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  

How to work out the allocable cost amount

SECTION 705-90   Undistributed, taxed profits accruing to joined group before joining time - step 3 in working out allocable cost amount  

705-90(1)    

For the purposes of step 3 in the table in section 705-60 , the step 3 amount is worked out in accordance with this section unless the joining entity is a trust that is not a *corporate tax entity at the joining time.

Note:

If the joining entity is such a trust, the step 3 amount is instead worked out in accordance with section 713-25 .

Undistributed profits

705-90(2)    

First work out the undistributed profits of the joining entity at the joining time. These are the amounts that, in accordance with the joining entity ' s *accounting principles for tax cost setting, are retained profits of the joining entity.

705-90(2A)    

However, if a loss that did not accrue to the joined group before the joining time (subsection (8) states what it means for a loss to accrue to the joined group before the joining time) would be taken into account in working out the undistributed profits, the loss is not so taken into account.

705-90(2B)    

Also, if an amount is not added under subsection 705-70(1) for an accounting liability to an extent because of subsection 705-70(1AB) , the accounting liability is not to be taken into account, to that extent, in working out the undistributed profits.

Extent to which tax paid on undistributed profits

705-90(3)    

Then work out how much of the undistributed profits does not exceed the amount worked out using the following formula as at the joining time:

Balance of *franking account (worked out on assumptions in subsection (4))

×

Applicable gross-up rate

where:

applicable gross-up rate
means the joining entity ' s *corporate tax gross-up rate for the income year that ends, or, if section 701-30 applies, for the income year that is taken by subsection (3) of that section to end, at the joining time.

Assumptions for purposes of subsection (3)

705-90(4)    
The assumptions are that the joining entity ' s franking account balance at the end of the income year that ends, or, if section 701-30 applies, of the income year that is taken by subsection (3) of that section to end, at the joining time had been adjusted to take account of franking credits or franking debits that would arise if the following were paid just before the joining time:

(a) the income tax, or refund of income tax, on the joining entity ' s taxable income for that income year; and

(b) any income tax, or refund of income tax, that has not yet been paid (regardless of whether it has become payable or due for payment) on the joining entity ' s taxable income for any earlier income year, other than one excluded by subsection (5).

Exclusion of certain income years where previous membership of a consolidated group

705-90(5)    
If the joining entity was previously a *subsidiary member of a *consolidated group, any income year earlier than the one that started, or, if section 701-30 applies, the one that is taken by subsection (3) of that section to have started, when the joining entity ceased to be a subsidiary member of that group is excluded for the purposes of paragraph (4)(b) of this section.

Undistributed profits must have accrued to joined group

705-90(6)    

Next, work out the extent to which the undistributed profits that satisfy the requirements of subsection (3) accrued to the joined group before the joining time (subsection (7) states what it means for a profit to accrue to the joined group before the joining time). The result is the step 3 amount.

Profit accruing to the joined group before the joining time

705-90(7)    
A profit accrued to the joined group before the joining time if, on the following assumptions:

(a) that it was distributed to holders of *membership interests as it accrued; and

(b) that entities interposed between the *head company and the joining entity successively distributed any of it immediately after receiving it;

it would have been received by the entity that is the head company at the joining time, in respect of membership interests that it held continuously until that time either directly or indirectly through interposed entities.

Note:

If an entity interposed between the head company and the joining entity is a non-fixed trust, this subsection may involve determining how a power of appointment would have been exercised. Section 713-50 lists matters to have regard to in determining this.

Loss accruing to the joined group before the joining time

705-90(8)    
A loss accrued to the joined group before the joining time if and to the extent that, assuming that as it arose it were instead a profit that was accruing, a distribution of that profit would have been a distribution made to the joined group out of profits that accrued to the joined group before the joining time.

Use of reliable estimates

705-90(9)    
In working out:

(a) for the purposes of subsection (4), the amount of income tax, or refund of income tax, on the joining entity ' s taxable income for a particular income year and the extent to which it has not yet been paid; or

(b) for the purposes of subsection (7), the amount of a profit that accrued to the joined group during a particular period; or

(c) for the purposes of subsection (8), the amount of a loss that accrued to the joined group during a particular period;

use the most reliable basis for estimation that is available.

705-90(10)    

Without limiting paragraph (9)(b), a way in which, for the purposes of subsection (7), the amount of a profit that accrued to the joined group during a particular period may be worked out is by:

(a) assuming that profits of income years were distributed in order from the most recent to the earliest; and

(b) assuming that, for any income year for which distributions were paid out of profits in accordance with paragraph (a), they were, to the extent they were not *franked distributions, paid out of profits of that income year that were not subject to income tax before they were paid out of such profits that were subject to income tax.