Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES  

PART 3-90 - CONSOLIDATED GROUPS  

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

Subdivision 705-A - Basic case: a single entity joining an existing consolidated group  

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

SECTION 705-57   Adjustment to tax cost setting amount where loss of pre-CGT status of membership interests in joining entity  

Object

705-57(1)    

The object of this section is to ensure that provisions that cause ^* membership interests in the joining entity to stop being ^* pre-CGT assets, with a resultant increase in their ^* cost base and ^* reduced cost base, do not increase ^* tax cost setting amounts for ^* trading stock, ^* depreciating assets, *registered emissions units or ^* revenue assets of the joining entity, where those amounts are above the joining entity ' s ^* terminating values for the assets.

When section applies

705-57(2)    
This section applies if:

(a) a ^* membership interest that a ^* member of the joined group holds in the joining entity at the joining time had previously stopped being a ^* pre-CGT asset in the circumstances covered by any of subsections (3) to (5); and

(b) the ^* cost base or ^* reduced cost base of the membership interest just after it stopped being a pre-CGT asset exceeded (the excess being the loss of pre-CGT status adjustment amount ) its cost base or reduced cost base just before it stopped being a pre-CGT asset; and

(c) an asset (a revenue etc. asset ) that is ^* trading stock, a ^* depreciating asset, a *registered emissions unit or a ^* revenue asset becomes that of the ^* head company of the joined group because subsection 701-1(1) (the single entity rule) applies when the joining entity becomes a ^* subsidiary member of the group; and

(d) the revenue etc. asset ' s ^* tax cost setting amount (after any application of section 705-40 , 705-45 or 705-47 ) exceeds the joining entity ' s ^* terminating value for the asset.

Loss of pre-CGT status because Division 149 etc. applied while interest held by member

705-57(3)    

The first circumstance for the purpose of paragraph (2)(a) is where Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the ^* membership interest to stop being a ^* pre-CGT asset while the ^* member held the membership interest.

Loss of pre-CGT status because Division 149 etc. applied before current holding by member

705-57(4)    
The second circumstance for the purpose of paragraph (2)(a) is where:

(a) either:

(i) the ^* member ^* acquired the ^* membership interest directly from another entity; or

(ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions; and

(b) Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the membership interest to stop being a ^* pre-CGT asset while the other entity held the membership interest or while the member held the membership interest on the previous occasion; and

(c) if subparagraph (a)(i) applies - at the time of the acquisition, the member ^* controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and

(d) if subparagraph (a)(ii) applies - the same entity:

(i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other party; or

(ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or

(iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;

or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.

Loss of pre-CGT status because of acquisition from another entity

705-57(5)    
The third circumstance for the purpose of paragraph (2)(a) is where:

(a) either:

(i) the ^* member acquired the ^* membership interest after 16 May 2002 directly from another entity; or

(ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions, all of which took place after 16 May 2002; and

(b) the membership interest stopped being a ^* pre-CGT asset because of the acquisition from the other entity or from the member while the member held the membership interest on a previous occasion; and

(c) if subparagraph (a)(i) applies - at the time of the acquisition, the member ^* controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and

(d) if subparagraph (a)(ii) applies - the same entity:

(i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other parties; or

(ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or

(iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;

or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.

Reduction in revenue etc. asset ' s tax cost setting amount

705-57(6)    

The revenue etc. asset ' s ^* tax cost setting amount (after any application of section 705-40 , 705-45 or 705-47 ) is instead the amount that would apply if, in working out the step 1 amount in the table in section 705-60 , the ^* cost base and ^* reduced cost base of the ^* membership interest were reduced by the sum of the loss of pre-CGT status adjustment amounts for the membership interest and all other membership interests that have loss of pre-CGT status adjustment amounts.

Limit on reduction

705-57(7)    

However, the reduction only takes place to the extent that it does not result in the asset ' s ^* tax cost setting amount being less than the joining entity ' s ^* terminating value for the asset.

Note:

The reduction under this section is converted into a capital loss available over a period of 5 income years starting with the income year in which the joining time occurs: see CGT event L1.