Consolidation Reference Manual
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.
C2 Assets
C2-4 Worked examples - cost setting on entry
Entry step C (allocate to reset cost base assets)
C2-4-530 Reduction for revenue-like assets (step C)
Description
This example shows how the tax cost setting amount for revenue-like assets may be reduced (at step C of the cost setting process).
Commentary
At step C of the cost setting process the remaining ACA of the joining entity is allocated among its reset cost base assets in proportion to their market values.
Where the amount allocated to a revenue-like asset (i.e. a revenue asset, item of trading stock or depreciating asset) exceeds the greater of its terminating value or market value, the allocated amount is reduced by the amount of the excess.
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- The terminating value of a revenue asset is its cost base just before the entity becomes a member of a consolidated group.
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- The terminating value of an item of trading stock is its value at the beginning of the joining entity's non-membership period that precedes the joining time, or its purchase price if acquired during that period. (A non-membership period is a period during an income year in which the entity is not a member of a consolidated group. Note that an entity will have more than one non-membership period in an income year if it leaves and then rejoins the same consolidated group or joins another consolidated group during that year.)
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- The terminating value of a depreciating asset is its adjustable value at the joining time. For a partly constructed asset the adjustable value is the cost of the asset to the point of construction at the joining time.
The excess is then reallocated to the other reset cost base assets in accordance with their market values, but not so as to exceed the limit for any revenue-like assets.
The reduction at this step applies to revenue assets, trading stock and depreciating assets. A CGT asset is a revenue asset if the profit or loss on disposal would be taken into account in calculating taxable income (or losses) other than under the CGT provisions, and the asset is neither trading stock nor a depreciating asset.
The reduction addresses the potential for unrealised capital losses to be converted to revenue losses when an entity joins a consolidated group. This relates to situations where assets still held by a joining entity have declined in value after the group it is joining purchased membership interests in it.
Example
Facts
Assume the ACA for a joining entity, ACo, is $9,400. The retained cost base assets consist of Cash of $650. After this amount is subtracted, the remainder of the ACA ($8,750) is first apportioned to the reset cost base assets according to their market values (Table 1).
| Cost ($) | Terminating value ($) | Market value ($) | Apportionment | Tax cost setting amount before reduction ($) | section 705-40 max. amount ($) | Excess for revenue-like assets ($) | Tax cost setting amount after reduction ($) | |
|---|---|---|---|---|---|---|---|---|
| Land 1 | 1,000 | 1,000 | 1,200 | 8750 × 1200/7400 | 1,419 | 1,419 | ||
| Land 2 | 2,000 | 2,000 | 2,500 | 8750 × 2500/7400 | 2,956 | 2,956 | ||
| Plant 1 | 500 | 200 | 220 | 8750 × 220/7400 | 260 | 220 | 40 | 220 |
| Plant 2 | 300 | 160 | 130 | 8750 × 130/7400 | 154 | 160 | 0 | 154 |
| Partly built Plant 3 | 1,000 | 1,000 | 1,500 | 8750 × 1500/7400 | 1,774 | 1,500 | 274 | 1,500 |
| Partly built Plant 4 | 800 | 800 | 650 | 8750 × 650/7400 | 769 | 800 | 0 | 769 |
| Trading stock 1 | 800 | 800 | 1,000 | 8750 × 1000/7400 | 1,182 | 1,000 | 182 | 1,000 |
| Trading stock 2 | 200 | 200 | 200 | 8750 × 200/7400 | 236 | 200 | 36 | 200 |
| Totals | 7,400 | 8,750 | 532 |
The excess of $532 must be reallocated against all reset cost base assets that have not had their tax cost setting amounts reduced → section 705-35, Income Tax Assessment Act 1997 (ITAA 1997). For revenue-like assets the reallocation must not result in the tax cost setting amount exceeding the limit set in section 705-40 of the ITAA 1997. The first stage of this reallocation is shown in Table 2.
| Market value ($) | Apportionment | Share of excess ($) | Share of 1st cut ($) | Tax cost setting amount with 1st excess ($) | section 705-40 max. amount ($) | Excess for revenue-like assets ($) | Tax cost setting amount after reduction ($) | |
|---|---|---|---|---|---|---|---|---|
| Land 1 | 1,200 | 532 × 1200/4480 | 143 | 1,419 | 1,562 | 1,562 | ||
| Land 2 | 2,500 | 532 × 2500/4480 | 297 | 2,956 | 3,253 | 3,253 | ||
| Plant 2 | 130 | 532 × 130/4480 | 15 | 154 | 169 | 160 | 9 | 160 |
| Partly built Plant 4 | 650 | 532 × 650/4480 | 77 | 769 | 846 | 800 | 46 | 800 |
| Totals | 4,480 | 532 | 55 |
The tax cost setting amounts for plant 2 and partly built plant 4 have exceeded the maximum allowable by a combined total of $55. This amount must be reallocated against the reset cost base assets whose tax cost setting amounts have not exceeded their limits. This second stage of the reallocation is shown in table 3.
| Market value ($) | Apportionment | Share of excess ($) | Share after 2nd cut ($) | Tax cost setting amount with 2nd excess ($) | |
|---|---|---|---|---|---|
| Land 1 | 1,200 | 55 × 1200/3700 | 18 | 1,562 | 1,580 |
| Land 2 | 2,500 | 55 × 2500/3700 | 37 | 3,253 | 3,290 |
| Totals | 3,700 | 55 |
The final results of step C of the cost setting process for each of ACo's reset cost base assets are shown in table 4. Note that a further reduction may be required for over-depreciated assets (step D) → Worked example: 'Reduction for over-depreciated assets (step D)', C2-4-610 . A further reduction for certain revenue-like assets may also be required (step E) → 'Treatment of assets', C2-1 ; Worked example: 'Limiting the tax cost setting amounts of revenue-like assets (step E)', C2-4-710 ; and section 705-57, ITAA 1997.
| Allocation ($) | 1st reallocation ($) | 2nd reallocation ($) | Tax cost setting amount ($) | |
|---|---|---|---|---|
| Land 1 | 1,419 | 143 | 18 | 1,580 |
| Land 2 | 2,956 | 297 | 37 | 3,290 |
| Plant 1 | 220 | 220 | ||
| Plant 2 | 154 | 6 | 160 | |
| Partly built Plant 3 | 1,500 | 1,500 | ||
| Partly built Plant 4 | 769 | 31 | 800 | |
| Trading stock 1 | 1,000 | 1,000 | ||
| Trading stock 2 | 200 | 200 | ||
| Totals | 8,218 | 477 | 55 | 8,750 |
References
Income Tax Assessment Act 1997, sections 705-35 and 705-40; as amended by:
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- New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1
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- New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (No. 90 of 2002), Schedule 4
Income Tax Assessment Act 1997, section 977-50; as amended by New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (No. 90 of 2002), Schedule 15
Income Tax Assessment Act 1997, section 705-57; as amended by: New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 (No. 117 of 2002), Schedule 3
Income Tax (Transitional Provisions) Act 1997, section 701A-5; as amended by New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 (No. 117 of 2002), Schedule 9
H. Coonan (Minister for Revenue and Assistant Treasurer, Government delivers on business tax reform, media release C72/02, 27 June 2002
History
Revision history
Section C2-4-530 first published (excluding drafts) 2 December 2002 and updated 28 May 2003.
Further revisions are described below.
| Date | Amendment | Reason |
|---|---|---|
| 3.12.03 | Changes to Commentary and Example to illustrate treatment of partly constructed assets that have a limited effective life as revenue-like assets. | To further expand interpretative information on treatment of revenue-like assets. |
| 14.7.04 | Note in Commentary on recent changes to consolidation rules. | Legislative amendments. |
| 26.10.05 | Deletion of note in Commentary on recent changes to consolidation rules. | Legislative amendments. |
Current at 26 October 2005