Taxation Laws Amendment Act (No. 6) 2003 (67 of 2003)

Schedule 4   Consolidation: partnerships

Income Tax Assessment Act 1997

1   After Subdivision 713-A

Insert:

Subdivision 713-E - Partnerships

Guide to Subdivision 713-E

713-200 What this Subdivision is about

This Subdivision modifies tax cost setting rules in Divisions 701 and 705 so that they take account of the special characteristics of partnerships. The modifications apply in these situations:

(a) an entity that is a partner in a partnership becomes a subsidiary member of a consolidated group;

(b) a partnership becomes a subsidiary member of a consolidated group.

Table of sections

Objects

713-205 Objects of this Subdivision

Partnership cost setting interests etc.

713-210 Partnership cost setting interests

713-215 Terminating value for partnership cost setting interest

Setting tax cost of partnership cost setting interests

713-220 Set tax cost of partnership cost setting interests if partner joins consolidated group

713-225 Tax cost setting amount for partnership cost setting interest

713-230 Reduction in allocable cost amount if partnership asset is over-depreciated

Special rules where partnership joins consolidated group

713-235 Partnership joins group - set tax cost of partnership assets

713-240 Partnership joins group - tax cost setting amount for partnership asset

713-245 Partnership joins group - pre-CGT factor for partnership asset

[This is the end of the Guide.]

Objects

713-205 Objects of this Subdivision

(1) The first object of this Subdivision is to ensure that if:

(a) an entity that is a partner in a partnership becomes a *subsidiary member of a *consolidated group; and

(b) the partnership does not become a *subsidiary member of the group;

the provisions mentioned in subsection (3) operate as if the *partnership cost setting interests of the entity in the partnership were the entity's only assets relating to the partnership.

Note: In general, the head company of the consolidated group is treated as a partner in the partnership, in accordance with section 701-1 (the single entity rule).

(2) The second object of this Subdivision is to ensure that where a partnership becomes a *subsidiary member of a *consolidated group, the provisions mentioned in subsection (3) operate:

(a) as if the group became the holder of the assets of the partnership; and

(b) to set the *tax cost of the assets of the partnership at an appropriate amount, taking into account the taxation treatment of partnerships.

Note: While the partnership is a subsidiary member of the group, it loses its separate tax identity (under the single entity rule in subsection 701-1(1)). Therefore, in general, the assets of the partnership are treated as assets of the head company of the group and partnership cost setting interests in the partnership are ignored.

(3) The provisions are:

(a) section 701-10 (about setting the tax cost of assets that an entity brings into the group); and

(b) Subdivision 705-A; and

(c) any other provision of this Act giving Subdivision 705-A a modified effect in circumstances other than those covered by that Subdivision.

Note: An example of provisions covered by paragraph (c) are the provisions of Subdivision 705-B giving Subdivision 705-A a modified effect when a consolidated group is formed.

Partnership cost setting interests etc.

713-210 Partnership cost setting interests

A partnership cost setting interest in a partnership is the asset that is comprised of:

(a) an interest in an asset of the partnership; or

(b) an interest in the partnership that is not covered by paragraph (a);

but does not include an asset that is comprised of a *membership interest in the partnership.

Note 1: A partner may have more than one partnership cost setting interest that relates to an asset of the partnership (see section 106-5).

Note 2: A partnership cost setting interest may relate to an asset of the partnership, but the asset of the partnership is not a partnership cost setting interest in the partnership.

713-215 Terminating value for partnership cost setting interest

(1) This section modifies the way in which the *terminating value of a *partnership cost setting interest in a partnership is worked out under section 705-30.

(2) For the purposes of this Subdivision, the *terminating value of the *partnership cost setting interest at a time is:

(a) if the interest relates to an asset of the partnership - the interest's individual share of the terminating value of that asset (worked out in accordance with subsection (3)) at that time; or

(b) otherwise - the terminating value of the interest at that time worked out under section 705-30.

(3) To work out the amount of the *terminating value of the asset of the partnership mentioned in paragraph (2)(a), apply section 705-30 as if:

(a) the time mentioned in subsection (2) were the joining time mentioned in that section; and

(b) the partnership were, at the time mentioned in subsection (2), the joining entity mentioned in that section.

Setting tax cost of partnership cost setting interests

713-220 Set tax cost of partnership cost setting interests if partner joins consolidated group

(1) This section applies if an entity (the joining entity ) that is a partner in a partnership becomes a *subsidiary member of a *consolidated group at a time (the joining time ).

Note: If the partnership becomes a subsidiary member of the group at the joining time, the application of this section is affected by section 713-235.

(2) In applying the provisions mentioned in subsection 713-205(3) in relation to the joining entity:

(a) work out the *tax cost setting amount for each *partnership cost setting interest in the partnership that the joining entity holds at the joining time, in accordance with section 713-225; and

(b) except for the purposes of section 713-235 (which applies only if the partnership joins the group), do not work out tax cost setting amounts for the assets of the partnership; and

(c) do not work out tax cost setting amounts for the *membership interests in the partnership held by the joining entity.

Note 1: Because of paragraphs (b) and (c), no amount of allocable cost amount for the joining entity is allocated to the assets of the partnership, or to membership interests in the partnership held by the joining entity.

Note 2: If assets of the partnership are held on revenue account, the related partnership cost setting interests held by the joining entity have their tax cost set at the joining time. However, that tax cost does not alter calculations of the net income or exempt income of the partnership, or of a partnership loss, for the purposes of section 92 of the Income Tax Assessment Act 1936.

713-225 Tax cost setting amount for partnership cost setting interest

(1) This section modifies the way in which the *tax cost setting amounts are worked out under Division 705 for the *partnership cost setting interests mentioned in paragraph 713-220(2)(a).

Partnership cost setting interest takes character of partnership asset - general

(2) Work out the *tax cost setting amounts for those *partnership cost setting interests as if any partnership cost setting interest that relates to an asset (the underlying partnership asset ) of the partnership were an asset of the same kind as the underlying partnership asset.

Note: The kinds of assets mentioned in subsection (2) include the following:

(a) retained cost base assets;

(b) reset cost base assets that are held on revenue account (however, if such assets are trading stock or depreciating assets, the special rule in subsection (4) will apply) or on capital account;

(c) excluded assets (see subsection (3));

(d) current assets (within the meaning of subsection 705-125(2)).

Example: The partnership has an asset that is Australian currency (which is a retained cost base asset). A partnership cost setting interest of the joining entity in that asset is treated as a retained cost base asset for the purpose of working out the tax cost setting amounts for the joining entity's partnership cost setting interests in the partnership.

Partnership cost setting interest takes character of partnership asset - excluded assets

(3) If:

(a) tax cost setting amounts were to be worked out for the assets of the partnership under Division 705; and

(b) in working out those amounts, the underlying partnership asset mentioned in subsection (2) would be an excluded asset for the purposes of section 705-35;

then subsection (2) operates so that the *tax cost setting amounts for those *partnership cost setting interests are worked out as if any partnership cost setting interest that relates to the underlying partnership asset were an excluded asset for the purposes of section 705-35.

Special character of partnership cost setting interest in partnership asset that is trading stock or depreciating asset

(4) Despite subsection (2), if an asset of the partnership is *trading stock or a *depreciating asset, work out the *tax cost setting amounts for those *partnership cost setting interests as if:

(a) a partnership cost setting interest relating to that asset were a *retained cost base asset; and

(b) the tax cost setting amount for that partnership cost setting interest were equal to its *terminating value (worked out in accordance with section 713-215).

Reduction in allocable cost amount for over-depreciated partnership assets

(5) If one or more assets of the partnership are *over-depreciated at the joining time, reduce the group's allocable cost amount for the joining entity in accordance with section 713-230.

Partnership liabilities - working out allocable cost amount

(6) If:

(a) according to *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, a thing (the partnership liability ) is a liability of the partnership at the joining time that can or must be recognised in the partnership's statement of financial position; and

(b) for that reason, the partnership liability is not an accounting liability of the joining entity at the joining time for the purposes of section 705-70;

then sections 705-70, 705-75 and 705-80 operate as if the partnership liability were an accounting liability of the joining entity at the joining time, to the extent of the joining entity's individual share of the partnership liability.

Partnership deductions - working out allocable cost amount

(7) Section 705-115 operates as if:

(a) a deduction to which the partnership is entitled (the partnership deduction ) were a deduction to which the joining entity was entitled, to the extent of the joining entity's individual share of the partnership deduction; and

(b) the deduction to which the joining entity was entitled were of the same kind as the partnership deduction.

Note: These kinds of deductions include acquired deductions and owned deductions (within the meaning of section 705-115).

713-230 Reduction in allocable cost amount if partnership asset is over-depreciated

(1) The object of this section is to reduce the group's allocable cost amount for the joining entity, if one or more assets of the partnership are *over-depreciated at the joining time. The amount of the reduction is calculated under section 705-50 in relation to the joining entity's *partnership cost setting interests (the reduction interests ) relating to those assets.

(2) Reduce the allocable cost amount mentioned in subsection 713-225(5) by the reduction amount worked out under subsection (3).

(3) The reduction amount is the total of the amounts that would be reduced under section 705-50 for all the reduction interests if:

(a) this Subdivision did not include subsection 713-225(5) or this section; and

(b) subsection 713-225(4) did not apply to any of the reduction interests; and

Note: This means that the reduction interests would be treated as over-depreciated assets, in accordance with subsection 713-225(2).

(c) the *adjustable value of a particular reduction interest were equal to its individual share of the adjustable value of the asset of the partnership to which it relates; and

(d) the *cost of the interest were equal to its individual share of the cost of the asset of the partnership to which it relates; and

(e) section 705-50 did not include subsection 705-50(4).

Special rules where partnership joins consolidated group

713-235 Partnership joins group - set tax cost of partnership assets

(1) This section applies if a partnership becomes a *subsidiary member of a *consolidated group at a time (the joining time ).

(2) In applying the provisions mentioned in subsection 713-205(3) in relation to the partnership:

(a) do not work out an allocable cost amount for the partnership; and

(b) work out the *tax cost setting amount for each asset of the partnership covered by subsection (3), in accordance with section 713-240.

Note: If a partner in the partnership becomes a subsidiary member of the group at the joining time, tax cost setting amounts are worked out for the assets of the partner (including partnership cost setting interests) before tax cost setting amounts are worked out for the assets of the partnership.

(3) An asset of the partnership at the joining time is covered by this subsection, unless it would be an excluded asset for the purposes of section 705-35 on the assumption that tax cost setting amounts were worked out for the assets of the partnership under Division 705 (instead of section 713-240).

713-240 Partnership joins group - tax cost setting amount for partnership asset

(1) Work out the *tax cost setting amounts for the assets covered by subsection 713-235(3) as follows:

(a) firstly, add up the subsection (2) amounts for all the partnership cost setting interests in the partnership at the joining time (the result is the partnership cost pool );

Note 1: Partnership cost setting interests held by a partner that becomes a subsidiary member of the group at the joining time are included in the calculation in paragraph (a). The operation of the cost setting rules in relation to that partner at the joining time may affect the subsection (2) amounts for those interests.

Note 2: Partnership cost setting interests are included in the calculation in paragraph (a), even if the cost setting rules have not applied in relation to the interests (for example, if the interests were acquired directly by the head company).

(b) secondly, work out the tax cost setting amounts for the assets covered by subsection 713-235(3) that are *retained cost base assets, in accordance with section 705-25;

(c) thirdly, work out the tax cost setting amounts for the rest of the assets covered by subsection 713-235(3), in accordance with subsection (3).

Subsection (2) amount for a partnership cost setting interest

(2) For the purposes of paragraph (1)(a), the subsection (2) amount for a *partnership cost setting interest is the amount specified in the following table:

Allocating partnership cost pool to partnership assets that are not retained cost base assets

(3) Work out the *tax cost setting amounts for the assets mentioned in paragraph (1)(c) by applying sections 705-35, 705-40 and 705-45 to those assets, as if:

(a) the partnership were, at the joining time, the joining entity mentioned in those sections; and

(b) the assets of the partnership were the assets covered by subsection 713-235(3); and

(c) the allocable cost amount mentioned in paragraph 705-35(1)(a) were the partnership cost pool.

(4) For the purposes of this section, section 104-510 (CGT event L3) applies as if the group's allocable cost amount for the entity mentioned in that section were the partnership cost pool.

713-245 Partnership joins group - pre-CGT factor for partnership asset

(1) The *pre-CGT factor for each asset covered by subsection 713-235(3) is worked out under subsections (2) and (3) (instead of subsection 705-125(3)).

(2) Firstly, identify the *partnership cost setting interests (the pre-CGT interests ) in the partnership, relating to assets of the partnership, for which there is a *pre-CGT factor at the joining time.

Note: The pre-CGT factor for such a partnership cost setting interest is worked out at the time the partner holding the interest became a subsidiary member of the group (whether that time is the joining time or was an earlier time).

(3) Secondly, work out the *pre-CGT factor for each asset covered by subsection 713-235(3) in this way:

Partnership assets' pre-CGT factor

Step 1. For each pre-CGT interest, multiply its *market value at the joining time by its *pre-CGT factor.

Step 2. Add up all the results of step 1.

Step 3. Add up the *market values of all the assets of the partnership at the joining time.

Step 4. Divide the result of step 2 by the result of step 3.

[The next Subdivision is Subdivision 713-L.]