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

Schedule 3   Consolidation: effect on cost base rules etc. of loss of pre-CGT status of membership interests

Part 1   Basic amendments

Income Tax Assessment Act 1997

1   After section 705-55

Insert:

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

Object

(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 or*revenue assets of the joining entity, where those amounts are above the joining entity's*terminating values for the assets.

When section applies

(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 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 705-50) 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

(3) The first circumstance for the purpose of paragraph (2)(a) is where Division 149 of this Act, subsection 160ZZS(1) of theIncome Tax Assessment Act 1936 or Subdivision C of Division 20 of 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

(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, subsection 160ZZS(1) of theIncome Tax Assessment Act 1936 or Subdivision C of Division 20 of 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

(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

(6) The revenue etc. asset's*tax cost setting amount (after any application of section 705-40, 705-45 or 705-50) 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

(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.