Draft Taxation Determination
TD 2008/D11
Income tax: consolidation: capital gains: for the purposes of Part 3-90 of the Income Tax Assessment Act 1997, is the CGT asset that an entity has contracted to sell to another taxpayer an asset of the entity at a time it joins or leaves a consolidated group, if the contract is not completed at that time?
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Please note that the PDF version is the authorised version of this draft ruling.This document has been finalised by TD 2008/31.There is a Compendium for this document: TD 2008/31EC .
FOI status:
may be released
This publication provides you with the following level of protection:
This publication is a draft for public comment. It represents the Commissioner's preliminary view about the way in which a relevant taxation provision applies, or would apply to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. You can rely on this publication (excluding appendixes) to provide you with protection from interest and penalties in the way explained below. If a statement turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the publication in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax provided the time limits under the law allow it. |
Ruling
1. Yes. The CGT asset, the subject of the contract, is an asset of the entity at the time it joins or leaves a consolidated group for the purposes of the consolidated group rules in Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997).
2. In general, no other asset arising under the contractual arrangements would be recognised separately as an asset of the entity at the joining time or the leaving time. One exception to this would be if the entity has had some separate dealings in respect of such an asset.
Application
3. This draft Determination does not apply if the CGT asset that is the subject of the contract is a CGT asset of the same consolidated group at both the contract time and the time just after the contract is completed.
Example 1 - entry sell case
4. On 22 June 2004, X Co entered into a contract to sell all of its shares in B Co (40%) to Y Co.
5. On 10 July 2004, Head Co acquired all of the shares in X Co which caused X Co to become a member of Head Co's consolidated group.
6. Head Co must allocate the group's allocable cost amount (ACA) for X Co's shares to the assets of X Co when it becomes a subsidiary member. In relation to the contract, the relevant asset recognised for tax cost setting purposes are the shares in B Co.
7. In this example, no asset that X Co may hold at its joining time arising under the contractual arrangement would be recognised separately by Head Co as an asset of X Co.
Example 2 - exit sell case
8. X Co is a subsidiary member of a consolidated group and the owner of land. Under the single entity rule, the land is an asset of the group's head company, Head Co.
9. On 16 June 2006, X Co entered into a contract to sell the land.
10. X Co leaves the group on 30 June 2006 as a result of Head Co selling all of its shares in X Co to an individual.
11. At the leaving time, Head Co must identify the assets X Co takes out of the group in calculating the tax cost of the group's membership interests in X Co. In applying section 711-25 of the ITAA 1997, the land is recognised as an asset that the head company holds at the leaving time (because of the single entity rule applying to X Co).
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 75 to 77 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
25 June 2008
Appendix 1 - Explanation
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This Appendix is provided as information to help you understand how the Commissioner's preliminary view has been reached. It does not form part of the proposed binding public ruling.
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Background
13. When an entity joins a consolidated group it is necessary to identify each asset that it brings with it into the group. This is because section 701-10 and Division 705 of the ITAA 1997 seek to align the assets' cost for income tax purposes with the group's cost of acquiring the entity (referred to as the allocable cost amount or ACA).
14. Similarly, when an entity ceases to be a subsidiary member of a consolidated group, it is necessary to identify the assets taken from the group when it leaves. This is because the assets' cost is used in working out the cost base of the group's membership interests in the leaving entity under Division 711 of the ITAA 1997.
Meaning of 'asset'
15. The meaning of an 'asset' for the purposes of applying the tax cost setting rules in Divisions 705 and 711 is not defined in the ITAA 1997.
16. The Commissioner takes the view in Taxation Ruling TR 2004/13[1] that an asset, for the purposes of the cost setting rules in Part 3-90 of the ITAA 1997, is 'anything recognised in commerce and business as having economic value to the joining entity at the joining time for which a purchaser of its membership interests would be willing to pay'. The same criteria would apply in identifying an asset a leaving entity takes with it on exiting the group.
17. As explained in paragraph 26 of TR 2004/13, the extent and degree to which the assets of the entity should be separately identified or treated as composite items will depend on the nature of the asset, the business being carried on by the entity and the circumstances of the particular case.
Identifying the relevant asset in a straddle contract
18. If the transfer of ownership of the asset has yet to be completed when the entity joins or leaves a consolidated group, the relevant assets for cost setting purposes must be identified.
19. When an entity enters into a contract to sell a CGT asset, its ownership of that asset continues to be recognised at law, until such time as ownership passes to another party.
20. Although entering into the contract to sell the asset will result in the seller acquiring legal or equitable rights (for example to receive the purchase price, or balance of the purchase price on settlement), this will normally be accompanied by obligations (for example to deliver up the asset on completion). Ordinarily, these rights and obligations will offset in value terms such that there will be no asset arising out of the contractual arrangements that is 'recognised in commerce and business as having economic value to the joining entity at the joining time for which a purchaser of its membership interests would be willing to pay.' In these circumstances, it is appropriate to recognise only the underlying asset for tax cost setting purposes.
21. However, if, for example, the entity has dealt with an asset arising under the contract separately, it may be separately recognised as an asset of the entity where it is held at the joining or leaving time.
22. Recognising the underlying CGT asset as the most relevant asset of the joining or leaving entity also achieves more appropriate cost setting outcomes. If an asset arising under the contract were recognised instead:
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- in an entry-sell case, there would be an over-allocation of ACA to other reset cost base assets of the joining entity because the asset arising under the contract would have a lower market value relative to the entity's other assets; and
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- in an exit sell case, the cost base for the group's membership interests in the leaving entity would be understated because the asset arising under the contract would have a terminating value of nil.
23. This approach is consistent with paragraph 26 of TR 2004/13 where it refers to CGT assets being identified consistently with the approach in Taxation Ruling TR 95/35[2] and Taxation Determination TD 93/86.[3]
Appendix 2 - Your comments
24. This draft Determination is part of a suite of draft Determinations that deal with issues related to straddle contracts. The complete suite of draft Determinations are:
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- Draft Taxation Determination TD 2008/D9;
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- Draft Taxation Determination TD 2008/D10; and
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- Draft Taxation Determination TD 2008/D11.
25. We invite you to comment on this draft Determination individually, or on the suite of draft Determinations as a whole. Please forward your comments to the contact officer by the due date.
26. We are developing our views on the way the tax cost setting provisions apply where the CGT asset the subject of the contract is a CGT asset of the same consolidated group at both the contract time and the time just after the contract is completed. Any comments and submissions on this and other intra-group related issues are also welcome. (Note: the Tax Office prepares a compendium of comments for the consideration of the relevant Rulings Panel. The Tax Office may use a sanitised version (names and identifying information removed) of the compendium in providing its responses to persons providing comments. Please advise if you do not want your comments included in a sanitised compendium.)
| Due date: | 25 July 2008 |
| Contact officer details have been removed following publication of the final ruling. | |
Footnotes
Taxation Ruling TR 2004/13 Income Tax: the meaning of an asset for the purposes of Part 3-90 of the Income Tax Assessment Act 1997.
Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts.
Taxation Determination TD 93/86 Income tax: capital gains: are the totality of rights under a contract considered to be the one asset, or is each right considered to be a separate asset for CGT purposes?
Not previously issued as a draft
References
ATO references:
NO 2006/7075
Related Rulings/Determinations:
TD 93/86
TD 2008/D9
TD 2008/D10
TR 95/35
TR 2004/13
TR 2006/10
Subject References:
assets
CGT asset
consolidation
consolidation - assets
consolidation - capital gains tax
consolidation - exiting
consolidation - joining
cost of membership interests
cost setting rules
head company
joining entity
joining time
leaving entity
leaving time
tax cost setting rules
Legislative References:
ITAA 1997 Pt 3-90
ITAA 1997 701-10
ITAA 1997 Div 705
ITAA 1997 Div 711
ITAA 1997 711-25