Draft Taxation Determination

TD 2004/D35

Income tax: consolidation tax cost setting rules: should distributions of profits accrued to the joined group that recoup losses accrued to the group be counted when determining the step 4 amount of the allocable cost amount on formation of a transitional consolidated group?

• Please note that the PDF version is the authorised version of this draft ruling.
  This document has been finalised by TD 2004/58.

FOI status:

draft only - for comment

1. Yes. Where a joining entity makes a distribution prior to the joining time out of profits that accrued to the joined group, and those profits recouped losses for income tax purposes that accrued to the joined group, the distribution is subtracted at step 4 of the allocable cost amount (ACA) under subparagraph 705-95(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997). This is not changed if the group is a transitional consolidated group.

2. The purpose of step 4 is to prevent the ACA reflecting a return of part of the amount paid to acquire the membership interests in the joining entity (step 4 column 2 in the table in section 705-60). In particular, subparagraph 705-95(b)(ii) prevents the ACA reflecting an amount paid for membership interests in the joining entity that was later (but before it became a member of the joined group) lost and, following the recoupment of the loss, the profit that recouped the loss was distributed.

Example 1

3. HCo incorporates ACo with $100,000.00 on 1 July, 2001. In its first year of operation, ACo makes a tax loss of $50,000.00. ACo makes an accounting loss of $35,000.00 (after creation of a deferred tax asset (DTA) of $15,000.00 in respect of the tax loss). In the second year of operation ACo has an accounting profit of $35,000.00 (after reversing for the DTA). The assessable income of $50,000.00 recouped the tax loss carried forward from the first year. The taxable income (loss) is therefore $nil. ACo paid the profits as an unfranked interim dividend on 30 June 2003. On 1 July 2003 HCo and ACo consolidate.

4. ACo's financial position at 1 July 2003 is shown in Table 1.

5. The ACA would be as follows:

6. In the above table, the Step 4 amount is $35,000.00. All of the profits were untaxed as they recouped the prior year tax loss. By subtracting the distribution of profits that accrued to the joined group of $35,000.00 at step 4, we ensure the ACA does not effectively reinstate the tax loss.

7. The ACA of $65,000.00 will be allocated to the retained cost base asset (that is, cash). There is no shortfall or excess of ACA. Example 2

8. Assume the same facts as above, but in this example the retained earnings balance is $nil because there was no distribution by ACo of current year profits.

9. ACo's financial position at 1 July 2003 is shown in Table 3.

10. The ACA would be as follows:

11. The ACA of $100,000.00 will be allocated to the retained cost base asset (that is, cash). There is no shortfall or excess of ACA.

Date of Effect

12. When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Your comments

13. We invite you to comment on this draft Taxation Determination. Please forward your comments to the contact officer by the due date.

Commissioner of Taxation
21 July 2004

Not previously issued in draft form.

References

ATO references:
NO 2004/9704

Related Rulings/Determinations:

TR 92/20

Subject References:
ACA
acquired profits
allocable cost amount
consolidation
cost setting
losses
profits
recouped losses
step 4
tax cost setting amount
transitional consolidated group

Legislative References:
TAA 1953 Pt IVAAA
ITAA 1997 705-60
ITAA 1997 705-95(b)(i)
ITAA 1997 705-95(b)(ii)