Federal Register of Legislation - Australian Government

Primary content

Income Tax Assessment Act 1997

Authoritative Version
  • - C2012C00272
  • In force - Superseded Version
  • View Series
Act No. 38 of 1997 as amended, taking into account amendments up to Clean Energy (Tax Laws Amendments) Act 2011
An Act about income tax and related matters
Administered by: Treasury
General Comments: This compilation is affected by retrospective amendments. Please see the Tax Laws Amendment (2011 Measures No. 9) Act 2012 (Act No. 12, 2012), the Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012 (Act No. 158, 2012) and the Tax and Superannuation Laws Amendment (2013 Measures No. 2) Act 2013 (Act No. 85, 2013) for details.
Registered 02 Mar 2012
Start Date 01 Jan 2012
End Date 20 Mar 2012

Income Tax Assessment Act 1997

Act No. 38 of 1997 as amended

This compilation was prepared on 20 February 2012
taking into account amendments up to Act No. 159 of 2011

Volume 7 includes:     Table of Contents
                                   
Sections 700‑1 to 727‑910

The text of any of those amendments not in force
on that date is appended in the Notes section

The operation of amendments that have been incorporated may be
affected by application provisions that are set out in the Notes section

 

Chapter 3Specialist liability rules

  

  


Contents

Chapter 3—Specialist liability rules                                                                             i

Part 3‑90—Consolidated groups                                                                                   1

Division 700—Guide and objects                                                                           1

Guide                                                                                                                             1

700‑1..... What this Part is about........................................................................ 1

700‑5..... Overview of this Part.......................................................................... 2

Objects                                                                                                                           3

700‑10... Objects of this Part.............................................................................. 3

Division 701—Core rules                                                                                           4

Common rule                                                                                                               5

701‑1..... Single entity rule................................................................................. 5

Head company rules                                                                                                  6

701‑5..... Entry history rule................................................................................ 6

701‑10... Cost to head company of assets of joining entity................................ 7

701‑15... Cost to head company of membership interests in entity that leaves group              8

701‑20... Cost to head company of assets consisting of certain liabilities owed by entity that leaves group            9

701‑25... Tax‑neutral consequence for head company of ceasing to hold assets when entity leaves group             10

Entity rules                                                                                                                 11

701‑30... Where entity not subsidiary member for whole of income year........ 11

701‑35... Tax‑neutral consequence for entity of ceasing to hold assets when it joins group    14

701‑40... Exit history rule................................................................................. 15

701‑45... Cost of assets consisting of liabilities owed to entity by members of the group       16

701‑50... Cost of certain membership interests of which entity becomes holder on leaving group          17

Supporting provisions                                                                                             18

701‑55... Setting the tax cost of an asset........................................................... 18

701‑56... Setting the tax cost of an asset—subsection 701‑55(6)..................... 20

701‑58... Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule               21

701‑60... Tax cost setting amount..................................................................... 22

701‑61... Assets in relation to Division 230 financial arrangement—head company’s assessable income or deduction          23

701‑65... Net income and losses for trusts and partnerships............................ 23

Exceptions                                                                                                                  24

701‑70... Adjustments to taxable income where identities of parties to arrangement merge on joining group         24

701‑75... Adjustments to taxable income where identities of parties to arrangement re‑emerge on leaving group   28

701‑80... Accelerated depreciation.................................................................... 30

701‑85... Other exceptions etc. to the rules....................................................... 31

701‑90... Valuable right to future income treated as separate asset................... 31

Division 703—Consolidated groups and their members                          33

Guide to Division 703                                                                                              33

703‑1..... What this Division is about............................................................... 33

Basic concepts                                                                                                           34

703‑5..... What is a consolidated group?.......................................................... 34

703‑10... What is a consolidatable group?....................................................... 35

703‑15... Members of a consolidated group or consolidatable group............... 35

703‑20... Certain entities that cannot be members of a consolidated group or consolidatable group        37

703‑25... Australian residence requirements for trusts..................................... 39

703‑30... When is one entity a wholly‑owned subsidiary of another?............... 39

703‑33... Transfer time for sale of shares in company...................................... 40

703‑35... Treating entities as wholly‑owned subsidiaries by disregarding employee shares    41

703‑37... Disregarding certain preference shares following an ADI restructure 42

703‑40... Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries         44

703‑45... Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group........................................................ 44

Choice to consolidate a consolidatable group                                                   44

703‑50... Choice to consolidate a consolidatable group.................................... 44

Consolidated group created when MEC group ceases to exist                      46

703‑55... Creating consolidated groups from certain MEC groups.................. 46

Notice of events affecting consolidated group                                                  46

703‑58... Notice of choice to consolidate.......................................................... 46

703‑60... Notice of events affecting consolidated group................................... 47

Effects of choice to continue group after shelf company becomes new head company               49

703‑65... Application........................................................................................ 49

703‑70... Consolidated group continues in existence with interposed company as head company and original company as a subsidiary member............................................................................ 49

703‑75... Interposed company treated as substituted for original company at all times before the completion time 50

703‑80... Effects on the original company’s tax position.................................. 51

Division 705—Tax cost setting amount for assets where entities become subsidiary members of consolidated groups                                                                           53

Guide to Division 705                                                                                              53

705‑1..... What this Division is about............................................................... 53

Subdivision 705‑A—Basic case: a single entity joining an existing consolidated group              53

Guide to Subdivision 705‑A                                                                                   53

705‑5..... What this Subdivision is about.......................................................... 53

Application and object                                                                                            55

705‑10... Application and object of this Subdivision........................................ 55

705‑15... Cases where this Subdivision does not have effect........................... 56

Tax cost setting amount for assets that joining entity brings into joined group             57

705‑20... Tax cost setting amount worked out under this Subdivision............. 57

705‑25... Tax cost setting amount for retained cost base assets........................ 57

705‑27... Reduction in tax cost setting amount that exceeds market value of certain retained cost base assets         59

705‑30... What is the joining entity’s terminating value for an asset?.............. 60

705‑35... Tax cost setting amount for reset cost base assets............................. 62

705‑40... Tax cost setting amount for reset cost base assets held on revenue account             63

705‑45... Reduction in tax cost setting amount for accelerated depreciation assets  64

705‑47... Reduction in tax cost setting amount for some privatised assets....... 65

705‑55... Order of application of sections 705‑40, 705‑45 and 705‑47............ 67

705‑56... Modification for tax cost setting in relation to finance leases............ 68

705‑57... Adjustment to tax cost setting amount where loss of pre‑CGT status of membership interests in joining entity      69

705‑58... Assets and liabilities not set off against each other............................ 73

705‑59... Exception: treatment of linked assets and liabilities........................... 73

How to work out the allocable cost amount                                                       77

705‑60... What is the joined group’s allocable cost amount for the joining entity? 77

705‑62... No double counting of amounts in allocable cost amount................. 79

705‑65... Cost of membership interests in the joining entity—step 1 in working out allocable cost amount            80

705‑70... Liabilities of the joining entity—step 2 in working out allocable cost amount          84

705‑75... Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount               85

705‑80... Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount.......................................................................................................... 87

705‑85... Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount 88

705‑90... Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount.......................................................................................................... 90

705‑93... If pre‑joining time roll‑over from foreign resident company or head company—step 3A in working out allocable cost amount.............................................................................................. 93

705‑95... Pre‑joining time distributions out of certain profits—step 4 in working out allocable cost amount          94

705‑100. Losses accruing to joined group before joining time—step 5 in working out allocable cost amount        94

705‑105. Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount            95

705‑110. If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount       95

705‑115. If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount  96

How to work out a pre‑CGT factor for assets of joining entity                    97

705‑125. Pre‑CGT proportion for joining entity.............................................. 97

Subdivision 705‑B—Case of group formation                                                 98

Guide to Subdivision 705‑B                                                                                   98

705‑130. What this Subdivision is about.......................................................... 98

Application and object                                                                                            99

705‑135. Application and object of this Subdivision........................................ 99

Modified application of Subdivision 705‑A                                                     100

705‑140. Subdivision 705‑A has effect with modifications........................... 100

705‑145. Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members............................................................... 100

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..................................................... 102

705‑155. Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests............................................................. 103

705‑160. Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members........................................................... 106

705‑163. Modified application of section 705‑57........................................... 108

Subdivision 705‑C—Case where a consolidated group is acquired by another              111

Guide to Subdivision 705‑C                                                                                 111

705‑170. What this Subdivision is about........................................................ 111

Application and object                                                                                          112

705‑175. Application and object of this Subdivision...................................... 112

Modified application of Division 701 in relation to acquired group etc. 113

705‑180. Modifications of Division 701........................................................ 113

Modified application of Subdivision 705‑A in relation to acquiring group 114

705‑185. Subdivision 705‑A has effect with modifications........................... 114

Modifications of Subdivision 705‑A for the purposes of this Subdivision 115

705‑195. Modified application of subsection 705‑65(6)................................ 115

705‑200. Modified application of section 705‑85........................................... 115

Subdivision 705‑D—Where multiple entities are linked by membership interests        117

Guide to Subdivision 705‑D                                                                                 117

705‑210. What this Subdivision is about........................................................ 117

Application and object                                                                                          118

705‑215. Application and object of this Subdivision...................................... 118

Modified application of Subdivision 705‑A                                                     118

705‑220. Subdivision 705‑A has effect with modifications........................... 118

705‑225. Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities.................................................................................. 119

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......................................................... 120

705‑230. Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests............................................................. 122

705‑235. Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities........................................................................................................ 123

705‑240. Modified application of section 705‑57........................................... 125

Subdivision 705‑E—Adjustments for errors etc.                                            127

Guide to Subdivision 705‑E                                                                                 127

705‑300. What this Subdivision is about........................................................ 127

Operative provisions                                                                                             127

705‑305. Object of this Subdivision............................................................... 127

705‑310. Operation of Part IVA of the Income Tax Assessment Act 1936.... 128

705‑315. Errors that attract special adjustment action..................................... 128

705‑320. Tax cost setting amounts taken to be correct................................... 129

Division 707—Losses for head companies when entities become members etc.                131

Subdivision 707‑A—Transfer of previously unutilised losses to head company           131

Guide to Subdivision 707‑A                                                                                 131

707‑100. What this Subdivision is about........................................................ 131

707‑105. Who can utilise the loss?................................................................. 132

Objects                                                                                                                       133

707‑110. Objects of this Subdivision............................................................. 133

Application                                                                                                               133

707‑115. What losses this Subdivision applies to.......................................... 133

Transfer of loss from joining entity to head company                                 134

707‑120. Transfer of loss from joining entity to head company..................... 134

707‑125. Modified same business test for companies’ post‑1999 losses....... 135

707‑130. Modified pattern of distributions test.............................................. 137

707‑135. Transferring loss transferred to joining entity because same business test was passed            138

Effect of transfer of loss                                                                                       138

707‑140. Effect of transfer of loss.................................................................. 138

Cancelling the transfer of the loss                                                                      139

707‑145. Cancelling the transfer of the loss................................................... 139

What happens if the loss is not transferred?                                                   139

707‑150. Loss cannot be utilised for income year ending after the joining time 139

Subdivision 707‑B—Can a transferred loss be utilised?                              140

Guide to Subdivision 707‑B                                                                                 140

707‑200. What this Subdivision is about........................................................ 140

Operative provisions                                                                                             140

707‑205. Modified period for test for maintaining same ownership............... 140

707‑210. Utilisation of certain losses transferred from a company depends on company that made the losses earlier             141

Subdivision 707‑C—Amount of transferred losses that can be utilised    143

Guide to Subdivision 707‑C                                                                                 143

707‑300. What this Subdivision is about........................................................ 143

Object                                                                                                                        144

707‑305. Object of this Subdivision............................................................... 144

How much of a transferred loss can be utilised?                                            145

707‑310. How much of a transferred loss can be utilised?............................. 145

707‑315. What is a bundle of losses?............................................................. 148

707‑320. What is the available fraction for a bundle of losses?..................... 149

707‑325. Modified market value of an entity becoming a member of a consolidated group [see Note 8]                151

707‑330. Losses transferred from former head company............................... 153

707‑335. Limit on utilising transferred losses if circumstances change during income year    154

707‑340. Utilising transferred losses while exempt income remains.............. 155

707‑345. Other provisions are subject to this Subdivision............................. 157

Subdivision 707‑D—Special rules about losses                                               157

707‑400. Head company’s business before and after consolidation not compared  157

707‑410. Exit history rule does not treat entity as having made a loss............ 157

707‑415. Application of losses with nil available fraction for certain purposes 158

Division 709—Other rules applying when entities become subsidiary members etc.     162

Subdivision 709‑A—Franking accounts                                                           162

Guide to Subdivision 709‑A                                                                                 162

709‑50... What this Subdivision is about........................................................ 162

Object                                                                                                                        163

709‑55... Object of this Subdivision............................................................... 163

Treatment of franking accounts at joining time                                            164

709‑60... Nil balance franking account for joining entity................................ 164

Treatment of subsidiary member’s franking account                                  164

709‑65... Subsidiary member’s franking account does not operate................ 164

Treatment of head company’s franking account                                           165

709‑70... Credits arising in head company’s franking account....................... 165

709‑75... Debits arising in head company’s franking account........................ 165

Franking distributions by subsidiary member                                               166

709‑80... Subsidiary member’s distributions on employee shares and certain preference shares taken to be distributions by the head company................................................................................. 166

709‑85... Non‑share distributions by subsidiary members taken to be distributions by head company   166

709‑90... Subsidiary member’s distributions to foreign resident taken to be distributions by head company          167

Payment of group liability by former subsidiary member                         167

709‑95... Payment of group liability by former subsidiary member............... 167

709‑100. Refund of income tax to former subsidiary member....................... 168

Subdivision 709‑B—Imputation issues                                                             169

Guide to Subdivision 709‑B                                                                                 169

709‑150. What this Subdivision is about........................................................ 169

Operative provisions                                                                                             169

709‑155. Testing consolidated groups............................................................ 169

709‑160. Subsidiary member is exempting entity........................................... 170

709‑165. Subsidiary member is former exempting entity............................... 171

709‑170. Head company and subsidiary are exempting entities..................... 172

709‑175. Head company is former exempting entity...................................... 172

Subdivision 709‑C—Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group                                                                   175

Guide to Subdivision 709‑C                                                                                 175

709‑180. What this Subdivision is about........................................................ 175

709‑185. Joining entity’s excess franking deficit tax offsets transferred to head company      175

709‑190. Exit history rule not to treat leaving entity as having a franking deficit tax offset excess          176

Subdivision 709‑D—Deducting bad debts                                                        177

Guide to Subdivision 709‑D                                                                                 177

709‑200. What this Subdivision is about........................................................ 177

Application and object                                                                                          177

709‑205. Application of this Subdivision....................................................... 177

709‑210. Object of this Subdivision............................................................... 179

Limit on deduction of bad debt                                                                           179

709‑215. Limit on deduction of bad debt........................................................ 179

Extension of Subdivision to debt/equity swap loss                                         183

709‑220. Limit on deduction of swap loss..................................................... 183

Division 711—Tax cost setting amount for membership interests where entities cease to be subsidiary members of consolidated groups                                              185

Guide to Division 711                                                                                            185

711‑1..... What this Division is about............................................................. 185

Application and object of this Division                                                             186

711‑5..... Application and object of this Division........................................... 186

Tax cost setting amount for membership interests etc.                                 187

711‑10... Tax cost setting amount worked out under this Division................ 187

711‑15... Tax cost setting amount where no multiple exit............................... 187

711‑20... What is the old group’s allocable cost amount for the leaving entity? 188

711‑25... Terminating values of the leaving entity’s assets—step 1 in working out allocable cost amount              190

711‑30... What is the head company’s terminating value for an asset?.......... 191

711‑35... If head company becomes entitled to certain deductions—step 2 in working out allocable cost amount  192

711‑40... Liabilities owed to the leaving entity by members of the old group—step 3 in working out allocable cost amount  192

711‑45... Liabilities etc. owed by the leaving entity—step 4 in working out allocable cost amount         193

711‑55... Tax cost setting amount for membership interests where multiple exit 197

711‑65... Membership interests treated as having been acquired before 20 September 1985   199

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...... 201

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............................... 202

Division 713—Rules for particular kinds of entities                                204

Subdivision 713‑A—Trusts                                                                                  204

Working out a joined group’s allocable cost amount for a joining trust 204

713‑20... Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests........................................................................................................ 204

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.................................................. 208

Determining destination of distribution by non‑fixed trust                         209

713‑50... Factors to consider.......................................................................... 209

Subdivision 713‑C—Some unit trusts treated like head companies of consolidated groups       209

Guide to Subdivision 713‑C                                                                                 209

713‑120. What this Subdivision is about........................................................ 209

Object of this Subdivision                                                                                     210

713‑125. Object of this Subdivision............................................................... 210

Choice to form a consolidated group                                                                211

713‑130. Choosing to form a consolidated group.......................................... 211

Effects of choice                                                                                                     211

713‑135. Effects of choice.............................................................................. 211

713‑140. Modifications of the applied law..................................................... 213

Subdivision 713‑E—Partnerships                                                                      215

Guide to Subdivision 713‑E                                                                                 215

713‑200. What this Subdivision is about........................................................ 215

Objects                                                                                                                       216

713‑205. Objects of this Subdivision............................................................. 216

Partnership cost setting interests etc.                                                                 217

713‑210. Partnership cost setting interests..................................................... 217

713‑215. Terminating value for partnership cost setting interest.................... 218

Setting tax cost of partnership cost setting interests                                      218

713‑220. Set tax cost of partnership cost setting interests if partner joins consolidated group 218

713‑225. Tax cost setting amount for partnership cost setting interest........... 219

Special rules where partnership joins consolidated group                          221

713‑235. Partnership joins group—set tax cost of partnership assets............ 221

713‑240. Partnership joins group—tax cost setting amount for partnership asset 222

Special rules where partnership leaves consolidated group                        223

713‑250. Partnership leaves group—standard provisions modified............... 223

713‑255. Partnership leaves group—tax cost setting amount for partnership cost setting interests         224

713‑260. Partnership leaves group—tax cost setting amount for assets consisting of being owed certain liabilities               225

713‑265. Partnership leaves group—adjustments to leaving partner’s allocable cost amount  226

Subdivision 713‑L—Life insurance companies                                              227

Guide to Subdivision 713‑L                                                                                 227

713‑500. What this Subdivision is about........................................................ 227

General modifications for life insurance companies                                    228

713‑505. Head company treated as a life insurance company......................... 228

713‑510. Certain subsidiaries of life insurance companies cannot be members of consolidated group    229

713‑510ADisregard single entity rule in working out certain amounts
in respect of life insurance company
............................................... 230

Life insurance companies’ liabilities on joining consolidated group       231

713‑511. Treatment of certain liabilities for income year when life insurance company joins consolidated group   231

Tax cost setting rules for life insurance companies joining consolidated group           232

713‑515. Certain assets taken to be retained cost base assets where life insurance company joins group                232

713‑520. Valuing certain liabilities where life insurance company joins group 233

713‑525. Obligation to value certain assets and liabilities at joining time....... 234

Losses of life insurance companies joining consolidated group                234

713‑530. Treatment of certain losses of life insurance company.................... 234

Losses of life insurance companies’ subsidiaries joining consolidated group                235

713‑535. Losses of entities whose membership interests are complying superannuation/FHSA assets of life insurance company........................................................................................................ 235

713‑540. Losses of entities whose membership interests are segregated exempt assets of life insurance company 236

Imputation rules for life insurance companies joining consolidated group 237

713‑545. Treatment of franking surplus in franking account of life insurance subsidiary joining group 237

713‑550. Treatment of head company’s franking account after joining.......... 238

Liabilities for life insurance companies leaving consolidated group       239

713‑565. Treatment of certain liabilities for income year when life insurance company leaves consolidated group 239

Losses for life insurance companies leaving consolidated group              240

713‑570. Certain losses transferred to leaving company................................ 240

Tax cost setting rules for life insurance companies leaving consolidated group           241

713‑575. Terminating value of certain assets where life insurance company leaves group      241

713‑580. Valuing certain liabilities where life insurance company leaves group 242

713‑585. Obligation to value certain assets and liabilities at leaving time....... 243

Subdivision 713‑M—General insurance companies                                     243

Guide to Subdivision 713‑M                                                                                243

713‑700. What this Subdivision is about........................................................ 243

Tax cost setting rules for general insurance companies joining consolidated group   244

713‑705. Certain assets taken to be retained cost base assets where general insurance company joins group         244

Liabilities and reserves of general insurance companies joining and leaving consolidated groups        244

713‑710. Treatment of liabilities and reserves for income year when general insurance company joins or leaves group         244

713‑715. If general insurance company joins consolidated group.................. 245

713‑720. If general insurance company leaves consolidated group................ 246

713‑725. Treatment of certain assets and liabilities of general insurance companies                247

Division 715—Interactions between this Part and other areas of the income tax law  248

Subdivision 715‑A—Treatment of unrealised losses existing when ownership or control of a company changes before or during consolidation                                             249

Object                                                                                                                        250

715‑15... Object of this Subdivision............................................................... 250

Effect on Subdivision 165‑CC of a company becoming a member of a consolidated group      251

715‑25... Subdivision 165‑CC stops applying to earlier changeover time...... 251

715‑30... Meaning of 165‑CC tagged asset................................................... 252

715‑35... Meaning of final RUNL.................................................................. 252

165‑CC tagged assets that affect tax cost setting amounts                           253

715‑50... Step 1 amount is reduced if membership interest in subsidiary member is 165‑CC tagged asset and same business test is failed............................................................................................... 253

715‑55... Step 2 amount is affected if liability of subsidiary member is 165‑CC tagged asset of another group member and same business test is failed....................................................................... 254

165‑CC tagged assets that form loss denial pools of head company when consolidated group is formed               256

715‑60... Assets that the head company already owns................................... 256

715‑70... Assets of subsidiary member that become those of head company. 257

How Subdivision 165‑CC applies to consolidated groups                            259

715‑75... Extension of single entity rule and entry history rule...................... 259

Effect on Subdivision 165‑CC of entity leaving consolidated group        259

715‑80... Application of sections 715‑85 to 715‑110..................................... 259

715‑85... First changeover time for leaving company at or after leaving time. 259

715‑90... How same business test applies if leaving time is changeover time for leaving company        260

715‑95... If ownership and control of leaving entity have not changed since head company’s last changeover time               260

715‑100. First choice: adjustable values of leaving assets reduced to nil........ 261

715‑105. Second choice: head company’s final RUNL applied in reducing adjustable values of leaving assets that are loss assets........................................................................................................ 261

715‑110. Third choice: loss denial pool of leaving entity created................... 262

Effect of assets in loss denial pool of head company becoming assets of leaving entity              263

715‑120. What happens.................................................................................. 263

715‑125. First choice: adjustable values of leaving assets reduced to nil........ 264

715‑130. Second choice: pool’s loss denial balance applied in reducing adjustable values of leaving assets that are loss assets........................................................................................................ 264

715‑135. Third choice: loss denial pool of leaving entity created................... 265

Effect of first and second choices on various kinds of assets                      266

715‑145. Effect of choice on adjustable value of leaving asset....................... 266

General provisions about loss denial pools                                                     267

715‑155. When asset leaves pool................................................................... 267

715‑160. How loss denial balance is applied to losses realised on assets in pool 267

715‑165. When pool ceases to exist............................................................... 268

Choices under this Subdivision                                                                           268

715‑175. When choice must be made............................................................. 268

715‑180. Head company to notify leaving entity of choice............................. 269

715‑185. Leaving entity may choose to cancel loss denial pool by reducing adjustable values of assets in the pool               269

Subdivision 715‑B—How Subdivision 165‑CD applies to consolidated groups and leaving entities        270

How Subdivision 165‑CD applies to consolidated groups                            270

715‑215. Extension of single entity rule and entry history rule...................... 270

715‑225. Working out adjusted unrealised loss using individual asset method 271

715‑230. No reductions or other consequences for interests subject to loss cancellation under Subdivision 715‑H               272

How Subdivision 165‑CD applies to leaving entity that is a company      272

715‑240. Application of sections 715‑245 to 715‑260................................... 272

715‑245. If ownership or control of leaving entity has altered since head company’s last alteration time or formation of group........................................................................................................ 273

715‑250. If head company has had an alteration time but ownership and control of leaving entity have not altered since       274

715‑255. Consequences if leaving entity is a loss company at the leaving time 275

715‑260. If neither of sections 715‑245 and 715‑250 applies........................ 276

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....................................................................... 277

How Subdivision 165‑CD applies to leaving entity that is a trust               278

715‑270. Subdivision 165‑CD applies........................................................... 278

Subdivision 715‑C—Common rules for the purposes of Subdivisions 715‑A and 715‑B             280

715‑290. Additional assumptions to be made when using reference time...... 280

Subdivision 715‑D—Treatment of company’s deferred losses under Subdivision 170‑D on joining a consolidated group                                                                                            280

Key terminology                                                                                                     281

715‑310. What is a 170‑D deferred loss, and when it revives........................ 281

Deferred loss on 165‑CC tagged asset                                                               281

715‑355. Head company’s own deferred losses at formation time................. 281

715‑360. Deferred losses brought in by subsidiary member.......................... 282

715‑365. How loss denial balance is applied when 170‑D deferred loss revives 283

Subdivision 715‑E—Interactions with Division 775 (Foreign currency gains and losses)           284

715‑370. Cost setting—reference time for determining currency exchange rate effect             284

Subdivision 715‑F—Interactions with Division 230 (financial arrangements)              285

715‑375. Cost setting—amount of liability that is Division 230 financial arrangement           285

715‑380. Exit history rule not to affect certain matters related to Division 230 financial arrangements   286

715‑385. Exit history rule and elective methods applying to Division 230 financial arrangements          287

Subdivision 715‑G—How value shifting rules apply to a consolidated group                287

715‑410. Extension of single entity rule and entry history rule...................... 287

715‑450. No reductions or other consequences for interests subject to loss cancellation under Subdivision 715‑H               288

Subdivision 715‑H—Cancelling loss on realisation event for direct or indirect interest in a member of a consolidated group                                                                   289

715‑610. Cancellation of loss......................................................................... 289

715‑615. Exception for interests in entity leaving consolidated group............ 290

715‑620. Exception if loss attributable to certain matters................................ 291

Subdivision 715‑J—Entry history rule and choices                                      292

Head company’s choice overriding entry history rule                                 292

715‑660. Head company’s choice overriding entry history rule..................... 292

Choices head company can make ignoring entry history rule to override inconsistencies         295

715‑665. Head company’s choice to override inconsistency.......................... 295

Choices with ongoing effect                                                                                 299

715‑670. Ongoing effect of choices made by entities before joining group.... 299

715‑675. Head company adopting choice with ongoing effect....................... 300

Subdivision 715‑K—Exit history rule and choices                                        300

Choices leaving entity can make ignoring exit history rule                        301

715‑700. Choices leaving entity can make ignoring exit history rule.............. 301

Choices leaving entity can make ignoring exit history rule to overcome inconsistencies           303

715‑705. Choices leaving entity can make ignoring exit history rule to overcome inconsistencies          303

Subdivision 715‑U—Effect on conduit foreign income                                306

715‑875. Extension of single entity rule and entry history rule...................... 306

715‑880. No CFI for leaving entity................................................................ 306

Subdivision 715‑V—Entity ceasing to be exempt from income tax on becoming subsidiary member of consolidated group                                                                                            306

715‑900. Transition time taken to be just before joining time......................... 306

Subdivision 715‑W—Effect on arrangements where CGT roll‑overs are obtained     307

715‑910. Effect on restructures—original entity becomes a subsidiary member 307

715‑915. Effect on restructures—original entity is a head company............... 308

715‑920. Effect on restructures—original entity is a head company that becomes a subsidiary member of another group      308

715‑925. Effect on restructures—original entity ceases being a subsidiary member                310

Division 716—Miscellaneous special rules                                                    311

Subdivision 716‑A—Assessable income and deductions spread over several membership or non‑membership periods                                                                                                       311

Guide to Subdivision 716‑A                                                                                 311

716‑1..... What this Division is about............................................................. 311

Operative provisions                                                                                             312

716‑15... Assessable income spread over 2 or more income years................. 312

716‑25... Deductions spread over 2 or more income years............................. 314

716‑70... Capital expenditure that is fully deductible in one income year....... 316

Assessable income and deductions arising from share of net income of a partnership or trust, or from share of partnership loss                                                                         318

716‑75... Application...................................................................................... 318

716‑80... Head company’s assessable income and deductions....................... 319

716‑85... Entity’s assessable income and deductions for a non‑membership period                320

716‑90... Entity’s share of assessable income or deductions of partnership or trust                321

716‑95... Special rule if not all partnership or trust’s assessable income or deductions taken into account in working out amount........................................................................................................ 322

716‑100. Spreading period............................................................................. 322

Subdivision 716‑E—Tax cost setting for exploration and prospecting assets                323

716‑300. Prime cost method of working out decline in value......................... 323

Subdivision 716‑G—Low‑value and software development pools            324

Assets in joining entity’s low‑value pool                                                           324

716‑330. Head company’s deductions for decline in value of assets in joining entity’s low‑value pool  324

Entity leaving group with asset allocated to head company’s low‑value pool                327

716‑335. Entity leaving group with asset allocated to head company’s low‑value pool           327

Depreciating assets arising from expenditure in joining entity’s software development pool   329

716‑340. Depreciating assets arising from expenditure in joining entity’s software development pool   329

Software development pools if entity leaves consolidated group              332

716‑345. Head company taken not to have incurred expenditure................... 332

Subdivision 716‑S—Miscellenous consequences of tax cost setting           332

716‑400. Tax cost setting and bad debts......................................................... 332

716‑405. Tax cost setting and rights to future income—deduction................. 334

716‑410. Rights to amounts that are expected to be included in assessable income after joining time     336

Subdivision 716‑V—Research and Development                                           336

716‑500. Head company bound by agreements binding on subsidiary members 336

716‑505. History for entitlement to tax offset: joining entity.......................... 337

716‑510. History for entitlement to tax offset: leaving entity.......................... 337

Subdivision 716‑Z—Other                                                                                   338

716‑800. Allocating amounts to periods if head company and subsidiary member have different income years     338

716‑850. Grossing up threshold amounts for periods of less than 365 days.. 339

716‑855. Working out the cost base or reduced cost base of a pre‑CGT asset after certain roll‑overs     339

716‑860. CGT event straddling joining or leaving time.................................. 340

Division 717—International tax rules                                                             342

Subdivision 717‑A—Foreign income tax offsets                                            342

717‑1..... What this Subdivision is about........................................................ 342

Object                                                                                                                        342

717‑5..... Object of this Subdivision............................................................... 342

Foreign income tax on amounts in head company’s assessable income   343

717‑10... Head company taken to be liable for subsidiary member’s foreign income tax        343

Subdivision 717‑D—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: entry rules                                                                                              343

Guide to Subdivision 717‑D                                                                                 343

717‑200. What this Subdivision is about........................................................ 343

Object                                                                                                                        344

717‑205. Object of this Subdivision............................................................... 344

Transfers                                                                                                                  344

717‑210. Attribution surpluses....................................................................... 344

717‑220. FIF surpluses.................................................................................. 345

717‑227. Deferred attribution credits.............................................................. 346

Subdivision 717‑E—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: exit rules                                                                                              347

Guide to Subdivision 717‑E                                                                                 347

717‑235. What this Subdivision is about........................................................ 347

Object                                                                                                                        347

717‑240. Object of this Subdivision............................................................... 347

Transfers                                                                                                                  348

717‑245. Attribution surpluses....................................................................... 348

717‑255. FIF surpluses.................................................................................. 349

717‑262. Deferred attribution credits.............................................................. 350

Subdivision 717‑O—Offshore banking units                                                  351

Guide to Subdivision 717‑O                                                                                 351

717‑700. What this Subdivision is about........................................................ 351

717‑705. Object of this Subdivision............................................................... 352

717‑710. Head company treated as OBU....................................................... 352

Division 719—MEC groups                                                                                  353

Subdivision 719‑A—Modified application of Part 3‑90 to MEC groups 353

719‑2..... Modified application of Part 3‑90 to MEC groups.......................... 353

Subdivision 719‑B—MEC groups and their members                                  353

719‑4..... What this Subdivision is about........................................................ 353

Basic concepts                                                                                                         355

719‑5..... What is a MEC group?.................................................................... 355

719‑10... What is a potential MEC group?..................................................... 358

719‑15... What is an eligible tier‑1 company?................................................ 361

719‑20... What is a top company and a tier‑1 company?................................ 362

719‑25... Head company, subsidiary members and members of a MEC group 364

719‑30... Treating entities as wholly‑owned subsidiaries by disregarding employee shares    364

719‑35... Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries         365

719‑40... Special conversion event—potential MEC group............................ 365

719‑45... Application of sections 703‑20 and 703‑25.................................... 366

Choice to consolidate a potential MEC group                                                367

719‑50... Eligible tier‑1 companies may choose to consolidate a potential MEC group           367

719‑55... When choice starts to have effect.................................................... 369

Provisional head company                                                                                  369

719‑60... Appointment of provisional head company..................................... 369

719‑65... Qualifications for the provisional head company of a MEC group. 370

719‑70... Income year of new provisional head company to be the same as that of former provisional head company           371

Head company                                                                                                        372

719‑75... Head company................................................................................ 372

Notice of events affecting group                                                                         373

719‑76... Notice of choice to consolidate........................................................ 373

719‑77... Notice in relation to new eligible tier‑1 members etc....................... 374

719‑78... Notice of special conversion event.................................................. 375

719‑79... Notice of appointment of provisional head company after formation of group         376

719‑80... Notice of events affecting MEC group............................................ 377

Effects of change of head company                                                                   378

719‑85... Application...................................................................................... 378

719‑90... New head company treated as substituted for old head company at all times before the transition time   378

719‑95... No consequences of old head company becoming, and new head company ceasing to be, subsidiary member of the group............................................................................................... 379

Subdivision 719‑BA—Group conversions involving MEC groups           380

719‑120. Application...................................................................................... 380

719‑125. Head company of new group retains history of head company of old group           381

719‑130. Provisions of this Part not to apply to conversion........................... 382

719‑135. Provisions of this Part applying to conversion despite section 719‑130.. 383

719‑140. Other provisions of this Part not applying to conversion................ 383

Subdivision 719‑C—MEC group cost setting rules: joining cases             384

Guide to Subdivision 719‑C                                                                                 384

719‑150. What this Subdivision is about........................................................ 384

Application and object                                                                                          384

719‑155. Object of this Subdivision............................................................... 384

Modified application of tax cost setting rules for joining                            385

719‑160. Tax cost setting rules for joining have effect with modifications..... 385

719‑165. Trading stock value not set for assets of eligible tier‑1 companies.. 386

719‑170. Modified effect of subsections 705‑175(1) and 705‑185(1)........... 386

Subdivision 719‑F—Losses                                                                                  387

Guide to Subdivision 719‑F                                                                                  387

719‑250. What this Subdivision is about........................................................ 387

Maintaining the same ownership to be able to utilise loss                            388

719‑255. Special rules.................................................................................... 388

719‑260. Special test for utilising a loss because a company maintains the same owners        389

719‑265. What is the test company?............................................................... 390

719‑270. Assumptions about the test company having made the loss for an income year       394

719‑275. Assumptions about nothing happening to affect direct and indirect ownership of the test company        396

719‑280. Assumptions about the test company failing to meet the conditions in section 165‑12             398

Same business test and change of head company                                           399

719‑285. Same business test and change of head company............................ 399

Bundles of losses and their available fractions                                              400

719‑300. Application...................................................................................... 400

719‑305. Subdivision 707‑C affects utilisation of losses made by ongoing head company while it was head company         401

719‑310. Adjustment of available fractions for bundles of losses previously transferred to ongoing head company              402

719‑315. Further adjustment of available fractions for all bundles................. 402

719‑320. Limit on utilising losses other than the prior group losses.............. 403

719‑325. Cancellation of all losses in a bundle............................................... 404

Subdivision 719‑H—Imputation issues                                                             405

719‑425. Guide to Subdivision 719‑H........................................................... 405

Operative provisions                                                                                             405

719‑430. Transfer of franking account balance on cessation event................. 405

719‑435. Distributions by subsidiary members of MEC group taken to be distributions by head company           406

Subdivision 719‑I—Bad debts                                                                             406

Guide to Subdivision 719‑I                                                                                   406

719‑450. What this Subdivision is about........................................................ 406

Maintaining the same ownership to be able to deduct bad debt                  407

719‑455. Special test for deducting a bad debt because a company maintains the same owners              407

719‑460. Assumptions about nothing happening to affect direct and indirect ownership of the test company        409

719‑465. Assumptions about the test company failing to meet the conditions in section 165‑123           409

Subdivision 719‑J—MEC group cost setting rules: leaving cases             410

Guide to Subdivision 719‑J                                                                                  410

719‑500. What this Subdivision is about........................................................ 410

719‑505. Application and object of this Subdivision...................................... 411

719‑510. Modified operation of paragraphs 711‑15(1)(b) and (c)................. 411

Subdivision 719‑K—MEC group cost setting rules: pooling cases            412

Guide to Subdivision 719‑K                                                                                 412

719‑550. What this Subdivision is about........................................................ 412

719‑555. Application and object of this Subdivision...................................... 412

719‑560. Pooled interests............................................................................... 413

719‑565. Setting cost of reset interests........................................................... 413

719‑570. Cost setting amount......................................................................... 414

Subdivision 719‑T—Interactions between this Part and other areas of the income tax law: special rules for MEC groups                                                                                          415

How Subdivision 165‑CC applies to MEC groups                                          416

719‑700. Changeover times under section 165‑115C or 165‑115D............... 416

719‑705. Additional changeover times for head company of MEC group..... 417

How Subdivision 165‑CD applies to MEC groups                                          418

719‑720. Alteration times under section 165‑115L or 165‑115M.................. 418

719‑725. Additional alteration times for head company of MEC group......... 419

719‑730. Some alteration times only affect interests in top company............. 420

719‑735. Some alteration times affect only pooled interests........................... 420

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....................................................................... 421

How indirect value shifting rules apply to a MEC group                            421

719‑755. Effect on MEC group cost setting rules if head company is losing entity or gaining entity for indirect value shift  421

Cancelling loss on realisation event for direct or indirect interest in a subsidiary member of a MEC group       422

719‑775. Cancellation of loss......................................................................... 422

719‑780. Exception for pooled interests in eligible tier‑1 companies.............. 423

719‑785. Exception for interests in top company........................................... 424

719‑790. Exception for interests in entity leaving MEC group....................... 424

719‑795. Exception if loss attributable to certain matters................................ 425

Division 721—Liability for payment of tax where head company fails to pay on time                426

Guide to Division 721                                                                                            426

721‑1..... What this Division is about............................................................. 426

Object                                                                                                                        427

721‑5..... Object of this Division.................................................................... 427

When this Division operates                                                                                427

721‑10... When this Division operates........................................................... 427

Joint and several liability of contributing member                                      430

721‑15... Head company and contributing members jointly and severally liable to pay group liability    430

721‑17... Notice of joint and several liability for general interest charge........ 432

721‑20... Limit on liability where group first comes into existence................ 432

Tax sharing agreements                                                                                       433

721‑25... When a group liability is covered by a tax sharing agreement......... 433

721‑30... TSA contributing members liable for contribution amounts............ 434

721‑32... Notice of general interest charge liability under TSA...................... 435

721‑35... When a TSA contributing member has left the group clear of the group liability     436

721‑40... TSA liability and group liability are linked...................................... 436

Part 3‑95—Value shifting                                                                                              438

Division 723—Direct value shifting by creating right over non‑depreciating asset       438

Subdivision 723‑A—Reduction in loss from realising non‑depreciating asset               438

723‑1..... Object.............................................................................................. 438

723‑10... Reduction in loss from realising non‑depreciating asset over which right has been created     439

723‑15... Reduction in loss from realising non‑depreciating asset at the same time as right is created over it          441

723‑20... Exceptions....................................................................................... 442

723‑25... Realisation event that is only a partial realisation............................. 443

723‑35... Multiple rights created to take advantage of the $50,000 threshold. 443

723‑40... Application to CGT asset that is also trading stock or revenue asset 444

723‑50... Effects if right created over underlying asset is also trading stock or a revenue asset               444

Subdivision 723‑B—Reducing reduced cost base of interests in entity that acquires non‑depreciating asset under roll‑over                                                                                      445

723‑105. Reduced cost base of interest reduced when interest realised at a loss 445

723‑110. Direct and indirect roll‑over replacement for underlying asset........ 446

Division 725—Direct value shifting affecting interests in companies and trusts              448

Guide to Division 725                                                                                            448

725‑1..... What this Division is about............................................................. 448

Subdivision 725‑A—Scope of the direct value shifting rules                      449

725‑45... Main object..................................................................................... 449

725‑50... When a direct value shift has consequences under this Division..... 450

725‑55... Controlling entity test...................................................................... 450

725‑65... Cause of the value shift................................................................... 450

725‑70... Consequences for down interest only if there is a material decrease in its market value           451

725‑80... Who is an affected owner of a down interest?................................. 452

725‑85... Who is an affected owner of an up interest?.................................... 452

725‑90... Direct value shift that will be reversed............................................ 453

725‑95... Direct value shift resulting from reversal........................................ 453

Subdivision 725‑B—What is a direct value shift                                            454

725‑145. When there is a direct value shift..................................................... 454

725‑150. Issue of equity or loan interests at a discount.................................. 455

725‑155. Meaning of down interests, decrease time, up interests and increase time              456

725‑160. What is the nature of a direct value shift?........................................ 457

725‑165. If market value decrease or increase is only partly attributable to the scheme           457

Subdivision 725‑C—Consequences of a direct value shift                           457

General                                                                                                                     458

725‑205. Consequences depend on character of down interests and up interests 458

725‑210. Consequences for down interests depend on pre‑shift gains and losses.. 458

Special cases                                                                                                            459

725‑220. Neutral direct value shifts................................................................ 459

725‑225. Issue of bonus shares or units......................................................... 459

725‑230. Off‑market buy‑backs..................................................................... 461

Subdivision 725‑D—Consequences for down interest or up interest as CGT asset        461

725‑240. CGT consequences; meaning of adjustable value........................... 462

725‑245. Table of taxing events generating a gain for interests as CGT assets 463

725‑250. Table of consequences for adjustable values of interests as CGT assets  464

725‑255. Multiple CGT consequences for the same down interest or up interest 467

Subdivision 725‑E—Consequences for down interest or up interest as trading stock or a revenue asset                467

725‑310. Consequences for down interest or up interest as trading stock...... 467

725‑315. Adjustable value of trading stock.................................................... 469

725‑320. Consequences for down interest or up interest as a revenue asset... 469

725‑325. Adjustable value of revenue asset.................................................... 471

725‑335. How to work out those consequences............................................. 471

725‑340. Multiple trading stock or revenue asset consequences for the same down interest or up interest             474

Subdivision 725‑F—Value adjustments and taxed gains                              475

725‑365. Decreases in adjustable values of down interests (with pre‑shift gains), and taxing events generating a gain          475

725‑370. Uplifts in adjustable values of up interests under certain table items 477

725‑375. Uplifts in adjustable values of up interests under other table items. 478

725‑380. Decreases in adjustable value of down interests (with pre‑shift losses) 480

Division 727—Indirect value shifting affecting interests in companies and trusts, and arising from non‑arm’s length dealings                                                            482

Guide to Division 727                                                                                            482

727‑1..... What this Division is about............................................................. 482

727‑5..... What is an indirect value shift?........................................................ 483

727‑10... How does this Division deal with indirect value shifts?.................. 485

727‑15... When does an indirect value shift have consequences under this Division?             485

727‑25... Effect of this Division on realisations at a loss that occur before the nature or extent of an indirect value shift can be fully determined....................................................................................... 486

Subdivision 727‑A—Scope of the indirect value shifting rules                   486

727‑95... Main object..................................................................................... 486

727‑100. When an indirect value shift has consequences under this Division 487

727‑105. Ultimate controller test.................................................................... 488

727‑110. Common‑ownership nexus test (if both losing and gaining entities are closely held)               488

727‑125. No consequences if losing entity is a superannuation entity............ 489

Subdivision 727‑B—What is an indirect value shift                                      489

727‑150. How to determine whether a scheme results in an indirect value shift 489

727‑155. Providing economic benefits........................................................... 491

727‑160. When an economic benefit is provided in connection with a scheme 492

727‑165. Preventing double‑counting of economic benefits........................... 492

Subdivision 727‑C—Exclusions                                                                          493

Guide to Subdivision 727‑C                                                                                 493

727‑200. What this Subdivision is about........................................................ 493

General                                                                                                                     494

727‑215. Amount does not exceed $50,000................................................... 494

727‑220. Disposal of asset at cost, or at undervalue if full value is not reflected in adjustable values of equity or loan interests in the losing entity............................................................................... 494

Indirect value shifts involving services                                                            495

727‑230. Services provided by losing entity to gaining entity for at least their direct cost       495

727‑235. Services provided by gaining entity to losing entity for no more than a commercially realistic price        496

727‑240. What services certain provisions apply to....................................... 497

727‑245. How to work out certain amounts for the purposes of sections 727‑230 and 727‑235            498

Anti‑overlap provisions                                                                                        499

727‑250. Distribution by an entity to a member or beneficiary....................... 499

Miscellaneous                                                                                                          500

727‑260. Shift down a wholly‑owned chain of entities.................................. 500

Subdivision 727‑D—Working out the market value of economic benefits 501

727‑300. What the rules in this Subdivision are for....................................... 501

727‑315. Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000       501

Subdivision 727‑E—Key concepts                                                                     502

Ultimate controller                                                                                                503

727‑350. Ultimate controller.......................................................................... 503

727‑355. Control (for value shifting purposes) of a company....................... 503

727‑360. Control (for value shifting purposes) of a fixed trust...................... 504

727‑365. Control (for value shifting purposes) of a non‑fixed trust.............. 505

727‑370. Preventing double counting for percentage stake tests.................... 506

727‑375. Tests in this Subdivision are exhaustive.......................................... 506

Common‑ownership nexus and ultimate stake of a particular percentage 506

727‑400. When 2 entities have a common‑ownership nexus within a period. 506

727‑405. Ultimate stake of a particular percentage in a company................... 508

727‑410. Ultimate stake of a particular percentage in a fixed trust................. 509

727‑415. Rules for tracing.............................................................................. 510

Subdivision 727‑F—Consequences of an indirect value shift                     511

Guide to Subdivision 727‑F                                                                                  511

727‑450. What this Subdivision is about........................................................ 511

Operative provisions                                                                                             512

727‑455. Consequences of the indirect value shift......................................... 512

Affected interests                                                                                                    512

727‑460. Affected interests in the losing entity............................................... 512

727‑465. Affected interests in the gaining entity............................................. 513

727‑470. Exceptions....................................................................................... 513

727‑520. Equity or loan interest and related terms......................................... 514

727‑525. Indirect equity or loan interest........................................................ 515

Affected owners                                                                                                      515

727‑530. Who are the affected owners........................................................... 515

Choices about method to be used                                                                        517

727‑550. Choosing the adjustable value method............................................ 517

727‑555. Giving other affected owners information about the choice............ 519

Subdivision 727‑G—The realisation time method                                         520

727‑600. What this Subdivision is about........................................................ 520

Operative provisions                                                                                             521

727‑610. Consequences of indirect value shift............................................... 521

727‑615. Reduction of loss on realisation event for affected interest in losing entity               522

727‑620. Reduction of gain on realisation event for affected interest in gaining entity            523

727‑625. Total gain reductions not to exceed total loss reductions................. 523

727‑630. How cap in section 727‑625 applies if affected interest is also trading stock or a revenue asset              524

727‑635. Splitting an equity or loan interest................................................... 526

727‑640. Merging equity or loan interests...................................................... 526

727‑645. Effect of CGT roll‑over................................................................... 527

Further exclusion for certain 95% services indirect value shifts if realisation time method must be used            528

727‑700. When 95% services indirect value shift is excluded........................ 528

95% services indirect value shifts that are not excluded                             529

727‑705. Another provision of the income tax law affects amount related to services by at least $100,000            529

727‑710. Ongoing or recent service arrangement reduces value of losing entity by at least $100,000     530

727‑715. Service arrangements reduce value of losing entity that is a group service provider by at least $500,000                531

727‑720. Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000........................................................................................................ 533

727‑725. Meaning of predominantly‑services indirect value shift.................. 534

Subdivision 727‑H—The adjustable value method                                        534

Guide to Subdivision 727‑H                                                                                 534

727‑750. What this Subdivision is about........................................................ 534

727‑755. Consequences of indirect value shift............................................... 535

Reductions of adjustable value                                                                           536

727‑770. Reduction under the adjustable value method.................................. 536

727‑775. Has there been a disaggregated attributable decrease?..................... 537

727‑780. Working out the reduction on a loss‑focussed basis....................... 538

Uplifts of adjustable value                                                                                   539

727‑800. Uplift under the attributable increase method.................................. 539

727‑805. Has there been a disaggregated attributable increase?...................... 541

727‑810. Scaling‑down formula..................................................................... 542

Consequences of the method for various kinds of assets                              543

727‑830. CGT assets...................................................................................... 543

727‑835. Trading stock.................................................................................. 544

727‑840. Revenue assets................................................................................ 545

Subdivision 727‑K—Reduction of loss on equity or loan interests realised before the IVS time               546

727‑850. Consequences of scheme under this Subdivision............................ 547

727‑855. Presumed indirect value shift.......................................................... 548

727‑860. Conditions about the prospective gaining entity.............................. 549

727‑865. How other provisions of this Division apply to support this Subdivision                551

727‑870. Effect of CGT roll‑over................................................................... 553

727‑875. Application to CGT asset that is also trading stock or revenue asset 553

Subdivision 727‑L—Indirect value shift resulting from a direct value shift  553

727‑905. How this Subdivision affects the rest of this Division.................... 554

727‑910. Treatment of value shifted under the direct value shift.................... 555


Part 3‑90Consolidated groups

Division 700Guide and objects

  

Table of sections

Guide

700‑1        What this Part is about

700‑5        Overview of this Part

Objects

700‑10      Objects of this Part

Guide

700‑1  What this Part is about

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

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

This is supported by rules that:

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

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

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

700‑5  Overview of this Part

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

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

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

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

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

Objects

700‑10  Objects of this Part

                   The objects of this Part are:

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

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

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

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

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


 

Division 701Core rules

Table of sections

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      Setting the tax cost of an asset—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

701‑61      Assets in relation to Division 230 financial arrangement—head company’s assessable income or deduction

701‑65      Net income and losses for trusts and partnerships


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

701‑90      Valuable right to future income treated as separate asset

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 same business 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

             (5)  However, if:

                     (a)  the asset is *trading stock; 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.

Excluded assets

             (7)  If an asset is an excluded asset under subsection 705‑35(2), its *tax cost is not set.

Note:          Excluded assets are assets such as entitlements to tax deductions.

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)  the asset is *trading stock 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, 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)  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 *livestock 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.

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 the asset is *trading stock 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, 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)  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 *livestock 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.

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—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; 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.

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.

Rights to future amounts to be included in assessable income of head company

          (5C)  If section 716‑410 (rights to future amounts that are expected to be included in assessable income) covers the asset at the particular time, the expression means that section 716‑405 may apply in relation to the asset after the particular time.

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 1:       This subsection modifies the application of the provision only for the purpose of determining the amount included in assessable income or the amount of the deduction. Therefore:

(a)    the acquisition mentioned in this subsection is recognised only for that purpose; and

(b)    apart from the things mentioned in subsection 701‑56(1), that acquisition does not affect the operation of section 701‑5 (the entry history rule) in relation to the asset for other purposes.

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

701‑56  Setting the tax cost of an asset—subsection 701‑55(6)

Entry history rule

             (1)  To avoid doubt, if subsection 701‑55(6) applies in relation to an asset at the time (the joining time) an entity (the joining entity) became a *subsidiary member of a *consolidated group, the things that are taken to have happened in relation to the *head company of the group under section 701‑5 (entry history rule) do not include:

                     (a)  the cost, outgoing, expenditure or other amount incurred or paid to acquire the asset by the joining entity; and

                     (b)  whether the cost, outgoing, expenditure or other amount incurred or paid by the joining entity to acquire the asset has been deducted by the joining entity before the joining time.

Trading stock

             (2)  Subsection 701‑55(6) does not apply in relation to an asset if it is *trading stock.

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), other than section 40‑880 (Business related costs);

                     (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), (4), (5), (5A), (5C) 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) or section 701‑45 (Cost of assets consisting of liabilities owed to entity by members of the group)

the *market value of the asset

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.

701‑61  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.

701‑65  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.

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.

701‑90  Valuable right to future income treated as separate asset

             (1)  This subsection covers a valuable right (including a contingent right) to receive an amount for the performance of work or services or the provision of goods (other than *trading stock) 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.

             (2)  For the purposes of this Part, treat a valuable right covered by subsection (1) as a separate asset.

             (3)  For the purposes of this Part, if:

                     (a)  a valuable right is treated as a separate asset under subsection (2); and

                     (b)  the contract or agreement mentioned in paragraph (1)(a) also includes one or more other rights;

for the purposes of this Part, treat the contract or agreement (excluding the valuable right) as a separate asset.

             (4)  For the purposes of this Part:

                     (a)  take into account all the obligations and conditions relating to a valuable right treated as a separate asset under subsection (2) in working out the *market value of that separate asset; and

                     (b)  if a contract or agreement (excluding the valuable right) is treated as a separate asset under subsection (3)—take into account all the obligations and conditions relating to each right (other than the valuable right) that forms part of the contract or agreement in working out the market value of that separate asset.


 

Division 703Consolidated 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 company as a subsidiary member

703‑75      Interposed company treated as substituted for original company at all times before the completion time

703‑80      Effects on the original company’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 124‑380(5) 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

6

A company

The company is a *film licensed investment company at the time

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 *corporate unit trust or 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 *corporate unit trust or 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)  an externally‑administered 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 an externally‑administered 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 (Business Transfer and Group Restructure) Act 1999 applies, a body corporate is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because the body (or another body corporate) has issued, or issues, certain preference *shares.

             (2)  This Part (except Division 719) operates as if a body corporate that meets the requirement of subsection (3) at a particular time were a *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 (Business Transfer and Group 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 124‑380(5) 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 Subdivision 124‑G 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 company 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 124‑380(5) as the original company 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 company is taken to have ceased to be the head company at that time.

Note:          A further result is that the original company is taken to have become a subsidiary member of the group at that time. Section 703‑80 deals with the original company’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 company 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 company at all times before the completion time

             (1)  Everything that happened in relation to the original company before the completion time:

                     (a)  is taken to have happened in relation to the interposed company instead of in relation to the original company; 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 company; and

                     (d)  the original company had been the interposed company.

Note:          This section treats the original company and the interposed company as having in effect exchanged identities throughout the period before the completion time, but without affecting any of the original company’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 company.

             (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 company 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 company’s tax position

                   In applying section 701‑30 to the original company 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 company’s tax position for the part of the income year that ends before the completion time, with the consequence that the original company’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 company 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 705Tax 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‑ABasic 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

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

705‑80      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) 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 that is an asset covered by section 716‑410 (rights to future amounts that are expected to be included in assessable income) if at the time the right was created:

                              (i)  the *head company was the head company of a *consolidatable group; and

                             (ii)  the joining entity was a *subsidiary member of the consolidatable group.

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 *livestock 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.

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 or an asset (an excluded asset) covered by subsection (2), 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 (other than excluded 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.

Excluded assets

             (2)  An asset is covered by this subsection if, under any of the steps in the table in section 705‑60, the joined group’s *allocable cost amount for the joining entity is reduced by an amount in respect of the asset.

Note:          An example is an entitlement to a deduction, for which there is a reduction under step 2 in the table.

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

             (1)  The *tax cost setting amount for a reset cost base asset that is *trading stock, a *depreciating asset 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 and *revenue assets) other than excluded 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 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 (other than excluded assets) by applying this subsection a further one or more times.

705‑45  Reduction in tax cost setting amount for accelerated depreciation assets

                   If:

                     (a)  an asset of the joining entity is a *depreciating asset to which Division 40 applies; and

                    (aa)  just before the entity became a subsidiary member, subsection 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.

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 705‑50 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 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 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 *