New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 (117 of 2002)

Schedule 13   Consolidation: thin capitalisation

Income Tax Assessment Act 1997

2   Before section 820-460

Insert in the operative provisions:

820-455 Removal of grouping under this Subdivision

(1) This section and sections 820-456 to 820-458 affect the making, by the*top entity of a*maximum TC group for an income year, of a choice under section 820-500 for the income year if:

(a) the choice would result in entities (the potential group members ) for which the income year ends on the same day being treated as a*resident TC group for the income year; and

(b) the income year includes, or starts after, the day (the cut-off day ) worked out under the table.

Note: If the top entity can and does make the choice, subsection 820-458(1) affects a foreign bank's ability to choose under paragraph 820-515(c) to include its Australian permanent establishments in the resident TC group.

(2) The*top entity cannot make the choice if:

(a) the cut-off day is before 1 July 2003 and the income year starts on or after 1 July 2003; or

(b) the cut-off day is on or after 1 July 2003 and the income year starts on or after the cut-off day.

Note: This means that the top entitycan make the choice in a case covered by item 2 of the table in subsection (1) if the income year ends immediately before the one described in that item. In these circumstances neither of sections 820-456 and 820-457 will apply.

820-456 Income year starts on or after cut-off day but before 1 July 2003

(1) This section applies if:

(a) the cut-off day is before 1 July 2003; and

(b) the income year starts on or after the cut-off day but before 1 July 2003; and

(c) the top entity makes the choice referred to in section 820-455.

(2) This Subdivision (except sections 820-455 to 820-458) applies to each of the potential group members on the following basis:

(a) the income year is treated as ending on 30 June 2003;

(b) the*resident TC group is treated as consisting only of each (if any) of the potential group members that, at no time before 1 July 2003, was a*member of a*consolidated group or*MEC group.

(3) For each of the potential group members, for each of the following periods:

(a) the period beginning at the start of the income year and ending on 30 June 2003;

(b) the rest (if any) of the income year;

this Division (except sections 820-455 to 820-458) is to have either:

(c) a single application in relation to the whole of the period; or

(d) 2 or more applications, each in relation to a part of that period.

Note: Subsection (3) is similar to section 820-581, which sets out an example of how that section works.

820-457 Income year includes, but does not start on, cut-off day

(1) This section applies if:

(a) the income year includes, but does not start on, the cut-off day; and

(b) the top entity makes the choice referred to in section 820-455.

(2) This Subdivision (except sections 820-455 to 820-458) applies to each of the potential group members as if the income year ended immediately before the cut-off day.

(3) If the cut-off day isbefore 1 July 2003, this Subdivision (except sections 820-455 to 820-458) has anadditional application to each of the potential group members on the following basis:

(a) the income year is treated as consisting of the period starting on the cut-off day and ending on 30 June 2003, or on the day when the income year would otherwise have ended, whichever is earlier;

(b) the*resident TC group is treated as consisting only of each (if any) of the potential group members that, at no time before or during that period, was a*member of a*consolidated group or*MEC group.

(4) For each of the potential group members, for each of the following periods:

(a) the period starting at the start of the income year and ending immediately before the cut-off day;

(b) if the cut-off day isbefore 1 July 2003:

(i) the period referred to in paragraph (3)(a);

(ii) the rest (if any) of the income year;

(c) if the cut-off day is 1 July 2003 - the period starting on the cut-off day and ending at the end of the income year;

this Division (except sections 820-455 to 820-458) is to have either:

(d) a single application in relation to the whole of the period; or

(e) 2 or more applications, each in relation to a part of that period.

Note: If the cut-off day is the consolidation day, this section complements provisions ensuring that, for the potential group members, this Division has at least one separate application to the part of the income year before the consolidation day:

· in the case of subsidiary members of a consolidated group or MEC group, this result is achieved by paragraph 701-30(3)(a); and

· in the case of the head company of the consolidated group or MEC group, it is achieved by section 820-581.

Section 820-581 sets out an example of how that section works. The example discusses how that section interacts with this one, and illustrates the operation of provisions like subsection (4) of this section.

820-458 Choice by foreign bank to include its Australian permanent establishments in the resident TC group

(1) If:

(a) the*top entity makes the choice referred to in section 820-455; but

(b) subsection 820-455(2) would have prevented the choice if the potential group members had included an*Australian permanent establishment of a*foreign bank;

the foreign bank cannot make a choice under paragraph 820-515(c) that would result in the*resident TC group including that Australian permanent establishment.

Note: Subdivision 820-FB allows the head company of a consolidated group or MEC group, or a single Australian company that cannot form such a group, to choose to treat as part of itself certain Australian permanent establishments of a foreign bank.

Section 820-603 then treats an Australian permanent establishment covered by the choice as an entity, and as a member of a consolidated group or MEC group, for the purposes of this Division. This means that the Australian permanent establishment in effect becomes a member of a consolidated group or MEC group, which then triggers the operation of item 1 or 2 in the table in subsection 820-455(1).

(2) If:

(a) the*top entity makes the choice referred to in section 820-455; and

(b) a*foreign bank makes a choice under paragraph 820-515(c) (that does not contravene subsection (1) of this section);

sections 820-456 and 820-457 apply (and are taken always to have applied) as if the potential group members included each*Australian permanent establishment included in the*resident TC group because of the choice under paragraph 820-515(c).

Note: This subsection will only change the effect of this section in a situation of the kind described in the note to subsection (1) of this section.