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.
C9 Tax liabilities
C9-6 Life insurance companies
C9-6-520 Modified cost setting rules for consolidated groups that include a life insurance company
Description
When an entity joins a consolidated group, or a consolidated group is formed, the tax costs of the assets of each joining entity are aligned with the cost to the group of acquiring the entity (unless the head company chooses the transitional option of retaining existing tax values). The cost setting rules are used to obtain the tax cost of each asset → 'Treatment of assets', C2-1 . The group's cost for each asset is worked out by allocating the ACA (allocable cost amount) for the joining entity among the entity's assets. This example shows how the cost setting rules are modified when a life insurance company joins a consolidated group.
Commentary
Subdivision 713-L of the Income Tax Assessment Act 1997 (ITAA 1997) modifies the tax cost setting rules in Subdivision 705-A to specify:
- •
- which assets of life insurance companies are to be treated as retained cost base assets (see table 1), and
- •
- the basis of valuing life insurance policy liabilities for the purposes of working out the ACA (see table 2).
| Basic principle in Subdivision 705-A | Modification in Subdivision 713-L | Tax cost setting amount specified as... |
|---|---|---|
| Retained cost base assets are defined in subsection 705-25(5) | Assets of a life insurance company defined as retained cost base assets are: | |
|
|
The transfer value* just before the joining time**, for the purpose of working out the tax cost setting amounts for reset cost base assets
( → section 705-35 ), or for all other purposes, the assets' terminating value
|
|
|
|
The embedded value (under section 121AM of the ITAA 1936) of the life insurance company reduced by the net value of shareholders' assets held by the company. |
* The transfer value of an asset is the amount expected to be received from disposal of the asset in an open market after deducting any expected costs in relation to that disposal.
** When a life insurance company joins a consolidated group, the joining time is taken to be a valuation time for the purposes of Division 320. Life insurance companies therefore need to value both complying superannuation/FHSA assets and segregated exempt assets, and their associated liabilities, immediately before they join a group. This ensures the transfer value of the assets is aligned with the value of the relevant liabilities.
| Basic principle in Subdivision 705-A | Modification in Subdivision 713-L | Value prescribed as... |
|---|---|---|
| In step 2 of the ACA, liabilities are valued in accordance with the joining entity's accounting principles for tax cost setting
→ subsection 705-70(1) and (3), section 995-1 |
The following liabilities have a prescribed value: | |
| (a) complying superannuation/FHSA liabilities | The amount worked out under section 320-190 at the joining time* | |
| (b) exempt life insurance policy liabilities | The amount worked out under section 320-245 at the joining time* | |
| (c) liabilities under net risk components of life insurance policies | The current termination value of that component at the joining time as calculated by an actuary | |
| (d) liabilities under net investment components of ordinary life insurance policies | The amount worked out for those liabilities under subsection 320-190(2) as if those liabilities were complying superannuation/FHSA liabilities |
* When a life insurance company joins a consolidated group, the joining time is taken to be a valuation time for the purposes of Division 320. Life insurance companies therefore need to value both complying superannuation/FHSA assets and segregated exempt assets, and their associated liabilities, immediately before they join a group. This ensures the transfer value of the assets does not exceed the value of the relevant liabilities.
→ Taxation Determination TD 2005/17
Example
Facts
HeadCo, whose income year ends on 30 June, chooses to consolidate with effect from 1 July 2002. Assuming the modified membership rules are satisfied, the consolidated group is structured as shown in figure 1.
Figure 1: Structure of the consolidated group
| Building | 1,000 | Capital | 1,400 |
| Shares in ACo | 300 | Retained profits | 70 |
| Shares in YCo | 200 | Liabilities | |
| Units in Alpha Trust | 500 | - Loan * | 500 |
| Cash | 950 | - Policy liabilities ** | 950 |
| - Income tax | 30 | ||
| 2,950 | 2,950 |
- *
- Not an intragroup loan.
- **
- All policy liabilities relate to complying superannuation business and immediate annuity business.
Note: LifeCo uses market value accounting for its investments.
The following assets are segregated for the purposes of Division 320:
- •
- all shares in ACo - complying superannuation/first home saver account (FHSA) assets
- •
- cash includes $150 - complying superannuation/FHSA assets and $100 - segregated exempt assets, and
- •
- all units in Alpha Trust - segregated exempt assets.
| Cash | 50 | Capital | 300 |
| Property | 100 | ||
| Shares in ZCo | 150 | ||
| 300 | 300 |
Application of cost setting rules
When a consolidated group is formed, no changes are made in relation to the assets of the head company (except that intragroup membership interests and debts are ignored after formation). The cost setting rules establish the tax values of assets owned by the subsidiary companies.
HeadCo must first apply the cost setting rules to LifeCo before it applies them to ACo. → section 705-145
In accordance with section 713-525, LifeCo undertakes a valuation under section 320-175 (for its complying superannuation/FHSA assets) and section 320-230 (for its segregated exempt assets) and carries out any resulting transfers under sections 320-180 and 320-235.
The transfer values of LifeCo's complying superannuation/FHSA assets and segregated exempt assets immediately before joining the consolidated group are set out in table 5. The table also sets out the value of LifeCo's complying superannuation/FHSA liabilities and exempt life insurance liabilities at the joining time.
| Division 320 value | |
|---|---|
| Assets | |
| Cash (complying superannuation/FHSA asset) | 150 |
| Shares in ACo (complying superannuation/FHSA asset) | 300 |
| Cash (segregated exempt asset) | 100 |
| Units in Alpha Trust (segregated exempt asset) | 500 |
| Liabilities | |
| Complying superannuation/FHSA liabilities | 450 |
| Exempt life insurance liabilities | 500 |
As a consequence of these valuations, LifeCo must transfer the excess segregated exempt assets ($100) out of the segregated exempt asset pool within 30 days of the date of valuation → section 320-235.
Assume LifeCo transfers $100 cash from its segregated exempt assets.
Setting tax costs of LifeCo's assets
| ACA step 1: | The cost base of membership interests * | $1,400 | |
| ACA step 2: | Value of LifeCo's liabilities | ||
| - loan | $500 | ||
| - income tax | $30 | ||
| - complying superannuation/FHSA liabilities | $450 | ||
| - exempt life insurance liabilities | $500 | $1,480 | |
| ACA step 3: | Undistributed frankable profits ** | $70 | |
| LifeCo's entry ACA (assuming no other adjustments are required) | $2,950 | ||
- *
- Assume the market value of membership interests equals the cost base of those interests.
- **
- Assume the retained earnings are undistributable frankable profits under section 705-90.
| Total entry ACA for LifeCo | $2,950 | ||
| Less amounts for retained cost base assets of LifeCo | |||
| - cash (including complying superannuation/FHSA cash of $150 and $100 cash transferred from segregated exempt assets) | $950 | ||
| - shares in ACo | $300 | ||
| - units in Alpha Trust | $500 | $1,750 | |
| Remaining ACA | $1,200 | ||
Note: For the purpose of working out the tax cost setting amount for reset cost base assets under section 705-35, the transfer values of the shares in ACo and the units in Alpha Trust are used. However, for all other purposes the 'terminating value' under section 705-30 is used → subsection 713-515(2).
| Asset | Market
value ($) |
Apportionment of
remainder of entry ACA |
Cost setting
amount ($) |
|---|---|---|---|
| Building | 1,000 | 1000/1200 x 1200 | 1000 |
| Shares in YCo | 200 | 200/1200 x 1200 | 200 |
| Total | 1,200 | 1,200 |
Setting tax costs of ACo's assets
| ACA step 1: The cost base of membership interests * | $300 |
| ACo's entry ACA (assuming no other adjustments are required) | $300 |
- *
- Generally, the tax cost setting amount calculated for the membership interest in a subsidiary is used as the ACA step 1 amount in order to calculate the tax cost setting amounts for assets of the subsidiary → subsection 705-145(3).
- The tax cost setting amount for shares in ACo outlined on p. 4 under '2. Determine ACA to be allocated to LifeCo's reset cost base assets' is $300 only for the purposes of working out the tax cost setting amount for reset cost base purposes → section 705-35.
- Shares in ACo are a complying superannuation/FHSA asset of LifeCo. In this situation, the tax cost setting amount is the asset's terminating value ' paragraph 713-515(2)(b). Therefore, the step 1 amount of ACo's entry ACA is the terminating value of the complying superannuation/FHSA asset (i.e. the membership interest LifeCo holds in ACo).
- In this example, the terminating value is the same as the amount used in determining the ACA to be allocated to LifeCo's reset cost base assets. For all other purposes, the tax cost setting amount is the asset's terminating value.
| Total entry ACA for ACo | $300 | |
| Less amounts for retained cost base assets of ACo | ||
| - cash | $50 | |
| Remaining ACA | $250 | |
| Asset | Market
value ($) |
Apportionment of
remainder of entry ACA |
Cost setting
amount ($) |
|---|---|---|---|
| Property | 150 | 150/250 x 250 | 150 |
| Shares in ZCo | 100 | 100/250 x 250 | 100 |
| Total | 250 | 250 |
References
Income Tax Assessment Act 1936 , section 121AM
Income Tax Assessment Act 1997 , sections 705-30 , 705-35 , 705-70 , 705-90 and subsection 705-25(5) ; as amended by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1
Income Tax Assessment Act 1997 , section 705-145 ; as amended by New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act (No. 90 of 2002), Schedule 3
Income Tax Assessment Act 1997 , Subdivision 713-L ; as amended by
- •
- New Business Tax System (Consolidation and Other Measures) Act (No. 2) 2002 , Schedule 6, Part 1
- •
- First Home Saver Accounts (Consequential Amendment) Act 2008
Income Tax Assessment Act 1997 , sections 705-70 and 995-1 ; as amended by Tax Laws Amendment (2010 Measures No. 1) Act 2010 (No. 56 of 2010), Schedule 5, Part 8
Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No. 2) 2002, Chapter 1
"Taxation Determination TD 2005/17 - Income tax: consolidation: life insurance: do sections 705-75 and 705-80 of the Income Tax Assessment Act 1997 apply to a policy liability that has been valued under section 713-520 for the purposes of working out step 2 of the allocable cost amount for a joining entity that is a life insurance company?
History
Revision history
Section C9-6-520 first published 28 May 2003.
Further revisions are described below.
| Date | Amendment | Reason |
|---|---|---|
| 27.10.03 | Table 2 (Modifications to step 2 of the ACA for a life insurance company) amended to include exempt life insurance policy liabilities. | Technical correction |
| Table 3 amended to change the composition of assets segregated for the purposes of Division 320. | Technical correction | |
| 26.10.05 | Reference to new taxation determination. | |
| 6.5.11 | Removal of notes on proposed changes to consolidation rules.
References to virtual PST assets and virtual PST liabilities replaced. Reference to 'accounting standards for tax cost setting' p. 2. |
Enactment of First Home Saver Accounts (Consequential Amendment) Act 2008
Legislative amendments |
Current at 6 May 2011