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Income Tax Assessment Act 1997

Authoritative Version
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Act No. 38 of 1997 as amended, taking into account amendments up to Tax Laws Amendment (Tax Incentives for Innovation) Act 2016
An Act about income tax and related matters
Administered by: Treasury
General Comments: This compilation is affected by a retrospective amendment. Please see the Tax and Superannuation Laws Amendment (2016 Measures No. 2) Act 2017 (Act No. 15, 2017) for details.
Registered 30 Jun 2016
Start Date 30 Jun 2016
End Date 30 Jun 2016

Income Tax Assessment Act 1997

No. 38, 1997

Compilation No. 157

Compilation date:                              30 June 2016

Includes amendments up to:            Act No. 54, 2016

Registered:                                         30 June 2016

This compilation is in 11 volumes

Volume 1:       sections 1‑1 to 36‑55

Volume 2:       sections 40‑1 to 55‑10

Volume 3:       sections 58‑1 to 122‑205

Volume 4:       sections 124‑1 to 152‑430

Volume 5:       sections 164‑1 to 220‑800

Volume 6:       sections 230‑1 to 312‑15

Volume 7:       sections 315‑1 to 420‑70

Volume 8:       sections 615‑1 to 727‑910

Volume 9:       sections 768‑1 to 995‑1

Volume 10:     Endnotes 1 to 3

Volume 11:     Endnote 4

Each volume has its own contents

 

This compilation includes a commenced amendment made by Act No. 118, 2009

About this compilation

This compilation

This is a compilation of the Income Tax Assessment Act 1997 that shows the text of the law as amended and in force on 30 June 2016 (the compilation date).

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

Uncommenced amendments

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

Application, saving and transitional provisions for provisions and amendments

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

Editorial changes

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

Modifications

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

Self‑repealing provisions

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

  

  

  


Contents

Chapter 3—Specialist liability rules                                                           1

Part 3‑80—Roll‑overs applying to assets generally                                            1

Division 615—Roll‑overs for business restructures                                     1

Guide to Division 615                                                                                                1

615‑1..................... What this Division is about................................................. 1

Subdivision 615‑A—Choosing to obtain roll‑overs                                           1

615‑5..................... Disposing of interests in one entity for shares in a company 2

615‑10................... Redeeming or cancelling interests in one entity for shares in a company 2

Subdivision 615‑B—Further requirements for choosing to obtain roll‑overs                3

615‑15................... Interposed company must own all the original interests...... 4

615‑20................... Requirements relating to your interests in the original entity 4

615‑25................... Requirements relating to the interposed company............... 5

615‑30................... Interposed company must make a particular choice............ 6

615‑35................... ADI restructures—disregard certain preference shares....... 6

Subdivision 615‑C—Consequences of roll‑overs                                               7

615‑40................... CGT consequences............................................................. 7

615‑45................... Additional consequences—deferral of profit or loss........... 8

615‑50................... Trading stock...................................................................... 8

615‑55................... Revenue assets.................................................................... 9

615‑60................... Disregard CGT exemption for trading stock..................... 10

Subdivision 615‑D—Consequences for the interposed company                 10

615‑65................... Consequences for the interposed company....................... 10

Division 620—Assets of wound‑up corporation passing to corporation with not significantly different ownership                                                                                                12

Subdivision 620‑A—Corporations covered by Subdivision 124‑I               12

Guide to Subdivision 620‑A                                                                                   12

620‑5..................... What this Subdivision is about......................................... 12

Application and object of this Subdivision                                                         13

620‑10................... Application....................................................................... 13

620‑15................... Object............................................................................... 13

CGT consequences                                                                                                   13

620‑20................... Disregard body’s capital gains and losses from CGT assets 13

620‑25................... Cost base and pre‑CGT status of CGT asset for company 14

Consequences for depreciating assets                                                                 14

620‑30................... Roll‑over relief for balancing adjustment events............... 14

Consequences for trading stock                                                                            15

620‑40................... Body taken to have sold trading stock to company........... 15

Consequences for revenue assets                                                                          15

620‑50................... Body taken to have sold revenue assets to company......... 15

Part 3‑90—Consolidated groups                                                                                 17

Division 700—Guide and objects                                                                         17

Guide                                                                                                                           17

700‑1..................... What this Part is about...................................................... 17

700‑5..................... Overview of this Part........................................................ 18

Objects                                                                                                                         19

700‑10................... Objects of this Part........................................................... 19

Division 701—Core rules                                                                                         20

Common rule                                                                                                             21

701‑1..................... Single entity rule............................................................... 21

Head company rules                                                                                                22

701‑5..................... Entry history rule.............................................................. 22

701‑10................... Cost to head company of assets of joining entity.............. 22

701‑15................... Cost to head company of membership interests in entity that leaves group              24

701‑20................... Cost to head company of assets consisting of certain liabilities owed by entity that leaves group            25

701‑25................... Tax‑neutral consequence for head company of ceasing to hold assets when entity leaves group             26

Entity rules                                                                                                                 28

701‑30................... Where entity not subsidiary member for whole of income year               28

701‑35................... Tax‑neutral consequence for entity of ceasing to hold assets when it joins group    31

701‑40................... Exit history rule................................................................ 32

701‑45................... Cost of assets consisting of liabilities owed to entity by members of the group       33

701‑50................... Cost of certain membership interests of which entity becomes holder on leaving group          34

Supporting provisions                                                                                             35

701‑55................... Setting the tax cost of an asset.......................................... 35

701‑56................... Application of subsection 701‑55(6)................................ 39

701‑58................... Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule.......................................................................................... 40

701‑60................... Tax cost setting amount.................................................... 40

701‑61................... Assets in relation to Division 230 financial arrangement—head company’s assessable income or deduction.......................................................................................... 41

701‑63................... Right to future income and WIP amount asset.................. 42

701‑65................... Net income and losses for trusts and partnerships............ 43

701‑67................... Assets in this Part are CGT assets, etc.............................. 44

Exceptions                                                                                                                  44

701‑70................... Adjustments to taxable income where identities of parties to arrangement merge on joining group         44

701‑75................... Adjustments to taxable income where identities of parties to arrangement re‑emerge on leaving group   48

701‑80................... Accelerated depreciation................................................... 50

701‑85................... Other exceptions etc. to the rules...................................... 51

Division 703—Consolidated groups and their members                          52

Guide to Division 703                                                                                              52

703‑1..................... What this Division is about............................................... 52

Basic concepts                                                                                                           53

703‑5..................... What is a consolidated group?.......................................... 53

703‑10................... What is a consolidatable group?....................................... 54

703‑15................... Members of a consolidated group or consolidatable group 54

703‑20................... Certain entities that cannot be members of a consolidated group or consolidatable group       57

703‑25................... Australian residence requirements for trusts..................... 58

703‑30................... When is one entity a wholly‑owned subsidiary of another? 59

703‑33................... Transfer time for sale of shares in company..................... 60

703‑35................... Treating entities as wholly‑owned subsidiaries by disregarding employee shares   61

703‑37................... Disregarding certain preference shares following an ADI restructure      62

703‑40................... Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries         63

703‑45................... Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group................... 64

Choice to consolidate a consolidatable group                                                   64

703‑50................... Choice to consolidate a consolidatable group.................... 64

Consolidated group created when MEC group ceases to exist                      66

703‑55................... Creating consolidated groups from certain MEC groups.. 66

Notice of events affecting consolidated group                                                  66

703‑58................... Notice of choice to consolidate......................................... 66

703‑60................... Notice of events affecting consolidated group.................. 67

Effects of choice to continue group after shelf company becomes new head company               69

703‑65................... Application....................................................................... 69

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

703‑75................... Interposed company treated as substituted for original entity at all times before the completion time       70

703‑80................... Effects on the original entity’s tax position....................... 72

Division 705—Tax cost setting amount for assets where entities become subsidiary members of consolidated groups                                                                           73

Guide to Division 705                                                                                              73

705‑1..................... What this Division is about............................................... 73

Subdivision 705‑A—Basic case: a single entity joining an existing consolidated group              73

Guide to Subdivision 705‑A                                                                                   73

705‑5..................... What this Subdivision is about......................................... 73

Application and object                                                                                            75

705‑10................... Application and object of this Subdivision....................... 75

705‑15................... Cases where this Subdivision does not have effect........... 76

Tax cost setting amount for assets that joining entity brings into joined group             77

705‑20................... Tax cost setting amount worked out under this Subdivision 77

705‑25................... Tax cost setting amount for retained cost base assets........ 77

705‑27................... Reduction in tax cost setting amount that exceeds market value of certain retained cost base assets        79

705‑30................... What is the joining entity’s terminating value for an asset? 80

705‑35................... Tax cost setting amount for reset cost base assets............. 82

705‑40................... Tax cost setting amount for reset cost base assets held on revenue account etc.       84

705‑45................... Reduction in tax cost setting amount for accelerated depreciation assets  84

705‑47................... Reduction in tax cost setting amount for some privatised assets              85

705‑55................... Order of application of sections 705‑40, 705‑45 and 705‑47.. 88

705‑56................... Modification for tax cost setting in relation to finance leases 88

705‑57................... Adjustment to tax cost setting amount where loss of pre‑CGT status of membership interests in joining entity.......................................................................................... 90

705‑58................... Assets and liabilities not set off against each other........... 94

705‑59................... Exception: treatment of linked assets and liabilities........... 94

How to work out the allocable cost amount                                                       98

705‑60................... What is the joined group’s allocable cost amount for the joining entity? 98

705‑62................... No double counting of amounts in allocable cost amount 101

705‑65................... Cost of membership interests in the joining entity—step 1 in working out allocable cost amount           102

705‑70................... Liabilities of the joining entity—step 2 in working out allocable cost amount          106

705‑75................... Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount........................................................................................ 107

705‑80................... Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount............................................................................ 109

705‑85................... Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount 110

705‑90................... Undistributed, taxed profits accruing to joined group before joining time—step 3 in working out allocable cost amount............................................................................ 112

705‑93................... If pre‑joining time roll‑over from foreign resident company or head company—step 3A in working out allocable cost amount...................................................... 115

705‑95................... Pre‑joining time distributions out of certain profits—step 4 in working out allocable cost amount          116

705‑100................. Losses accruing to joined group before joining time—step 5 in working out allocable cost amount        117

705‑105................. Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount            117

705‑110................. If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount      118

705‑115................. If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount  118

How to work out a pre‑CGT factor for assets of joining entity                  119

705‑125................. Pre‑CGT proportion for joining entity............................ 119

Subdivision 705‑B—Case of group formation                                               121

Guide to Subdivision 705‑B                                                                                 121

705‑130................. What this Subdivision is about....................................... 121

Application and object                                                                                          122

705‑135................. Application and object of this Subdivision..................... 122

Modified application of Subdivision 705‑A                                                     122

705‑140................. Subdivision 705‑A has effect with modifications........... 122

705‑145................. Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members............................. 123

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................... 124

705‑155................. Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests............................ 126

705‑160................. Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members.................................... 129

705‑163................. Modified application of section 705‑57.......................... 131

Subdivision 705‑C—Case where a consolidated group is acquired by another              134

Guide to Subdivision 705‑C                                                                                 134

705‑170................. What this Subdivision is about....................................... 134

Application and object                                                                                          135

705‑175................. Application and object of this Subdivision..................... 135

Modified application of Division 701 in relation to acquired group etc. 136

705‑180................. Modifications of Division 701........................................ 136

Modified application of Subdivision 705‑A in relation to acquiring group 137

705‑185................. Subdivision 705‑A has effect with modifications........... 137

Modifications of Subdivision 705‑A for the purposes of this Subdivision 138

705‑195................. Modified application of subsection 705‑65(6)................ 138

705‑200................. Modified application of section 705‑85.......................... 139

Subdivision 705‑D—Where multiple entities are linked by membership interests        140

Guide to Subdivision 705‑D                                                                                 140

705‑210................. What this Subdivision is about....................................... 140

Application and object                                                                                          141

705‑215................. Application and object of this Subdivision..................... 141

Modified application of Subdivision 705‑A                                                     141

705‑220................. Subdivision 705‑A has effect with modifications........... 141

705‑225................. Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities..................................................... 142

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.............................. 143

705‑230................. Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests............................ 145

705‑235................. Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities............................................................................. 146

705‑240................. Modified application of section 705‑57.......................... 148

Subdivision 705‑E—Adjustments for errors etc.                                            150

Guide to Subdivision 705‑E                                                                                 150

705‑300................. What this Subdivision is about....................................... 150

Operative provisions                                                                                             151

705‑305................. Object of this Subdivision.............................................. 151

705‑310................. Operation of Part IVA of the Income Tax Assessment Act 1936             151

705‑315................. Errors that attract special adjustment action..................... 151

705‑320................. Tax cost setting amounts taken to be correct................... 153

Division 707—Losses for head companies when entities become members etc.                154

Subdivision 707‑A—Transfer of losses to head company                           154

Guide to Subdivision 707‑A                                                                                 154

707‑100................. What this Subdivision is about....................................... 154

707‑105................. Who can utilise the loss?................................................. 155

Objects                                                                                                                       156

707‑110................. Objects of this Subdivision............................................. 156

Application                                                                                                               156

707‑115................. What losses this Subdivision applies to.......................... 156

Transfer of loss from joining entity to head company                                 157

707‑120................. Transfer of loss from joining entity to head company..... 157

707‑125................. Modified same business test for companies’ post‑1999 losses                158

707‑130................. Modified pattern of distributions test.............................. 160

707‑135................. Transferring loss transferred to joining entity because same business test was passed            161

Effect of transfer of loss                                                                                       162

707‑140................. Effect of transfer of loss................................................. 162

Cancelling the transfer of the loss                                                                      163

707‑145................. Cancelling the transfer of the loss................................... 163

What happens if the loss is not transferred?                                                   163

707‑150................. Loss cannot be utilised for income year ending after the joining time      163

Subdivision 707‑B—Can a transferred loss be utilised?                              163

Guide to Subdivision 707‑B                                                                                 163

707‑200................. What this Subdivision is about....................................... 163

Operative provisions                                                                                             164

707‑205................. Modified period for test for maintaining same ownership 164

707‑210................. Utilisation of certain losses transferred from a company depends on company that made the losses earlier........................................................................................ 164

Subdivision 707‑C—Amount of transferred losses that can be utilised    167

Guide to Subdivision 707‑C                                                                                 167

707‑300................. What this Subdivision is about....................................... 167

Object                                                                                                                        168

707‑305................. Object of this Subdivision.............................................. 168

How much of a transferred loss can be utilised?                                            169

707‑310................. How much of a transferred loss can be utilised?............. 169

707‑315................. What is a bundle of losses?............................................. 172

707‑320................. What is the available fraction for a bundle of losses?..... 173

707‑325................. Modified market value of an entity becoming a member of a consolidated group    176

707‑330................. Losses transferred from former head company............... 178

707‑335................. Limit on utilising transferred losses if circumstances change during income year    179

707‑340................. Utilising transferred losses while exempt income remains 180

707‑345................. Other provisions are subject to this Subdivision............. 181

Subdivision 707‑D—Special rules about losses                                               181

707‑400................. Head company’s business before and after consolidation not compared  181

707‑410................. Exit history rule does not treat entity as having made a loss 182

707‑415................. Application of losses with nil available fraction for certain purposes       182

Division 709—Other rules applying when entities become subsidiary members etc.     186

Subdivision 709‑A—Franking accounts                                                           186

Guide to Subdivision 709‑A                                                                                 186

709‑50................... What this Subdivision is about....................................... 186

Object                                                                                                                        187

709‑55................... Object of this Subdivision.............................................. 187

Treatment of franking accounts at joining time                                            188

709‑60................... Nil balance franking account for joining entity............... 188

Treatment of subsidiary member’s franking account                                  188

709‑65................... Subsidiary member’s franking account does not operate 188

Treatment of head company’s franking account                                           189

709‑70................... Credits arising in head company’s franking account....... 189

709‑75................... Debits arising in head company’s franking account........ 189

Franking distributions by subsidiary member                                               190

709‑80................... Subsidiary member’s distributions on employee shares and certain preference shares taken to be distributions by the head company...................................................... 190

709‑85................... Non‑share distributions by subsidiary members taken to be distributions by head company   191

709‑90................... Subsidiary member’s distributions to foreign resident taken to be distributions by head company          191

Payment of group liability by former subsidiary member                         191

709‑95................... Payment of group liability by former subsidiary member 191

709‑100................. Refund of income tax to former subsidiary member....... 192

Subdivision 709‑B—Imputation issues                                                             193

Guide to Subdivision 709‑B                                                                                 193

709‑150................. What this Subdivision is about....................................... 193

Operative provisions                                                                                             193

709‑155................. Testing consolidated groups........................................... 193

709‑160................. Subsidiary member is exempting entity.......................... 194

709‑165................. Subsidiary member is former exempting entity............... 195

709‑170................. Head company and subsidiary are exempting entities..... 196

709‑175................. Head company is former exempting entity...................... 197

Subdivision 709‑C—Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group                                                                   199

Guide to Subdivision 709‑C                                                                                 199

709‑180................. What this Subdivision is about....................................... 199

709‑185................. Joining entity’s excess franking deficit tax offsets transferred to head company     200

709‑190................. Exit history rule not to treat leaving entity as having a franking deficit tax offset excess         201

Subdivision 709‑D—Deducting bad debts                                                        201

Guide to Subdivision 709‑D                                                                                 201

709‑200................. What this Subdivision is about....................................... 201

Application and object                                                                                          202

709‑205................. Application of this Subdivision...................................... 202

709‑210................. Object of this Subdivision.............................................. 203

Limit on deduction of bad debt                                                                           204

709‑215................. Limit on deduction of bad debt....................................... 204

Extension of Subdivision to debt/equity swap loss                                         210

709‑220................. Limit on deduction of swap loss..................................... 210

Division 711—Tax cost setting amount for membership interests where entities cease to be subsidiary members of consolidated groups                                              211

Guide to Division 711                                                                                            211

711‑1..................... What this Division is about............................................. 211

Application and object of this Division                                                             212

711‑5..................... Application and object of this Division........................... 212

Tax cost setting amount for membership interests etc.                                 213

711‑10................... Tax cost setting amount worked out under this Division 213

711‑15................... Tax cost setting amount where no multiple exit.............. 213

711‑20................... What is the old group’s allocable cost amount for the leaving entity?     214

711‑25................... Terminating values of the leaving entity’s assets—step 1 in working out allocable cost amount             216

711‑30................... What is the head company’s terminating value for an asset? 217

711‑35................... If head company becomes entitled to certain deductions—step 2 in working out allocable cost amount  218

711‑40................... Liabilities owed to the leaving entity by members of the old group—step 3 in working out allocable cost amount............................................................................ 218

711‑45................... Liabilities etc. owed by the leaving entity—step 4 in working out allocable cost amount         219

711‑55................... Tax cost setting amount for membership interests where multiple exit     224

711‑65................... Membership interests treated as having been acquired before 20 September 1985  226

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     227

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..... 229

Division 713—Rules for particular kinds of entities                                231

Subdivision 713‑A—Trusts                                                                                  231

Working out a joined group’s allocable cost amount for a joining trust 231

713‑20................... Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests........................................................................... 231

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......... 235

Determining destination of distribution by non‑fixed trust                         236

713‑50................... Factors to consider.......................................................... 236

Subdivision 713‑C—Some unit trusts treated like head companies of consolidated groups       237

Guide to Subdivision 713‑C                                                                                 237

713‑120................. What this Subdivision is about....................................... 237

Object of this Subdivision                                                                                     237

713‑125................. Object of this Subdivision.............................................. 237

Choice to form a consolidated group                                                                238

713‑130................. Choosing to form a consolidated group.......................... 238

Effects of choice                                                                                                     239

713‑135................. Effects of choice............................................................. 239

713‑140................. Modifications of the applied law..................................... 240

Subdivision 713‑E—Partnerships                                                                      243

Guide to Subdivision 713‑E                                                                                 243

713‑200................. What this Subdivision is about....................................... 243

Objects                                                                                                                       244

713‑205................. Objects of this Subdivision............................................. 244

Partnership cost setting interests etc.                                                                 245

713‑210................. Partnership cost setting interests..................................... 245

713‑215................. Terminating value for partnership cost setting interest.... 246

Setting tax cost of partnership cost setting interests                                      247

713‑220................. Set tax cost of partnership cost setting interests if partner joins consolidated group                247

713‑225................. Tax cost setting amount for partnership cost setting interest 247

Special rules where partnership joins consolidated group                          250

713‑235................. Partnership joins group—set tax cost of partnership assets 250

713‑240................. Partnership joins group—tax cost setting amount for partnership asset   250

Special rules where partnership leaves consolidated group                        252

713‑250................. Partnership leaves group—standard provisions modified 252

713‑255................. Partnership leaves group—tax cost setting amount for partnership cost setting interests         252

713‑260................. Partnership leaves group—tax cost setting amount for assets consisting of being owed certain liabilities........................................................................................ 254

713‑265................. Partnership leaves group—adjustments to allocable cost amount of partner who also leaves group        255

Subdivision 713‑L—Life insurance companies                                              256

Guide to Subdivision 713‑L                                                                                 256

713‑500................. What this Subdivision is about....................................... 256

General modifications for life insurance companies                                    257

713‑505................. Head company treated as a life insurance company........ 257

713‑510................. Certain subsidiaries of life insurance companies cannot be members of consolidated group   258

713‑510A.............. Disregard single entity rule in working out certain amounts in respect of life insurance company           259

Life insurance companies’ liabilities on joining consolidated group       260

713‑511................. Treatment of certain liabilities for income year when life insurance company joins consolidated group  260

Tax cost setting rules for life insurance companies joining consolidated group           261

713‑515................. Certain assets taken to be retained cost base assets where life insurance company joins group               261

713‑520................. Valuing certain liabilities where life insurance company joins group       262

713‑525................. Obligation to value certain assets and liabilities at joining time                263

Losses of life insurance companies joining consolidated group                264

713‑530................. Treatment of certain losses of life insurance company.... 264

Losses of life insurance companies’ subsidiaries joining consolidated group                264

713‑535................. Losses of entities whose membership interests are complying superannuation assets of life insurance company........................................................................................ 264

713‑540................. Losses of entities whose membership interests are segregated exempt assets of life insurance company........................................................................................ 265

Imputation rules for life insurance companies joining consolidated group 266

713‑545................. Treatment of franking surplus in franking account of life insurance subsidiary joining group 266

713‑550................. Treatment of head company’s franking account after joining 268

Liabilities for life insurance companies leaving consolidated group       268

713‑565................. Treatment of certain liabilities for income year when life insurance company leaves consolidated group........................................................................................ 268

Losses for life insurance companies leaving consolidated group              270

713‑570................. Certain losses transferred to leaving company................ 270

Tax cost setting rules for life insurance companies leaving consolidated group           271

713‑575................. Terminating value of certain assets where life insurance company leaves group      271

713‑580................. Valuing certain liabilities where life insurance company leaves group     271

713‑585................. Obligation to value certain assets and liabilities at leaving time                272

Subdivision 713‑M—General insurance companies                                     273

Guide to Subdivision 713‑M                                                                                273

713‑700................. What this Subdivision is about....................................... 273

Tax cost setting rules for general insurance companies joining consolidated group   273

713‑705................. Certain assets taken to be retained cost base assets where general insurance company joins group         273

Liabilities and reserves of general insurance companies joining and leaving consolidated groups        274

713‑710................. Treatment of liabilities and reserves for income year when general insurance company joins or leaves group........................................................................................ 274

713‑715................. If general insurance company joins consolidated group.. 275

713‑720................. If general insurance company leaves consolidated group 276

713‑725................. Treatment of certain assets and liabilities of general insurance companies               277

Division 715—Interactions between this Part and other areas of the income tax law  278

Subdivision 715‑A—Treatment of unrealised losses existing when ownership or control of a company changes before or during consolidation                                             279

Object                                                                                                                        280

715‑15................... Object of this Subdivision.............................................. 280

Effect on Subdivision 165‑CC of a company becoming a member of a consolidated group      282

715‑25................... Subdivision 165‑CC stops applying to earlier changeover time               282

715‑30................... Meaning of 165‑CC tagged asset................................... 282

715‑35................... Meaning of final RUNL.................................................. 283

165‑CC tagged assets that affect tax cost setting amounts                           283

715‑50................... Step 1 amount is reduced if membership interest in subsidiary member is 165‑CC tagged asset and same business test is failed...................................................... 283

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....................................... 285

165‑CC tagged assets that form loss denial pools of head company when consolidated group is formed               286

715‑60................... Assets that the head company already owns................... 286

715‑70................... Assets of subsidiary member that become those of head company          287

How Subdivision 165‑CC applies to consolidated groups                            289

715‑75................... Extension of single entity rule and entry history rule...... 289

Effect on Subdivision 165‑CC of entity leaving consolidated group        290

715‑80................... Application of sections 715‑85 to 715‑110..................... 290

715‑85................... First changeover time for leaving company at or after leaving time          290

715‑90................... How same business test applies if leaving time is changeover time for leaving company        290

715‑95................... If ownership and control of leaving entity have not changed since head company’s last changeover time........................................................................................ 291

715‑100................. First choice: adjustable values of leaving assets reduced to nil 292

715‑105................. Second choice: head company’s final RUNL applied in reducing adjustable values of leaving assets that are loss assets....................................................................... 292

715‑110................. Third choice: loss denial pool of leaving entity created... 293

Effect of assets in loss denial pool of head company becoming assets of leaving entity              294

715‑120................. What happens................................................................. 294

715‑125................. First choice: adjustable values of leaving assets reduced to nil 294

715‑130................. Second choice: pool’s loss denial balance applied in reducing adjustable values of leaving assets that are loss assets.............................................................................. 295

715‑135................. Third choice: loss denial pool of leaving entity created... 296

Effect of first and second choices on various kinds of assets                      296

715‑145................. Effect of choice on adjustable value of leaving asset....... 296

General provisions about loss denial pools                                                     298

715‑155................. When asset leaves pool................................................... 298

715‑160................. How loss denial balance is applied to losses realised on assets in pool    298

715‑165................. When pool ceases to exist............................................... 299

Choices under this Subdivision                                                                           299

715‑175................. When choice must be made............................................. 299

715‑180................. Head company to notify leaving entity of choice............ 299

715‑185................. Leaving entity may choose to cancel loss denial pool by reducing adjustable values of assets in the pool........................................................................................ 300

Subdivision 715‑B—How Subdivision 165‑CD applies to consolidated groups and leaving entities        300

How Subdivision 165‑CD applies to consolidated groups                            301

715‑215................. Extension of single entity rule and entry history rule...... 301

715‑225................. Working out adjusted unrealised loss using individual asset method       302

715‑230................. No reductions or other consequences for interests subject to loss cancellation under Subdivision 715‑H........................................................................................ 303

How Subdivision 165‑CD applies to leaving entity that is a company      303

715‑240................. Application of sections 715‑245 to 715‑260................... 303

715‑245................. If ownership or control of leaving entity has altered since head company’s last alteration time or formation of group.............................................................................. 303

715‑250................. If head company has had an alteration time but ownership and control of leaving entity have not altered since........................................................................................ 304

715‑255................. Consequences if leaving entity is a loss company at the leaving time       306

715‑260................. If neither of sections 715‑245 and 715‑250 applies........ 307

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......................................... 308

How Subdivision 165‑CD applies to leaving entity that is a trust               309

715‑270................. Subdivision 165‑CD applies........................................... 309

Subdivision 715‑C—Common rules for the purposes of Subdivisions 715‑A and 715‑B             311

715‑290................. Additional assumptions to be made when using reference time               311

Subdivision 715‑D—Treatment of company’s deferred losses under Subdivision 170‑D on joining a consolidated group                                                                                            311

Key terminology                                                                                                     312

715‑310................. What is a 170‑D deferred loss, and when it revives........ 312

Deferred loss on 165‑CC tagged asset                                                               312

715‑355................. Head company’s own deferred losses at formation time. 312

715‑360................. Deferred losses brought in by subsidiary member.......... 313

715‑365................. How loss denial balance is applied when 170‑D deferred loss revives    315

Subdivision 715‑E—Interactions with Division 775 (Foreign currency gains and losses)           315

715‑370................. Cost setting—reference time for determining currency exchange rate effect            315

Subdivision 715‑F—Interactions with Division 230 (financial arrangements)              316

715‑375................. Cost setting—amount of liability that is Division 230 financial arrangement           316

715‑378................. Cost setting—head company’s right to receive or obligation to provide payment    317

715‑380................. Exit history rule not to affect certain matters related to Division 230 financial arrangements   318

715‑385................. Exit history rule and elective methods applying to Division 230 financial arrangements         319

Subdivision 715‑G—How value shifting rules apply to a consolidated group                320

715‑410................. Extension of single entity rule and entry history rule...... 320

715‑450................. No reductions or other consequences for interests subject to loss cancellation under Subdivision 715‑H........................................................................................ 320

Subdivision 715‑H—Cancelling loss on realisation event for direct or indirect interest in a member of a consolidated group                                                                   321

715‑610................. Cancellation of loss......................................................... 321

715‑615................. Exception for interests in entity leaving consolidated group 323

715‑620................. Exception if loss attributable to certain matters............... 323

Subdivision 715‑J—Entry history rule and choices                                      324

Head company’s choice overriding entry history rule                                 324

715‑660................. Head company’s choice overriding entry history rule..... 324

Choices head company can make ignoring entry history rule to override inconsistencies         328

715‑665................. Head company’s choice to override inconsistency.......... 328

Choices with ongoing effect                                                                                 332

715‑670................. Ongoing effect of choices made by entities before joining group             332

715‑675................. Head company adopting choice with ongoing effect....... 333

Subdivision 715‑K—Exit history rule and choices                                        334

Choices leaving entity can make ignoring exit history rule                        334

715‑700................. Choices leaving entity can make ignoring exit history rule 334

Choices leaving entity can make ignoring exit history rule to overcome inconsistencies           336

715‑705................. Choices leaving entity can make ignoring exit history rule to overcome inconsistencies          336

Subdivision 715‑U—Effect on conduit foreign income                                339

715‑875................. Extension of single entity rule and entry history rule...... 339

715‑880................. No CFI for leaving entity................................................ 339

Subdivision 715‑V—Entity ceasing to be exempt from income tax on becoming subsidiary member of consolidated group                                                                                            340

715‑900................. Transition time taken to be just before joining time......... 340

Subdivision 715‑W—Effect on arrangements where CGT roll‑overs are obtained     340

715‑910................. Effect on restructures—original entity becomes a subsidiary member     341

715‑915................. Effect on restructures—original entity is a head company 342

715‑920................. Effect on restructures—original entity is a head company that becomes a subsidiary member of another group........................................................................................ 342

715‑925................. Effect on restructures—original entity ceases being a subsidiary member               344

Division 716—Miscellaneous special rules                                                    345

Subdivision 716‑A—Assessable income and deductions spread over several membership or non‑membership periods                                                                                                       345

Guide to Subdivision 716‑A                                                                                 345

716‑1..................... What this Division is about............................................. 345

Operative provisions                                                                                             346

716‑15................... Assessable income spread over 2 or more income years 346

716‑25................... Deductions spread over 2 or more income years............ 348

716‑70................... Capital expenditure that is fully deductible in one income year                351

Assessable income and deductions arising from share of net income of a partnership or trust, or from share of partnership loss                                                                         353

716‑75................... Application..................................................................... 353

716‑80................... Head company’s assessable income and deductions....... 353

716‑85................... Entity’s assessable income and deductions for a non‑membership period               355

716‑90................... Entity’s share of assessable income or deductions of partnership or trust                356

716‑95................... Special rule if not all partnership or trust’s assessable income or deductions taken into account in working out amount............................................................................ 356

716‑100................. Spreading period............................................................. 357

Subdivision 716‑E—Tax cost setting for exploration and prospecting assets                357

716‑300................. Prime cost method of working out decline in value........ 357

Subdivision 716‑G—Low‑value and software development pools            358

Assets in joining entity’s low‑value pool                                                           359

716‑330................. Head company’s deductions for decline in value of assets in joining entity’s low‑value pool 359

Entity leaving group with asset allocated to head company’s low‑value pool                362

716‑335................. Entity leaving group with asset allocated to head company’s low‑value pool          362

Depreciating assets arising from expenditure in joining entity’s software development pool   364

716‑340................. Depreciating assets arising from expenditure in joining entity’s software development pool   364

Software development pools if entity leaves consolidated group              367

716‑345................. Head company taken not to have incurred expenditure... 367

Subdivision 716‑S—Miscellenous consequences of tax cost setting           367

716‑400................. Tax cost setting and bad debts........................................ 368

Subdivision 716‑V—Research and Development                                           369

716‑500................. Head company bound by agreements binding on subsidiary members    369

716‑505................. History for entitlement to tax offset: joining entity.......... 369

716‑510................. History for entitlement to tax offset: leaving entity......... 370

Subdivision 716‑Z—Other                                                                                   370

716‑800................. Allocating amounts to periods if head company and subsidiary member have different income years     371

716‑850................. Grossing up threshold amounts for periods of less than 365 days           371

716‑855................. Working out the cost base or reduced cost base of a pre‑CGT asset after certain roll‑overs    372

716‑860................. CGT event straddling joining or leaving time................. 373

Division 717—International tax rules                                                             375

Subdivision 717‑A—Foreign income tax offsets                                            375

717‑1..................... What this Subdivision is about....................................... 375

Object                                                                                                                        376

717‑5..................... Object of this Subdivision.............................................. 376

Foreign income tax on amounts in head company’s assessable income   376

717‑10................... Head company taken to be liable for subsidiary member’s foreign income tax        376

Subdivision 717‑D—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: entry rules                                                                                              377

Guide to Subdivision 717‑D                                                                                 377

717‑200................. What this Subdivision is about....................................... 377

Object                                                                                                                        377

717‑205................. Object of this Subdivision.............................................. 377

Transfers                                                                                                                  378

717‑210................. Attribution surpluses...................................................... 378

717‑220................. FIF surpluses.................................................................. 378

717‑227................. Deferred attribution credits............................................. 380

Subdivision 717‑E—Transfer of certain surpluses under CFC provisions and former FIF and FLP provisions: exit rules                                                                                              380

Guide to Subdivision 717‑E                                                                                 380

717‑235................. What this Subdivision is about....................................... 380

Object                                                                                                                        381

717‑240................. Object of this Subdivision.............................................. 381

Transfers                                                                                                                  381

717‑245................. Attribution surpluses...................................................... 381

717‑255................. FIF surpluses.................................................................. 382

717‑262................. Deferred attribution credits............................................. 384

Subdivision 717‑O—Offshore banking units                                                  385

Guide to Subdivision 717‑O                                                                                 385

717‑700................. What this Subdivision is about....................................... 385

717‑705................. Object of this Subdivision.............................................. 386

717‑710................. Head company treated as OBU....................................... 386

Division 719—MEC groups                                                                                  387

Subdivision 719‑A—Modified application of Part 3‑90 to MEC groups 387

719‑2..................... Modified application of Part 3‑90 to MEC groups......... 387

Subdivision 719‑B—MEC groups and their members                                  387

719‑4..................... What this Subdivision is about....................................... 387

Basic concepts                                                                                                         389

719‑5..................... What is a MEC group?................................................... 389

719‑10................... What is a potential MEC group?..................................... 392

719‑15................... What is an eligible tier‑1 company?................................ 395

719‑20................... What is a top company and a tier‑1 company?................ 396

719‑25................... Head company, subsidiary members and members of a MEC group       398

719‑30................... Treating entities as wholly‑owned subsidiaries by disregarding employee shares   398

719‑35................... Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries         399

719‑40................... Special conversion event—potential MEC group........... 399

719‑45................... Application of sections 703‑20 and 703‑25.................... 401

Choice to consolidate a potential MEC group                                                401

719‑50................... Eligible tier‑1 companies may choose to consolidate a potential MEC group           401

719‑55................... When choice starts to have effect.................................... 403

Provisional head company                                                                                  403

719‑60................... Appointment of provisional head company.................... 403

719‑65................... Qualifications for the provisional head company of a MEC group          405

719‑70................... Income year of new provisional head company to be the same as that of former provisional head company........................................................................................ 406

Head company                                                                                                        407

719‑75................... Head company................................................................ 407

Notice of events affecting group                                                                         408

719‑76................... Notice of choice to consolidate....................................... 408

719‑77................... Notice in relation to new eligible tier‑1 members etc....... 409

719‑78................... Notice of special conversion event.................................. 410

719‑79................... Notice of appointment of provisional head company after formation of group        411

719‑80................... Notice of events affecting MEC group........................... 411

Effects of change of head company                                                                   413

719‑85................... Application..................................................................... 413

719‑90................... New head company treated as substituted for old head company at all times before the transition time   413

719‑95................... No consequences of old head company becoming, and new head company ceasing to be, subsidiary member of the group.................................................................... 414

Subdivision 719‑BA—Group conversions involving MEC groups           415

719‑120................. Application..................................................................... 415

719‑125................. Head company of new group retains history of head company of old group           416

719‑130................. Provisions of this Part not to apply to conversion.......... 417

719‑135................. Provisions of this Part applying to conversion despite section 719‑130  418

719‑140................. Other provisions of this Part not applying to conversion 418

Subdivision 719‑C—MEC group cost setting rules: joining cases             419

Guide to Subdivision 719‑C                                                                                 419

719‑150................. What this Subdivision is about....................................... 419

Application and object                                                                                          420

719‑155................. Object of this Subdivision.............................................. 420

Modified application of tax cost setting rules for joining                            420

719‑160................. Tax cost setting rules for joining have effect with modifications              420

719‑165................. Trading stock value and registered emissions unit value not set for assets of eligible tier‑1 companies   421

719‑170................. Modified effect of subsections 705‑175(1) and 705‑185(1) 421

Subdivision 719‑F—Losses                                                                                  423

Guide to Subdivision 719‑F                                                                                  423

719‑250................. What this Subdivision is about....................................... 423

Maintaining the same ownership to be able to utilise loss                            424

719‑255................. Special rules.................................................................... 424

719‑260................. Special test for utilising a loss because a company maintains the same owners       425

719‑265................. What is the test company?............................................... 426

719‑270................. Assumptions about the test company having made the loss for an income year       430

719‑275................. Assumptions about nothing happening to affect direct and indirect ownership of the test company        433

719‑280................. Assumptions about the test company failing to meet the conditions in section 165‑12            435

Same business test and change of head company                                           436

719‑285................. Same business test and change of head company........... 436

Bundles of losses and their available fractions                                              436

719‑300................. Application..................................................................... 436

719‑305................. Subdivision 707‑C affects utilisation of losses made by ongoing head company while it was head company........................................................................................ 437

719‑310................. Adjustment of available fractions for bundles of losses previously transferred to ongoing head company........................................................................................ 439

719‑315................. Further adjustment of available fractions for all bundles. 439

719‑320................. Limit on utilising losses other than the prior group losses 440

719‑325................. Cancellation of all losses in a bundle.............................. 441

Subdivision 719‑H—Imputation issues                                                             442

719‑425................. Guide to Subdivision 719‑H........................................... 442

Operative provisions                                                                                             442

719‑430................. Transfer of franking account balance on cessation event 442

719‑435................. Distributions by subsidiary members of MEC group taken to be distributions by head company           443

Subdivision 719‑I—Bad debts                                                                             444

Guide to Subdivision 719‑I                                                                                   444

719‑450................. What this Subdivision is about....................................... 444

Maintaining the same ownership to be able to deduct bad debt                  444

719‑455................. Special test for deducting a bad debt because a company maintains the same owners              444

719‑460................. Assumptions about nothing happening to affect direct and indirect ownership of the test company        446

719‑465................. Assumptions about the test company failing to meet the conditions in section 165‑123          447

Subdivision 719‑J—MEC group cost setting rules: leaving cases             448

Guide to Subdivision 719‑J                                                                                  448

719‑500................. What this Subdivision is about....................................... 448

719‑505................. Application and object of this Subdivision..................... 448

719‑510................. Modified operation of paragraphs 711‑15(1)(b) and (c). 449

Subdivision 719‑K—MEC group cost setting rules: pooling cases            449

Guide to Subdivision 719‑K                                                                                 449

719‑550................. What this Subdivision is about....................................... 449

719‑555................. Application and object of this Subdivision..................... 450

719‑560................. Pooled interests............................................................... 450

719‑565................. Setting cost of reset interests........................................... 451

719‑570................. Cost setting amount........................................................ 452

Subdivision 719‑T—Interactions between this Part and other areas of the income tax law: special rules for MEC groups                                                                                          453

How Subdivision 165‑CC applies to MEC groups                                          454

719‑700................. Changeover times under section 165‑115C or 165‑115D 454

719‑705................. Additional changeover times for head company of MEC group              455

How Subdivision 165‑CD applies to MEC groups                                          455

719‑720................. Alteration times under section 165‑115L or 165‑115M.. 455

719‑725................. Additional alteration times for head company of MEC group  456

719‑730................. Some alteration times only affect interests in top company 457

719‑735................. Some alteration times affect only pooled interests........... 458

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......................................... 459

How indirect value shifting rules apply to a MEC group                            459

719‑755................. Effect on MEC group cost setting rules if head company is losing entity or gaining entity for indirect value shift................................................................................. 459

Cancelling loss on realisation event for direct or indirect interest in a subsidiary member of a MEC group       460

719‑775................. Cancellation of loss......................................................... 460

719‑780................. Exception for pooled interests in eligible tier‑1 companies 462

719‑785................. Exception for interests in top company........................... 462

719‑790................. Exception for interests in entity leaving MEC group...... 462

719‑795................. Exception if loss attributable to certain matters............... 463

Division 721—Liability for payment of tax where head company fails to pay on time                464

Guide to Division 721                                                                                            464

721‑1..................... What this Division is about............................................. 464

Object                                                                                                                        465

721‑5..................... Object of this Division.................................................... 465

When this Division operates                                                                                465

721‑10................... When this Division operates........................................... 465

Joint and several liability of contributing member                                      469

721‑15................... Head company and contributing members jointly and severally liable to pay group liability    469

721‑17................... Notice of joint and several liability for general interest charge 471

721‑20................... Limit on liability where group first comes into existence 472

Tax sharing agreements                                                                                       472

721‑25................... When a group liability is covered by a tax sharing agreement  472

721‑30................... TSA contributing members liable for contribution amounts 474

721‑32................... Notice of general interest charge liability under TSA...... 475

721‑35................... When a TSA contributing member has left the group clear of the group liability     475

721‑40................... TSA liability and group liability are linked..................... 476

Part 3‑95—Value shifting                                                                                              478

Division 723—Direct value shifting by creating right over non‑depreciating asset       478

Subdivision 723‑A—Reduction in loss from realising non‑depreciating asset               478

723‑1..................... Object............................................................................. 478

723‑10................... Reduction in loss from realising non‑depreciating asset over which right has been created     479

723‑15................... Reduction in loss from realising non‑depreciating asset at the same time as right is created over it         481

723‑20................... Exceptions...................................................................... 482

723‑25................... Realisation event that is only a partial realisation............ 483

723‑35................... Multiple rights created to take advantage of the $50,000 threshold          484

723‑40................... Application to CGT asset that is also trading stock or revenue asset        484

723‑50................... Effects if right created over underlying asset is also trading stock or a revenue asset              484

Subdivision 723‑B—Reducing reduced cost base of interests in entity that acquires non‑depreciating asset under roll‑over                                                                                      485

723‑105................. Reduced cost base of interest reduced when interest realised at a loss     485

723‑110................. Direct and indirect roll‑over replacement for underlying asset 487

Division 725—Direct value shifting affecting interests in companies and trusts              488

Guide to Division 725                                                                                            488

725‑1..................... What this Division is about............................................. 488

Subdivision 725‑A—Scope of the direct value shifting rules                      489

725‑45................... Main object..................................................................... 489

725‑50................... When a direct value shift has consequences under this Division              490

725‑55................... Controlling entity test...................................................... 490

725‑65................... Cause of the value shift................................................... 490

725‑70................... Consequences for down interest only if there is a material decrease in its market value           492

725‑80................... Who is an affected owner of a down interest?................ 492

725‑85................... Who is an affected owner of an up interest?................... 492

725‑90................... Direct value shift that will be reversed............................ 493

725‑95................... Direct value shift resulting from reversal........................ 494

Subdivision 725‑B—What is a direct value shift                                            494

725‑145................. When there is a direct value shift.................................... 494

725‑150................. Issue of equity or loan interests at a discount.................. 495

725‑155................. Meaning of down interests, decrease time, up interests and increase time              497

725‑160................. What is the nature of a direct value shift?........................ 497

725‑165................. If market value decrease or increase is only partly attributable to the scheme           497

Subdivision 725‑C—Consequences of a direct value shift                           498

General                                                                                                                     498

725‑205................. Consequences depend on character of down interests and up interests    498

725‑210................. Consequences for down interests depend on pre‑shift gains and losses  499

Special cases                                                                                                            499

725‑220................. Neutral direct value shifts............................................... 499

725‑225................. Issue of bonus shares or units........................................ 500

725‑230................. Off‑market buy‑backs..................................................... 501

Subdivision 725‑D—Consequences for down interest or up interest as CGT asset        502

725‑240................. CGT consequences; meaning of adjustable value........... 502

725‑245................. Table of taxing events generating a gain for interests as CGT assets      504

725‑250................. Table of consequences for adjustable values of interests as CGT assets  505

725‑255................. Multiple CGT consequences for the same down interest or up interest    508

Subdivision 725‑E—Consequences for down interest or up interest as trading stock or a revenue asset                509

725‑310................. Consequences for down interest or up interest as trading stock               509

725‑315................. Adjustable value of trading stock.................................... 510

725‑320................. Consequences for down interest or up interest as a revenue asset            511

725‑325................. Adjustable value of revenue asset................................... 512

725‑335................. How to work out those consequences............................ 513

725‑340................. Multiple trading stock or revenue asset consequences for the same down interest or up interest             516

Subdivision 725‑F—Value adjustments and taxed gains                              517

725‑365................. Decreases in adjustable values of down interests (with pre‑shift gains), and taxing events generating a gain........................................................................................ 517

725‑370................. Uplifts in adjustable values of up interests under certain table items        519

725‑375................. Uplifts in adjustable values of up interests under other table items          520

725‑380................. Decreases in adjustable value of down interests (with pre‑shift losses)   522

Division 727—Indirect value shifting affecting interests in companies and trusts, and arising from non‑arm’s length dealings                                                            524

Guide to Division 727                                                                                            524

727‑1..................... What this Division is about............................................. 524

727‑5..................... What is an indirect value shift?....................................... 525

727‑10................... How does this Division deal with indirect value shifts?. 527

727‑15................... When does an indirect value shift have consequences under this Division?             527

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................................................... 528

Subdivision 727‑A—Scope of the indirect value shifting rules                   528

727‑95................... Main object..................................................................... 529

727‑100................. When an indirect value shift has consequences under this Division         529

727‑105................. Ultimate controller test.................................................... 530

727‑110................. Common‑ownership nexus test (if both losing and gaining entities are closely held)              530

727‑125................. No consequences if losing entity is a superannuation entity 531

Subdivision 727‑B—What is an indirect value shift                                      531

727‑150................. How to determine whether a scheme results in an indirect value shift      531

727‑155................. Providing economic benefits........................................... 533

727‑160................. When an economic benefit is provided in connection with a scheme        534

727‑165................. Preventing double‑counting of economic benefits.......... 535

Subdivision 727‑C—Exclusions                                                                          536

Guide to Subdivision 727‑C                                                                                 536

727‑200................. What this Subdivision is about....................................... 536

General                                                                                                                     537

727‑215................. Amount does not exceed $50,000................................... 537

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............................................. 537

Indirect value shifts involving services                                                            538

727‑230................. Services provided by losing entity to gaining entity for at least their direct cost       538

727‑235................. Services provided by gaining entity to losing entity for no more than a commercially realistic price       539

727‑240................. What services certain provisions apply to....................... 540

727‑245................. How to work out certain amounts for the purposes of sections 727‑230 and 727‑235            541

Anti‑overlap provisions                                                                                        542

727‑250................. Distribution by an entity to a member or beneficiary...... 542

Miscellaneous                                                                                                          543

727‑260................. Shift down a wholly‑owned chain of entities.................. 543

Subdivision 727‑D—Working out the market value of economic benefits 544

727‑300................. What the rules in this Subdivision are for....................... 544

727‑315................. Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000       544

Subdivision 727‑E—Key concepts                                                                     545

Ultimate controller                                                                                                546

727‑350................. Ultimate controller......................................................... 546

727‑355................. Control (for value shifting purposes) of a company....... 546

727‑360................. Control (for value shifting purposes) of a fixed trust..... 547

727‑365................. Control (for value shifting purposes) of a non‑fixed trust 548

727‑370................. Preventing double counting for percentage stake tests.... 549

727‑375................. Tests in this Subdivision are exhaustive......................... 550

Common‑ownership nexus and ultimate stake of a particular percentage 550

727‑400................. When 2 entities have a common‑ownership nexus within a period          550

727‑405................. Ultimate stake of a particular percentage in a company... 552

727‑410................. Ultimate stake of a particular percentage in a fixed trust. 553

727‑415................. Rules for tracing............................................................. 553

Subdivision 727‑F—Consequences of an indirect value shift                     555

Guide to Subdivision 727‑F                                                                                  555

727‑450................. What this Subdivision is about....................................... 555

Operative provisions                                                                                             556

727‑455................. Consequences of the indirect value shift......................... 556

Affected interests                                                                                                    556

727‑460................. Affected interests in the losing entity............................... 556

727‑465................. Affected interests in the gaining entity............................. 556

727‑470................. Exceptions...................................................................... 557

727‑520................. Equity or loan interest and related terms......................... 558

727‑525................. Indirect equity or loan interest........................................ 559

Affected owners                                                                                                      559

727‑530................. Who are the affected owners........................................... 559

Choices about method to be used                                                                        561

727‑550................. Choosing the adjustable value method............................ 561

727‑555................. Giving other affected owners information about the choice 563

Subdivision 727‑G—The realisation time method                                         564

727‑600................. What this Subdivision is about....................................... 564

Operative provisions                                                                                             565

727‑610................. Consequences of indirect value shift............................... 565

727‑615................. Reduction of loss on realisation event for affected interest in losing entity              566

727‑620................. Reduction of gain on realisation event for affected interest in gaining entity            567

727‑625................. Total gain reductions not to exceed total loss reductions. 567

727‑630................. How cap in section 727‑625 applies if affected interest is also trading stock or a revenue asset              568

727‑635................. Splitting an equity or loan interest................................... 570

727‑640................. Merging equity or loan interests..................................... 570

727‑645................. Effect of CGT roll‑over.................................................. 571

Further exclusion for certain 95% services indirect value shifts if realisation time method must be used            572

727‑700................. When 95% services indirect value shift is excluded........ 572

95% services indirect value shifts that are not excluded                             573

727‑705................. Another provision of the income tax law affects amount related to services by at least $100,000            573

727‑710................. Ongoing or recent service arrangement reduces value of losing entity by at least $100,000    574

727‑715................. Service arrangements reduce value of losing entity that is a group service provider by at least $500,000........................................................................................ 575

727‑720................. Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000......................................................................... 577

727‑725................. Meaning of predominantly‑services indirect value shift. 579

Subdivision 727‑H—The adjustable value method                                        579

Guide to Subdivision 727‑H                                                                                 579

727‑750................. What this Subdivision is about....................................... 579

727‑755................. Consequences of indirect value shift............................... 580

Reductions of adjustable value                                                                           581

727‑770................. Reduction under the adjustable value method................. 581

727‑775................. Has there been a disaggregated attributable decrease?..... 582

727‑780................. Working out the reduction on a loss‑focussed basis....... 583

Uplifts of adjustable value                                                                                   584

727‑800................. Uplift under the attributable increase method.................. 584

727‑805................. Has there been a disaggregated attributable increase?..... 586

727‑810................. Scaling‑down formula.................................................... 587

Consequences of the method for various kinds of assets                              588

727‑830................. CGT assets..................................................................... 588

727‑835................. Trading stock.................................................................. 589

727‑840................. Revenue assets................................................................ 591

Subdivision 727‑K—Reduction of loss on equity or loan interests realised before the IVS time               592

727‑850................. Consequences of scheme under this Subdivision........... 592

727‑855................. Presumed indirect value shift.......................................... 594

727‑860................. Conditions about the prospective gaining entity.............. 595

727‑865................. How other provisions of this Division apply to support this Subdivision               597

727‑870................. Effect of CGT roll‑over.................................................. 599

727‑875................. Application to CGT asset that is also trading stock or revenue asset        599

Subdivision 727‑L—Indirect value shift resulting from a direct value shift  600

727‑905................. How this Subdivision affects the rest of this Division.... 600

727‑910................. Treatment of value shifted under the direct value shift.... 601


Chapter 3Specialist liability rules

Part 3‑80Roll‑overs applying to assets generally

Division 615Roll‑overs for business restructures

Table of Subdivisions

             Guide to Division 615

615‑A   Choosing to obtain roll‑overs

615‑B    Further requirements for choosing to obtain roll‑overs

615‑C    Consequences of roll‑overs

615‑D   Consequences for the interposed company

Guide to Division 615

615‑1  What this Division is about

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

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

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

Subdivision 615‑AChoosing to obtain roll‑overs

Table of sections

615‑5        Disposing of interests in one entity for shares in a company

615‑10      Redeeming or cancelling interests in one entity for shares in a company

615‑5  Disposing of interests in one entity for shares in a company

             (1)  You can choose to obtain a roll‑over if:

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

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

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

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

Note 1:       For paragraph (c), see section 124‑20 if an exchanging member uses a share sale facility.

Note 2:       After the completion of the scheme, later dealings between the interposed company and the original entity may be subject to the rules for consolidated groups (see Part 3‑90).

             (2)  You are taken to have chosen to obtain the roll‑over if:

                     (a)  immediately before the completion time (see section 615‑15), the original entity is the *head company of a *consolidated group; and

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

Note:          The consolidated group continues in existence because of section 703‑70.

615‑10  Redeeming or cancelling interests in one entity for shares in a company

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

                     (a)  a company (the interposed company) *acquires no more than 5 *shares or units in the original entity; and

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

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

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

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

and the requirements in Subdivision 615‑B are satisfied.

Note:          For paragraph (e), see section 124‑20 if an exchanging member uses a share sale facility.

             (2)  You are taken to have chosen to obtain the roll‑over if:

                     (a)  immediately before the completion time (see section 615‑15), the original entity is the *head company of a *consolidated group; and

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

Note:          The consolidated group continues in existence because of section 703‑70.

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

Note:          Some of the interposed company’s shares or units in the original entity may be taken to be acquired before 20 September 1985: see section 615‑65.

Subdivision 615‑BFurther requirements for choosing to obtain roll‑overs

Table of sections

615‑15      Interposed company must own all the original interests

615‑20      Requirements relating to your interests in the original entity

615‑25      Requirements relating to the interposed company

615‑30      Interposed company must make a particular choice

615‑35      ADI restructures—disregard certain preference shares

615‑15  Interposed company must own all the original interests

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

615‑20  Requirements relating to your interests in the original entity

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

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

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

                              (i)  owned by the member; and

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

             (2)  The following ratios must be equal:

                     (a)  the ratio of:

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

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

                     (b)  the ratio of:

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

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

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

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

             (3)  Either:

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

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

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

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

615‑25  Requirements relating to the interposed company

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

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

             (3)  Immediately after the completion time:

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

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

615‑30  Interposed company must make a particular choice

             (1)  Unless subsection (2) applies, the interposed company must choose that section 615‑65 applies.

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

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

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

Note:          Sections 703‑65 to 703‑80 deal with the effects of the choice for the consolidated group.

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

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

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

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

The choice cannot be revoked.

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

615‑35  ADI restructures—disregard certain preference shares

                   For the purposes of this Division, disregard any *shares in the original entity that can be disregarded under subsection 703‑37(4) if:

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

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

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

                     (d)  the original entity is:

                              (i)  the ADI; or

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

Subdivision 615‑CConsequences of roll‑overs

Table of sections

615‑40      CGT consequences

615‑45      Additional consequences—deferral of profit or loss

615‑50      Trading stock

615‑55      Revenue assets

615‑60      Disregard CGT exemption for trading stock

615‑40  CGT consequences

                   The consequences set out in Subdivision 124‑A also apply to a roll‑over under this Division as if that roll‑over were a roll‑over covered by Division 124 (about replacement‑asset roll‑overs).

Note:          Those consequences generally involve:

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

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

615‑45  Additional consequences—deferral of profit or loss

                   The additional consequences in sections 615‑50 and 615‑55 apply if:

                     (a)  under this Division:

                              (i)  you are taken to have chosen to obtain the roll‑over; or

                             (ii)  you otherwise choose to obtain the roll‑over; and

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

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

                              (i)  disposed of as described in paragraph 615‑5(1)(c); or

                             (ii)  redeemed or cancelled as described in paragraph 615‑10(1)(d);

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

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

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

Note 2:       The CGT exemption for trading stock does not prevent you obtaining the roll‑over (see section 615‑60).

615‑50  Trading stock

             (1)  The amount included in your assessable income because of the disposal, redemption or cancellation of each of your *shares or units described in paragraph 615‑45(c) that was your *trading stock at the time mentioned in that paragraph is equal to:

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

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

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

                     (b)  otherwise—its cost at that time.

             (2)  For each of the *shares that you acquired as described in paragraph 615‑45(d) that is your *trading stock, you are taken to have paid:

             (3)  For the purposes of Division 70 (about trading stock), you, the original entity and the interposed company are taken to have dealt with each other in the ordinary course of *business and at *arm’s length for each of the transactions referred to in paragraph 615‑5(1)(c) or 615‑10(1)(d) or (e).

615‑55  Revenue assets

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

                     (a)  is described in paragraph 615‑45(c); and

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

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

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

                     (a)  you acquired as described in paragraph 615‑45(d); and

                     (b)  is a *revenue asset;

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

615‑60  Disregard CGT exemption for trading stock

                   For the purposes of this Division, disregard section 118‑25 (which gives a CGT exemption for trading stock).

Subdivision 615‑DConsequences for the interposed company

Table of sections

615‑65      Consequences for the interposed company

615‑65  Consequences for the interposed company

             (1)  This section applies if the interposed company so chooses under subsection 615‑30(1).

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

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

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

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

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

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

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

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

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

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

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

Note:          An example is a bank overdraft.

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

Division 620Assets of wound‑up corporation passing to corporation with not significantly different ownership

Table of Subdivisions

620‑A   Corporations covered by Subdivision 124‑I

Subdivision 620‑ACorporations covered by Subdivision 124‑I

Guide to Subdivision 620‑A

620‑5  What this Subdivision is about

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

Table of sections

Application and object of this Subdivision

620‑10      Application

620‑15      Object

CGT consequences

620‑20      Disregard body’s capital gains and losses from CGT assets

620‑25      Cost base and pre‑CGT status of CGT asset for company

Consequences for depreciating assets

620‑30      Roll‑over relief for balancing adjustment events

Consequences for trading stock

620‑40      Body taken to have sold trading stock to company

Consequences for revenue assets

620‑50      Body taken to have sold revenue assets to company

Application and object of this Subdivision

620‑10  Application

                   This Subdivision applies to a body that is incorporated under one law and ceases to exist, and to a company incorporated under another law, if section 124‑525 applies in relation to the body and the company.

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

620‑15  Object

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

CGT consequences

620‑20  Disregard body’s capital gains and losses from CGT assets

             (1)  This section applies if:

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

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

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

620‑25  Cost base and pre‑CGT status of CGT asset for company

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

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

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

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

Consequences for depreciating assets

620‑30  Roll‑over relief for balancing adjustment events

             (1)  This section applies if:

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

                     (b)  the disposal involves a *CGT event.

             (2)  This Act applies as if:

                     (a)  there were roll‑over relief under subsection 40‑340(1) for the *balancing adjustment event; and

                     (b)  the body were the transferor mentioned in that subsection and subsection 328‑243(1A); and

                     (c)  the company were the transferee mentioned in that subsection and subsection 328‑243(1A).

Note:          Some effects of this are as follows:

(a)    the balancing adjustment event does not affect the body’s assessable income or deductions (see subsection 40‑345(1));

(b)    the company can deduct for the decline in value of the asset on the same basis as the body did (see subsection 40‑345(2));

(c)    Division 45 (Disposal of leases and leased plant) applies to the company as if it had done the things the body did (see subsection 40‑350(1)).

             (3)  Disregard paragraph 328‑243(1A)(c) in determining whether subsection 328‑243(1A) applies.

Consequences for trading stock

620‑40  Body taken to have sold trading stock to company

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

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

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

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

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

Consequences for revenue assets

620‑50  Body taken to have sold revenue assets to company

Disposal

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

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

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

Note:       Trading stock and depreciating assets are not revenue assets. See section 977‑50.

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

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

Ceasing to own or other realising

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

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

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

Note:       Trading stock and depreciating assets are not revenue assets. See section 977‑50.

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

Part 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      Application of subsection 701‑55(6)

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

701‑60      Tax cost setting amount

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

701‑63      Right to future income and WIP amount asset

701‑65      Net income and losses for trusts and partnerships

701‑67      Assets in this Part are CGT assets, etc.


Exceptions

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

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

701‑80      Accelerated depreciation

701‑85      Other exceptions etc. to the rules

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 or registered emissions unit

             (5)  However, if:

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

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

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

             (6)  If:

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

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

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

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

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

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

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

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

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

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

Object

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

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

Setting tax cost of membership interests

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

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

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

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

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

Assets to which section applies

             (2)  This section applies in relation to each asset, consisting of a liability owed by the entity, that becomes an asset of the *head company because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member. This is a liability that, ignoring that subsection, is owed to a *member of the group.

Object

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

Setting tax cost of assets

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

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

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

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

Assets to which section applies

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

                     (a)  either:

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

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

                     (b)  the asset becomes an asset of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group; and

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

Object

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

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

Setting value of trading stock at tax‑neutral amount

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

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

                     (b)  if paragraph (a) does not apply and the asset is *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.

Setting value of registered emissions unit at tax‑neutral amount

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

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

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

Entity rules

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

Object

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

When section has effect

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

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

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

Tax position of each non‑membership period to be worked out

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

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

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

                     (c)  so that each relevant item is either:

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

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

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

•       section 701‑40 (Exit history rule); and

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

•       section 716‑850 (about grossing up threshold amounts for periods of less than 365 days).

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

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

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

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

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

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

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

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

Income tax for the financial year

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

Taxable income for the income year

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

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

Loss for the income year

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

Utilisation and transfer of non‑membership period loss

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

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

                     (b)  ended at the end of the period.

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

Excess franking deficit tax offset for the income year

           (10)  For the purposes of applying section 205‑70 in relation to an income year after the income year (the current income year) to which this section applies, the entity has an excess mentioned in paragraph 205‑70(1)(c) (about excess franking deficit tax offsets) for the current income year only if it has such an excess for the non‑membership period (if any) ending at the end of the current income year. The amount of the excess for the current income year is the amount of the excess for the non‑membership period.

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

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

Assets to which section applies

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

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

                     (b)  the asset is:

                              (i)  a *registered emissions unit; and

                             (ii)  an asset of the entity;

                            just before it becomes a subsidiary member of the group.

Object

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

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

Setting value of trading stock at tax‑neutral amount

             (4)  If paragraph (2)(a) applies, the *value of the *trading stock at the end of the income year that ends, or, if section 701‑30 applies, of the income year that is taken by subsection (3) of that section to end, when the entity becomes a *subsidiary member is taken to be equal to:

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

                     (b)  if paragraph (a) does not apply and the asset is *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.

Setting value of registered emissions unit at tax‑neutral amount

             (5)  If paragraph (2)(b) applies, the *value of the *registered emissions unit at the end of the income year that ends, or, if section 701‑30 applies, of the income year that is taken by subsection (3) of that section to end, when the entity becomes a *subsidiary member is taken to be equal to:

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

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

Note:          See also section 701A‑7 of the Income Tax (Transitional Provisions) Act 1997.

701‑40  Exit history rule

             (1)  If the entity ceases to be a *subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to any thing covered by subsection (2) (an eligible asset etc.) after it becomes that of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity.

Assets, liabilities and businesses covered

             (2)  This subsection covers the following:

                     (a)  any asset;

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

                     (c)  any business;

that becomes that of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group.

Head company history inherited

             (3)  Everything that happened in relation to any eligible asset etc. while it was that of the *head company, including because of any application of section 701‑5 (the entry history rule), is taken to have happened in relation to it as if it had been an eligible asset etc. of the entity.

Note 1:       If the eligible asset etc. was brought into the group when an entity became a subsidiary member, section 701‑5 (the entry history rule) would have had the effect that things happening to the eligible asset etc. while it was that of the entity would be taken to have happened as if it was that of the head company. Such things will in turn be taken by this subsection to have happened in relation to the eligible asset etc. as if it were that of the entity that takes the asset out of the group.

Note 2:       Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701‑45).

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

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

Assets to which section applies

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

                     (a)  it becomes an asset of the entity because subsection 701‑1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group; and

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

Object

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

Note:          In the case of other assets, the fact that the entity inherits their history under section 701‑40 when the entity ceases to be a subsidiary member of the group means that the assets would be treated as having the same cost as they would for the head company at that time. However, assets consisting of liabilities do not have such a history because they are only recognised when the entity ceases to be a subsidiary member and the single entity rule ceases to apply.

Setting the asset’s tax cost

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

Note 1:       If section 701‑30 (Where entity not subsidiary member for whole of income year) applies, the time the entity ceases to be a subsidiary member will be treated as the start of an income year.

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

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

             (1)  If:

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

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

this section has effect for the entity core purposes.

Object

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

Setting tax cost of membership interests

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

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

Supporting provisions

701‑55  Setting the tax cost of an asset

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

Depreciating asset provisions

             (2)  If any of Subdivisions 40‑A to 40‑D, sections 40‑425 to 40‑445 and Subdivisions 328‑D and 355‑E is to apply in relation to the asset, the expression means that the provisions apply as if:

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

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

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

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

                              (i)  the *head company were required to choose at that time an effective life for the asset in accordance with subsections 40‑95(1) and (3), and any choice of an effective life determined by the Commissioner were limited to one in force at that time; or

                             (ii)  an effective life for the asset were worked out under subsection 40‑95(7), (8), (9) or (10) at that time; and

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

Trading stock provisions

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

Registered emissions unit provisions

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

Qualifying security provisions

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

Capital gain and loss provisions

             (5)  If Part 3‑1 or 3‑3 is to apply in relation to the asset, the expression means that the Part applies as if the asset’s *cost base or *reduced cost base were increased or reduced so that the cost base or reduced cost base at the particular time equals the asset’s *tax cost setting amount.

Division 230 (financial arrangements)

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

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

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

          (5B)  To avoid doubt, for the purposes of paragraph (5A)(b), determine the asset’s *Division 230 starting value by reference to the relevant standards (as mentioned in section 230‑230, 230‑280 or 230‑420) that apply in relation to the *head company’s financial report for the income year in which the entity becomes a subsidiary member of the group.

WIP amount assets

          (5C)  If:

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

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

the expression means that section 25‑95 applies as if the *head company had paid a *work in progress amount for the income year in which the particular time occurs equal to the *tax cost setting amount of the asset.

Consumable stores

          (5D)  If:

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

                     (b)  the asset is consumable stores;

the expression means that, for the purposes of section 8‑1, the *head company of the group is taken to have incurred an outgoing at the particular time in acquiring the asset equal to the asset’s *tax cost setting amount.

Other provisions

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

                     (a)  the cost of the asset;

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

                     (c)  expenditure in respect of the asset;

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

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

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

701‑56  Application of subsection 701‑55(6)

             (1)  Subsection (2) applies in relation to each asset that would be an asset of an entity at the time (the joining time) it becomes a *subsidiary member of a *consolidated group, assuming that subsection 701‑1(1) (the single entity rule) did not apply.

          (1A)  Subsection (2) applies only to the extent necessary for the purposes of subsection 701‑55(6) to determine whether a provision of this Act is to apply in relation to each of those assets on and after the joining time.

          (1B)  Subsection (2) applies despite section 701‑5 (the entry history rule).

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

Certain depreciating assets etc.

             (3)  Subsection 701‑55(6) does not apply in relation to an asset if any of the following provisions are to apply in relation to the asset:

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

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

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

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

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

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

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

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

             (1)  This section applies if:

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

                     (b)  ignoring the operation of subsection 701‑1(1) (the single entity rule), the entity held the asset at the joining time; and

                     (c)  taking into account the operation of subsection 701‑1(1) (the single entity rule), the *head company of the group did not hold the asset at the joining time.

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

             (2)  To avoid doubt, the asset’s *tax cost setting amount mentioned in paragraph (1)(a) is not to be taken into account in applying the provisions mentioned in subsections 701‑55(2), (3) (3A),, (4), (5), (5A), (5C), (5D) and (6) in relation to the asset at and after the joining time.

701‑60  Tax cost setting amount

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

 

Tax cost setting amount

Item

If the asset’s tax cost is set by:

The asset’s tax cost setting amount is:

1

section 701‑10 (Cost to head company of assets of joining entity)

the amount worked out in accordance with Division 705

2

section 701‑15 (Cost to head company of membership interests in entity that leaves group)

the amount worked out in accordance with section 711‑15 or 711‑55

3

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

701‑63  Right to future income and WIP amount asset

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

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

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

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

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

             (6)  WIP amount asset means an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in paragraph 25‑95(3)(b) for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work.

701‑65  Net income and losses for trusts and partnerships

Net income of partnerships and trusts

             (1)  If:

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

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

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

                     (b)  the entity is a trust or partnership;

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

Note:          Subsection 701‑30(3) requires non‑membership periods mentioned in that subsection to be treated as the start and end of an income year. This section would therefore also apply to those periods.

Partnership losses

             (2)  If:

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

                     (b)  the entity is a partnership;

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

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

701‑67  Assets in this Part are CGT assets, etc.

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

                     (a)  a *CGT asset;

                     (b)  a *revenue asset;

                     (c)  a *depreciating asset;

                     (d)  *trading stock;

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

Exceptions

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

Section applies to certain arrangements

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

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

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

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

                             (ii)  the *head company.

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

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

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

Object

             (2)  The object of this section is to align the income tax position of the combining entities at the joining time, because after that time they lose their separate tax identities under the single entity rule in subsection 701‑1(1) and this would preserve any imbalance.

Adjustment for disproportionate deductibility

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

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

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

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

                            (iii)  in any other case—the income year that ends, or, if section 701‑30 applies, the income year that is taken by subsection (3) of that section to end, at the joining time; and

                     (b)  all earlier income years;

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

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

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

Pre‑joining time proportion of total arrangement deductions

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

where:

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

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

Adjustment for disproportionate assessability

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

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

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

Pre‑joining time proportion of total arrangement assessable income

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

where:

pre‑joining time services proportion has the same meaning as in subsection (4).

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

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

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

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

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

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

                             (ii)  in any other case—those for the income year that started, or, if section 701‑30 applies, the income year that is taken by subsection (3) of that section to have started, when the entity ceased to be a *subsidiary member of the group on the previous occasion or the last of the previous occasions and those for all later income years.

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

Section applies to certain arrangements

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

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

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

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

                             (ii)  the *head company.

Note:          The notes to subsection 701‑70(1) on the application of that subsection to expenditure under certain kinds of arrangements are equally applicable for the purposes of this subsection.

Object

             (2)  The object of this section is to align the income tax position of the separating entities at the leaving time, because from that time they have separate tax identities as a result of the single entity rule in subsection 701‑1(1) ceasing to apply, and this may create an imbalance.

Adjustment for disproportionate deductibility

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

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

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

                             (ii)  in any other case—the income year that starts, or, if section 701‑30 applies, the income year that is taken by subsection (3) of that section to start, at the leaving time; and

                     (b)  all later income years;

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

Post‑leaving time proportion of total arrangement deductions

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

where:

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

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

Adjustment for disproportionate assessability

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

Post‑leaving time proportion of total arrangement assessable income

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

where:

post‑leaving time services proportion has the same meaning as in subsection (4).

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

701‑80  Accelerated depreciation

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

Object

             (2)  The object of this section is to preserve any entitlement to accelerated depreciation for assets that become those of the *head company because subsection 701‑1(1) (the single entity rule) applies when the entity becomes a *subsidiary member of the group. This is only to apply where the asset’s *tax cost setting amount is not more than the entity’s *terminating value for the asset.

Section applies to certain depreciating assets

             (3)  This section applies if:

                     (a)  a *depreciating asset to which Division 40 applies becomes that of the *head company because subsection 701‑1(1) (the single entity rule) applies when the entity becomes a *subsidiary member of the group; and

                     (b)  just before the entity became a subsidiary member, subsection 40‑10(3) or 40‑12(3) of the Income Tax (Transitional Provisions) Act 1997 applied for the purpose of the entity working out the asset’s decline in value under Division 40; and

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

                     (c)  the *tax cost setting amount that applies in relation to the asset for the purposes of section 701‑10 when it becomes an asset of the head company is not more than the entity’s *terminating value for the asset.

Preservation of accelerated depreciation

             (4)  While the asset is held by the *head company under subsection 701‑1(1) (the single entity rule), the decline in its value under Division 40 is worked out by replacing the component in the formula in subsection 40‑70(1) or 40‑75(1) that includes the asset’s *effective life with the rate that would apply under subsection 42‑160(1) or 42‑165(1) of this Act if it had not been amended by the New Business Tax System (Capital Allowances) Act 2001.

701‑85  Other exceptions etc. to the rules

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

Note:          An example of such a provision is Division 707 (about the transfer of certain losses to the head company of a consolidated group). That Division modifies the effect that the inheritance of history rule in section 701‑5 would otherwise have.

Division 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 entity as a subsidiary member

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

703‑80      Effects on the original entity’s tax position

Basic concepts

703‑5  What is a consolidated group?

             (1)  A consolidated group comes into existence:

                     (a)  on the day specified in a choice by a company under section 703‑50 as the day on and after which a *consolidatable group is taken to be consolidated; or

                     (b)  as described in section 703‑55 (about creating a consolidated group from a *MEC group).

Note:          The day specified in a choice under section 703‑50 as the day on and after which a consolidatable group is taken to be consolidated may be a day before the choice is made.

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

                     (a)  ceases to be a head company; or

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

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

Note:          The group does not cease to exist in some cases where a shelf company is interposed between the head company and its former members: see subsection 615‑30(2) and section 703‑70.

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

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

703‑10  What is a consolidatable group?

             (1)  A consolidatable group consists of:

                     (a)  a single *head company; and

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

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

703‑15  Members of a consolidated group or consolidatable group

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

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

                     (b)  a *subsidiary member of the group.

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

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

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

 

Head companies and subsidiary members of groups

Column 1
Entity’s role in relation to group

Column 2
Income tax treatment requirements

Column 3
Australian residence requirements

Column 4
Ownership requirements

1 Head company

The entity must be a company (but not one covered by section 703‑20) that has all or some of its taxable income (if any) taxed at a rate that is or equals the *corporate tax rate

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

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

2   Subsidiary member

The requirements are that:

(a) the entity must be a company, trust or partnership (but not one covered by section 703‑20); and

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

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

The entity must:

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

(b) comply with section 703‑25, if it is a trust; or

(c) be a partnership

The entity must be a *wholly‑owned subsidiary of the head company of the group and, if there are interposed between them any entities, the set of requirements in section 703‑45, section 701C‑10 of the Income Tax (Transitional Provisions) Act 1997 or section 701C‑15 of that Act must be met

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

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

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

 

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

Item

An entity of this kind:

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

1

An entity of any kind

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

2

A company

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

3

A company

The company:

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

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

5

A company

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

7

A trust

The trust is:

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

(b) a *non‑complying approved deposit fund or a *non‑complying superannuation fund for the income year

Note:          A subsidiary of a life insurance company cannot be a member of a consolidated group or consolidatable group in certain circumstances: see section 713‑510.

703‑25  Australian residence requirements for trusts

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

 

Australian residence requirements for trusts

Item

A trust of this kind:

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

1

A trust (except a unit trust)

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

2

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

The trust must be:

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

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

3

A *public trading trust for the income year

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

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

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

                     (a)  the holding entity; or

                     (b)  one or more wholly‑owned subsidiaries of the holding entity; or

                     (c)  the holding entity and one or more wholly‑owned subsidiaries of the holding entity.

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

                     (a)  it is a wholly‑owned subsidiary of the holding entity; or

                     (b)  it is a wholly‑owned subsidiary of a wholly‑owned subsidiary of the holding entity;

because of any other application or applications of this section.

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

(a)    ownership of shares under certain arrangements for employee shareholding (see section 703‑35); or

(aa)  ownership of certain preference shares following an ADI restructure (see section 703‑37); or

(b)    interposed trusts that are not fixed trusts (see section 703‑40).

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

                     (a)  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 1:       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).

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

Choice is irrevocable

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

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

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

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

Choice has no effect after consolidated group ceases to exist

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

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

                     (b)  having effect in relation to a time before the consolidated group ceased to exist, even if that time is before the choice is made.

Choice does not have effect if company is a member of a MEC group

             (7)  The choice does not have effect (and is taken not to have had effect) if, on the day specified, the company was a member of a *MEC group.

Consolidated group created when MEC group ceases to exist

703‑55  Creating consolidated groups from certain MEC groups

             (1)  A *consolidated group comes into existence at the time a *MEC group ceases to exist if:

                     (a)  the MEC group included only one *eligible tier‑1 company just before the time; and

                     (b)  the MEC group ceases to exist only because the company ceases to be an eligible tier‑1 company; and

                     (c)  the company is a *head company as defined in section 703‑15 at the time.

             (2)  To avoid doubt, the *consolidated group consists at the time of:

                     (a)  the company (as the *head company of the consolidated group); and

                     (b)  every entity (if any) that was a *subsidiary member of the *MEC group just before that time (as a subsidiary member of the consolidated group).

Notice of events affecting consolidated group

703‑58  Notice of choice to consolidate

             (1)  If a *consolidated group comes into existence on the day specified in a choice under section 703‑50, the *head company of the group must give the Commissioner a notice in the *approved form containing the following information:

                     (a)  the identity of the head company;

                     (b)  the day specified in the choice on which the *consolidatable group is taken to be consolidated;

                     (c)  the identity of each *subsidiary member of the group on that day;

                     (d)  the identity of each entity that was a subsidiary member of the group on that day but was not such a subsidiary member when the notice is given;

                     (e)  the identity of each entity that was not a subsidiary member of the group on that day but was such a subsidiary member when the notice is given;

                      (f)  the identity of each entity that became a subsidiary member of the group after that day but was not such a subsidiary member when the notice is given.

             (2)  The notice must be given no later than:

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

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

703‑60  Notice of events affecting consolidated group

             (1)  Within 28 days of an event described in an item of the table, the entity described in column 3 of the item must give the Commissioner notice in the *approved form of the event.

 

Notice of events

Column 1

Item

Column 2

If this event happens:

Column 3

Notice must be given by:

1

An entity becomes a *member of a *consolidated group

The *head company of the consolidated group

2

An entity ceases to be a *subsidiary member of a *consolidated group

The *head company of the group, or the person who was its public officer just before it ceased to exist if the former subsidiary member ceases to be a *member of the group because the head company ceases to exist

3

A *consolidated group ceases to exist

The company that was the *head company of the group, or the person who was its public officer just before it ceased to exist if it ceases to be the head company of the group because it ceases to exist

             (2)  Despite subsection (1), if:

                     (a)  an event described in subsection (1) happens in relation to a *consolidated group that comes into existence on the day specified in a choice under section 703‑50; and

                     (b)  the event happens before the relevant notice is given to the Commissioner under section 703‑58 (notice of choice to consolidate);

the *head company of the consolidated group must give the Commissioner notice in the *approved form of the event.

          (2A)  The notice must be given no later than:

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

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

             (3)  Despite subsection (1), if:

                     (a)  an event described in subsection (1) happens in relation to a *consolidated group that comes into existence at a time under subsection 703‑55(1) because a *MEC group ceased to exist at that time; and

                     (b)  the *MEC group came into existence under paragraph 719‑5(1)(a) because a choice under section 719‑50 is made after that time; and

                     (c)  the event happens before the relevant notice is given to the Commissioner under section 719‑76 (notice of choice to consolidate);

the *head company of the consolidated group must give the Commissioner notice in the *approved form of the event.

             (4)  The notice must be given no later than:

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

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

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

703‑65  Application

                   Sections 703‑70 to 703‑80 set out the effects if a company (the interposed company) chooses under subsection 615‑30(2) that a *consolidated group is to continue in existence at and after the time referred to in that subsection as the completion time.

Note:          The choice is one of the conditions for a compulsory roll‑over under Division 615 on an exchange of shares in the head company of a consolidated group for shares in the interposed company.

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

             (1)  The *consolidated group is taken not to have ceased to exist under subsection 703‑5(2) because the company referred to in subsection 615‑30(2) as the original entity ceases to be the *head company of the group.

             (2)  To avoid doubt, the interposed company is taken to have become the *head company of the *consolidated group at the completion time, and the original entity is taken to have ceased to be the head company at that time.

Note:          A further result is that the original entity is taken to have become a subsidiary member of the group at that time. Section 703‑80 deals with the original entity’s tax position for the income year that includes the completion time.

             (3)  A provision of this Part that applies on an entity becoming a *subsidiary member of a *consolidated group does not apply to an entity being taken to have become such a member as a result of this section, unless the provision is expressed to apply despite this subsection.

Note:          An example of the effect of this subsection is that there is no resetting under section 701‑10 of the tax cost of assets of the original entity that become assets of the interposed company because of subsection 701‑1(1) (the single entity rule).

             (4)  To avoid doubt, subsection (3) does not affect the application of subsection 701‑1(1) (the single entity rule).

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

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

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

                     (b)  is taken to have happened in relation to the interposed company instead of what would (apart from this section) be taken to have happened in relation to the interposed company before that time;

just as if, at all times before the completion time:

                     (c)  the interposed company had been the original entity; and

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

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

             (2)  To avoid doubt, subsection (1) also covers everything that, immediately before the completion time, was taken, because of:

                     (a)  section 701‑1 (Single entity rule); or

                     (b)  section 701‑5 (Entry history rule); or

                     (c)  one or more previous applications of this section; or

                     (d)  section 719‑90 (about the effects of a change of head company of a MEC group); or

                     (e)  section 719‑125 (about the effects of a group conversion involving a MEC group);

to have happened in relation to the original entity.

             (3)  Subsections (1) and (2) have effect:

                     (a)  for the head company core purposes in relation to an income year ending after the completion time; and

                     (b)  for the entity core purposes in relation to an income year ending after the completion time; and

                     (c)  for the purposes of determining the respective balances of the *franking accounts of the original entity and the interposed company at and after the completion time.

             (4)  Subsections (1) and (2) have effect subject to:

                     (a)  section 701‑40 (Exit history rule); and

                     (b)  a provision of this Act to which section 701‑40 is subject because of section 701‑85 (about exceptions to the core rules in Division 701).

Note:          An example of provisions covered by paragraph (b) of this subsection is Subdivision 717‑E (about transferring to a company leaving a consolidated group various surpluses under the CFC rules in Part X of the Income Tax Assessment Act 1936).

703‑80  Effects on the original entity’s tax position

                   In applying section 701‑30 to the original entity for the income year that includes the completion time, disregard a non‑membership period that starts before the completion time.

Note 1:       Section 701‑30 is about working out an entity’s tax position for a period when it is not a subsidiary member of any consolidated group. Its application can also affect the entity’s tax position in later income years.

Note 2:       Under section 703‑75 the interposed company inherits the original entity’s tax position for the part of the income year that ends before the completion time, with the consequence that the original entity’s taxable income, income tax payable, and losses of any sort, for that part are each nil.

                   Because of section 703‑75 and this section, the only tax payable by the original entity for the income year arises because of the application of section 701‑30 to non‑membership periods in the income year after the completion time.

Division 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 etc.

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

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

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

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

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

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

705‑59      Exception: treatment of linked assets and liabilities

How to work out the allocable cost amount

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

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

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

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

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

705‑80      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 to future income (other than a *WIP amount asset).

Note 1:       There are some additional retained cost base assets for a joining entity that is a life insurance company: see Subdivision 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