New Business Tax System (Consolidation and Other Measures) Act 2003 (16 of 2003)

Schedule 1   Consolidation: amendments of various cost base provisions

Part 3   Changes to tax cost setting amount in Subdivision 705-B and 705-D cases to take account of steps 3 and 5 of allocable cost amount

Income Tax Assessment Act 1997

10   Section 705-235

Repeal the section, substitute:

705-235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities

Object

(1) The object of this section is to prevent a distortion under section 705-35 in the allocation of *allocable cost amount to a linked entity where that entity has direct or indirect *membership interests in another linked entity that has certain profits or tax losses.

Adjustment to allocation of allocable cost amount where direct interest in linked entity with profits/losses

(2) If:

(a) a linked entity has *membership interests in a second linked entity; and

(b) in working out the group's *allocable cost amount for the second linked entity:

(i) an amount is required to be added (the second linked entity's profit/loss adjustment amount ) under step 3 in the table in section 705-60 (about profits accruing before becoming a subsidiary member of the group); or

(ii) an amount is required to be subtracted (also the second linked entity's profit/loss adjustment amount ) under step 5 in the table in section 705-60 (about losses accruing before becoming a subsidiary member of the group);

then, for the purposes of working out under section 705-35 the *tax cost setting amount for the assets of the first linked entity, the *market value of the first linked entity's membership interests in the second linked entity is reduced (in a subparagraph (b)(i) case) or increased (in a subparagraph (b)(ii) case) by the first linked entity's interest in the second linked entity's profit/loss adjustment amount (see subsection (3)).

First linked entity's interest in second linked entity's profit/loss adjustment amount

(3) The first linked entity's interest in the second linked entity's profit/loss adjustment amount is worked out using the formula:

Adjustment to allocation of allocable cost amount for indirect interest in linked entity with profits/losses

(4) If:

(a) a linked entity has *membership interests in a second linked entity; and

(b) the second linked entity has, directly or indirectly through one or more interposed linked entities, membership interests in a third linked entity; and

(c) in working out the group's *allocable cost amount for the third linked entity:

(i) an amount is required to be added (the third linked entity's profit/loss adjustment amount ) under step 3 in the table in section 705-60 (about profits accruing before becoming a subsidiary member of the group); or

(ii) an amount is required to be subtracted (also the third linked entity's profit/loss adjustment amount ) under step 5 in the table in section 705-60 (about losses accruing before becoming a subsidiary member of the group);

then, for the purposes of working out under section 705-35 the *tax cost setting amount for the assets of the first linked entity, the *market value of the first linked entity's membership interests in the second linked entity is reduced (in a subparagraph (c)(i) case) or increased (in a subparagraph (c)(ii) case) by the first linked entity's interest in the third linked entity's profit/loss adjustment amount (see subsection (5)).

First linked entity's interest in third linked entity's profit/loss adjustment amount

(5) The first linked entity's interest in the third linked entity's profit/loss adjustment amount is worked out using the formula:

where:

market value of first linked entity's membership interests in third linked entity held through second linked entity means the *market value of all *membership interests in the third linked entity that the first linked entity holds indirectly through the second linked entity (including through that entity and one or more other linked entities that are interposed between the second linked entity and the third linked entity).