year of the joining entity containing the time at which the joining entity is taken under subsection 707‑210(5) to fail to meet the condition in section 165‑12, if that subsection is relevant to working out whether the joining entity can *utilise the loss.
Note 1: Section 707‑205 affects the start of the test period if the joining entity made the loss under a previous operation of this Subdivision.
Note 2: Section 707‑210 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 707‑210(6).
Note: Subsection 707‑210(6) modifies section 166‑5 for working out whether a company can utilise certain losses transferred to it under this Subdivision from a company.
707‑130 Modified pattern of distributions test
(1) This section operates for the purpose of working out (under section 707‑120) whether the loss is transferred from the joining entity, if section 267‑20 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 non‑fixed 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 267‑30(2) (if applicable) and section 267‑35 in that Schedule by passing the pattern of distributions test for certain income years.
(2) Section 267‑30 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 267‑30 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 267‑35 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 267‑30 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 267‑30 or 267‑35 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 269‑65 in that Schedule, and thus affect whether the joining entity passes the pattern of distributions test under section 269‑60 in that Schedule.
707‑135 Transferring loss transferred to joining entity because business continuity test was satisfied
(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:
(a) the same business as it carried on at a particular time; or
(b) if section 165‑211 applies in relation to the loss—a business similar to the business it carried on at a particular time.
Note: Section 165‑211 enables an entity to satisfy the business continuity test by carrying on a similar business.
(2) The loss is not transferred from the joining entity to the *head company of the joined group (despite section 707‑120), unless the joining entity satisfies the *business continuity test for:
(a) the *trial year (the business continuity 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
707‑140 Effect of transfer of loss
(1) To the extent that the loss is transferred under section 707‑120 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.
(1A) However, subsection (1) does not affect the operation of paragraph 165‑211(1)(a) or (c).
Note: This subsection ensures that the head company can only apply the version of the business continuity test in section 165‑211 if the loss of the joining entity was incurred on or after 1 July 2015.
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 245‑115 and 245‑130 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
707‑145 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 707‑120.
(3) The choice cannot be revoked.
What happens if the loss is not transferred?
707‑150 Loss cannot be utilised for income year ending after the joining time
To the extent that the loss is not transferred under section 707‑120 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 707‑B—Can a transferred loss be utilised?
Guide to Subdivision 707‑B
707‑200 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 707‑A, 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
707‑205 Modified period for test for maintaining same ownership
707‑210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier
Operative provisions
707‑205 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 707‑A.
(2) Subdivision 165‑A 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 165‑12(1) and the test period defined by subsection 166‑5(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.
707‑210 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 707‑A 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 165‑12; and
(b) the conditions in one or more of paragraphs 165‑15(1)(a), (b) and (c) do not exist in relation to the transferor.
Meeting conditions in section 165‑12
(2) The latest transferee is taken to meet the conditions in section 165‑12 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 707‑405 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 707‑A 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 707‑A 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 165‑12 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 165‑12 for the income year.
Failing to meet conditions in section 165‑12
(5) The latest transferee is taken to fail to meet a condition in section 165‑12 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 166‑5(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.
Business continuity test applying to latest transferee under Division 166
(6) If subsection 166‑5(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 166‑5(6) operates as if it required the *business continuity 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 707‑A 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 707‑C—Amount of transferred losses that can be utilised
Guide to Subdivision 707‑C
707‑300 What this Subdivision is about
Losses transferred to the head company of a consolidated group under Subdivision 707‑A 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 415‑45.
Table of sections
Object
707‑305 Object of this Subdivision
How much of a transferred loss can be utilised?
707‑310 How much of a transferred loss can be utilised?
707‑315 What is a bundle of losses?
707‑320 What is the available fraction for a bundle of losses?
707‑325 Modified market value of an entity becoming a member of a consolidated group
707‑330 Losses transferred from former head company
707‑335 Limit on utilising transferred losses if circumstances change during income year
707‑340 Utilising transferred losses while exempt income remains
707‑345 Other provisions are subject to this Subdivision
Object
707‑305 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 707‑A 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?
707‑310 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 707‑A that can be *utilised by the transferee. The limit is set by reference to the *available fraction for the bundle.
Note: Section 707‑335 of this Act and section 707‑350 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 707‑A.
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 102‑5(1); or (b) step 3 of the method statement in section 165‑111; (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 grossed‑up 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 36‑17(2) all of the tax losses and that subsection 36‑17(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 grossed‑up 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 210‑H (except those that are subject to the refundable tax offset rules because of section 67‑25).
(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 375‑805(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 36‑20(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.
707‑315 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 707‑A is transferred under that Subdivision from an entity (the real loss‑maker) 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 loss‑maker 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 707‑327 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 707‑A 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 707‑A, this Subdivision and other provisions that relate to or may affect the *available fractions for one or more *bundles of losses (including sections 707‑140 and 719‑325) operate as if the transfer had occurred.
Note: Section 707‑140 provides for a choice to cancel a transfer under Subdivision 707‑A. Section 719‑325 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 707‑145 or 719‑325, 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 707‑A 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 707‑145 or 719‑325, 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.
707‑320 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 701‑1 (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 707‑325(4) (but not covered by subsection 707‑325(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 707‑A 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 non‑zero 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.
707‑325 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 707‑A 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 707‑330 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 707‑325 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 703‑35(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 703‑37(4) are met.
Note 1: Section 703‑35 of this Act deals with shares acquired under arrangements for employee shareholdings.
Note 2: Section 703‑37 of this Act deals with certain preference shares following an ADI restructure.
707‑330 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 ex‑head 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 ex‑head company was the *head company of another consolidated group (the old group); and
(c) at the joining time the losses are transferred under Subdivision 707‑A from the ex‑head company to the head company of the bigger group.
(2) Work out the ex‑head 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 ex‑head company, and not a separate member of the bigger group, when the transfer occurred.
(3) Also, work out the ex‑head company’s *modified market value as if each *subsidiary member of the old group had been a part of the ex‑head company while it was a subsidiary member of the old group.
707‑335 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 707‑A 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 loss‑holding period) described in subsection (2).
(2) The transferee’s loss‑holding 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 707‑310 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 loss‑holding period; and
(c) the value or values of the *available fraction for the *bundle during the transferee’s loss‑holding period; and
(d) the number of days in the transferee’s loss‑holding 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 707‑A 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 707‑310 has effect subject to this section.
707‑340 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 707‑310(3) for the transferee and the bundle; or
(ii) if section 707‑335 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 707‑310(3) for the transferee and the bundle; or
(ii) if section 707‑335 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 707‑310 or 707‑335 on *utilisation for the year of losses of that *sort in the bundle.
707‑345 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 707‑D—Special rules about losses
Table of sections
707‑400 Head company’s business before and after consolidation not compared
707‑410 Exit history rule does not treat entity as having made a loss
707‑415 Application of losses with nil available fraction for certain purposes
707‑400 Head company’s business before and after consolidation not compared
(1) If:
(a) the *business continuity test applies to a company that becomes a *head company of a *consolidated group at a time; and
(b) apart from this section, the business continuity test period would start before that time and end after it;
the business continuity test period starts at that time (and ends when it would end apart from this section), for the purposes of that application of the business continuity test.
(2) Subsection (1) does not apply for the purposes of working out whether the company can transfer to itself a loss under section 707‑120.
707‑410 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 701‑40 (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 707‑A (whether from the entity or another entity) or because of another provision.
707‑415 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 707‑A; 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 245‑E (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 245‑115, 245‑130, 245‑145 and 245‑175 |
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 243‑15(1)(c) for an income year ending before the joining time | the deduction | working out the excess referred to in subsection 243‑35(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
104‑520(1)(b) | working out whether *CGT event L5 happens at the leaving time, and if so, the amount of any *capital gain under subsection 104‑520(3). |
Limits on application of loss
(3) The loss can be applied under subsection (2) in relation to an income year only to the extent that it could be *utilised by the *head company for the income year, on the assumption that the *available fraction for the *bundle of losses was 1.
(4) The amount of the loss that may be applied in accordance with item 1 of the table in subsection (2) cannot exceed the *gross forgiven amount of the debt to which the loss is attributable.
(5) The amount of the loss that may be applied in accordance with item 2 of the table in subsection (2) cannot exceed the amount of the loss that is attributable to the deduction mentioned in that item.
(6) For the purposes of item 3 of the table in subsection (2), if:
(a) assuming that the joining entity ceased to be a *subsidiary member of the *consolidated group just after the joining time, the *
