Table of sections

701A-1 Continuing majority-owned entity, designated group etc.

701A-5 Modified application of Part 3-90 ofIncome Tax Assessment Act 1997 to trading stock of continuing majority-owned entity

701A-10 Modified application of Part 3-90 ofIncome Tax Assessment Act 1997 to certain internally generated assets of continuing majority-owned entity

701A-1 Continuing majority-owned entity, designated group etc.

Continuing majority-owned entity and designated group

(1) If:

(a) an entity becomes a subsidiary member of a consolidated group at any time on or after 1 July 2002; and

(b) a person or persons continued to be the majority owners (see subsection (2)) of the entity from the start of 27 June 2002 until the entity became a subsidiary member of the group;

the entity is a continuing majority-owned entity and the group is the entity's designated group .

Majority owners of an entity

(2) A person or persons are the majority owners of an entity if they beneficially own, directly or indirectly through one or more interposed entities, membership interests in the entity whose market value is more than 50% of the market value of all of the membership interests in the entity.

Interposed non-fixed trust to be treated as fixed trust

(3) For the purposes of subsection (2), if the interposed entity or any of the interposed entities is a trust that is not a fixed trust:

(a) it is treated as if it were a fixed trust; and

(b) all of its objects are treated as if they were beneficiaries of that trust with equal interests in it.

701A-5 Modified application of Part 3-90 of Income Tax Assessment Act 1997 to trading stock of continuing majority-owned entity

(1) The operation of Part 3-90 of theIncome Tax Assessment Act 1997is modified in accordance with this sectionin relation to each asset of a continuing majority-owned entity that is trading stock just before the entity becomes a subsidiary member of the entity's designated group.

Continuing majority-owned entity to revalue its trading stock under normal provisions

(2) For the entity core purposes:

(a) subsection 701-35(4) of theIncome Tax Assessment Act 1997does not apply in relation to the asset; and

(b) instead, the value of the asset at the end of the income year that ends, or, if section 701-30 of that Act applies, of the income year that is taken by subsection (3) of that section to end, is the value determined in accordance with sections 70-45 to 70-70 of that Act.

For head company, trading stock to be retained cost base asset with tax cost setting amount equal to entity's year-end valuation

(3) For the head company core purposes when the continuing majority-owned entity becomes a subsidiary member of the designated group, the asset is a retained cost base asset whose tax cost setting amount is equal to the value applicable in accordance with paragraph (2)(b).

701A-10 Modified application of Part 3-90 of Income Tax Assessment Act 1997 to certain internally generated assets of continuing majority-owned entity

(1) This section applies if:

(a) because subsection 701-1(1) (the single entity rule) of theIncome Tax Assessment Act 1997 applies, a depreciating asset becomes that of the head company of a continuing majority-owned entity's designated group when the entity becomes a subsidiary member of that group; and

(b) the continuing majority-owned entity's terminating value for the asset is less than the asset's tax cost setting amount; and

(c) the asset existed at the start of 27 June 2002; and

(d) more than half of the expenditure incurred in constructing or creating the asset was of a revenue nature and allowable as a deduction to the entity (whether or not the continuing majority-owned entity) that constructed or created the asset; and

(e) for every balancing adjustment event occurring for the asset before the continuing majority-owned entity became a subsidiary member of the group, there was roll-over relief under section 40-340 of theIncome Tax Assessment Act 1997.

Reduced depreciation deductions etc. for head company

(2) If this section applies, for the head company core purposes:

(a) while the asset is, because subsection 701-1(1) of that Act applies, that of the head company of the designated group, for the purpose of working out deductions for the asset's decline in value under Division 40 of theIncome Tax Assessment Act 1997, its tax cost setting amount is taken to be equal to the continuing majority-owned entity's terminating value for the asset; and

(b) if a balancing adjustment event occurs for the asset, or the head company ceases to hold the asset because an entity ceases to be a subsidiary member of the group, and:

(i) the deductions for its decline in value up to that time worked out on the basis in paragraph (a);

are less than:

(ii) the deductions that would have been worked out using its actual tax cost setting amount;

then:

(iii) if a balancing adjustment event occurs for the asset - the shortfall is allowable as a deduction to the head company for the income year in which it ceases to hold the asset; or

(iv) if the head company ceases to hold the asset because an entity ceases to be a subsidiary member of the group - the group's allocable cost amount worked out under section 711-30 of theIncome Tax Assessment Act 1997for the entity is increased by the shortfall.

Note: The asset's actual tax cost setting amount would be used for the purpose of working out any balancing adjustment for a balancing adjustment event or for working out the terminating value of the asset under Division 711 of theIncome Tax Assessment Act 1997.

Reduced depreciation deductions etc. for acquirer from head company

(3) If:

(a) the asset is acquired by another entity (a new asset holder ) from the head company; and

(b) at the time of the acquisition:

(i) either party to the acquisition controls (for value shifting purposes) the other; or

(ii) a third entity controls (for value shifting purposes) the parties to the acquisition; and

(c) the following amount:

(i) the asset's adjustable value (the roll-over adjustable value ) just before the acquisition, worked out on the assumption that the head company had acquired the asset for an amount equal to the continuing majority-owned entity's terminating value for the asset;

is less than:

(ii) the asset's cost to the new asset holder;

then the consequences in subsection (4) occur.

(4) The consequences are as follows:

(a) while the asset is held by the new asset holder, for the purpose of working out deductions for the asset's decline in value under Division 40 of theIncome Tax Assessment Act 1997, the acquisition by the new asset holder is taken to have been for an amount equal to the asset's roll-over adjustable value;

(b) if a balancing adjustment event occurs for the asset and:

(i) the deductions for its decline in value up to that time, worked out on the basis in paragraph (a);

are less than:

(ii) the deductions that would otherwise have been worked out;

then the shortfall is allowable as a deduction to the new asset holder for the income year in which it ceases to hold the asset.

Reduced depreciation deductions etc. for entity that ceases to be a subsidiary member

(5) If:

(a) the asset becomes that of an entity (a new asset holder ) other than the head company because subsection 701-1(1) of theIncome Tax Assessment Act 1997 ceases to apply when the entity ceases to be a subsidiary member of the designated group as a result of a third entity (the buyer of the new asset holder ) acquiring some or all of the membership interests in the new asset holder; and

(b) at the time of the acquisition:

(i) the buyer of the new asset holder controls (for value shifting purposes) the head company of the designated group, or vice versa; or

(ii) a third entity controls (for value shifting purposes) the head company of the designated group and the buyer of the new asset holder; and

(c) the following amount:

(i) the asset's adjustable value (the roll-over adjustable value ) just before the cessation, worked out on the assumption that the head company had acquired the asset for an amount equal to the continuing majority-owned entity's terminating value for the asset;

is less than:

(ii) the asset's cost to the new asset holder;

then the consequences in subsection (6) occur.

(6) The consequences are as follows:

(a) while the asset is held by the new asset holder, for the purpose of working out deductions for the asset's decline in value under Division 40 of theIncome Tax Assessment Act 1997, the acquisition by the new asset holder is taken to have been for an amount equal to the asset's roll-over adjustable value; and

(b) if a balancing adjustment event occurs for the asset and:

(i) the deductions for its decline in value up to that time worked out on the basis in paragraph (a);

are less than:

(ii) the deductions that would otherwise have been worked out;

then the shortfall is allowable as a deduction to the new asset holder for the income year in which it ceases to hold the asset.

Reduced depreciation deductions etc. for later acquirer

(7) If:

(a) the asset is acquired by another entity (a new asset holder ) from an entity that is a new asset holder under subsection (3) or (5) or a previous application of this subsection; and

(b) an entity:

(i) was a party to the acquisition and, at the time of the acquisition, controlled (for value shifting purposes) the other party; or

(ii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition; and

(c) that entity was also the entity whose control (for value shifting purposes) resulted in the control test being satisfied in respect of each previous acquisition or cessation involving a new asset holder; and

(d) the following amount:

(i) the asset's adjustable value (the roll-over adjustable value ) just before the acquisition, worked out on the assumption that every previous new asset holder had acquired the asset for the asset's roll-over adjustable value, worked out under subsection (3) or (5) or this subsection, just before it did so;

is less than:

(ii) the asset's cost to the new asset holder;

then the consequences in subsection (8) occur.

(8) The consequences are as follows:

(a) while the asset is held by the new asset holder, for the purpose of working out deductions for the asset's decline in value under Division 40 of theIncome Tax Assessment Act 1997, the acquisition by the new asset holder is taken to have been for an amount equal to the asset's roll-over adjustable value asset just before the acquisition; and

(b) if a balancing adjustment event occurs for the asset and:

(i) the deductions for its decline in value up to that time worked out on the basis in paragraph (a);

are less than:

(ii) the deductions that would otherwise have been worked out;

then the shortfall is allowable as a deduction to the new asset holder for the income year in which it ceases to hold the asset.

Schedule 10   Consolidation: transitional rules for MEC tax cost setting provisions

Income Tax (Transitional Provisions) Act 1997

1   Section 717-25 (link note)

Repeal the link note, substitute:

[The next Division is Division 719.]

2   At the end of Part 3-90

Add:

Division 719 MEC rules

Table of Subdivisions

719-C Cost setting

719-F Losses

Subdivision 719-C - Cost setting

Table of sections

719-160 Transitional cost setting rules on joining have effect with modifications

719-165 Modified effect of paragraph 701-45(1)(b)

719-160 Transitional cost setting rules on joining have effect with modifications

(1) Section 719-160 of theIncome Tax Assessment Act 1997 has effect in relation to the provisions of this Act mentioned in subsection (2) in the same way as that section has effect in relation to the provisions mentioned in subsection 719-160(3) of theIncome Tax Assessment Act 1997.

(2) The provisions are Divisions 701 and 702 of this Act, other than:

(a) section 701-5; and

(b) section 701-40; and

(c) section 701-45.

(3) However, that effect of section 719-160 of theIncome Tax Assessment Act 1997 is subject to modifications set out in this Division.

719-165 Modified effect of paragraph 701-45(1)(b)

(1) This section applies if the transitional group mentioned in paragraph 701-45(1)(b) of this Act is a MEC group.

(2) That paragraph applies as if the reference in that paragraph to the entity that became the head company were a reference to any entity that became a member of the group, and that was an eligible tier-1 company, at the time the transitional group came into existence.

Subdivision 719-F - Losses

Table of sections

719-305 Available fraction for bundle of losses not affected by concessional rules

719-305 Available fraction for bundle of losses not affected by concessional rules

To avoid doubt, sections 707-325 and 707-327 do not apply for the purposes of working out the available fraction for the bundle of losses that are taken under subsection 719-305(2) of theIncome Tax Assessment Act 1997 to be transferred under Subdivision 707-A of that Act.

[The next Division is Division 820.]

Schedule 11   Consolidation: consequential provisions for research and development

Income Tax Assessment Act 1936

1   Subsection 6(1)

Insert:

consolidated group has the same meaning as in theIncome Tax Assessment Act 1997.

2   Subsection 6(1)

Insert:

head company of a consolidated group or a MEC group has the same meaning as in theIncome Tax Assessment Act 1997.

3   Subsection 6(1)

Insert:

MEC group has the same meaning as in theIncome Tax Assessment Act 1997.

4   Subsection 6(1)

Insert:

member of a consolidated group or MEC group has the same meaning as in theIncome Tax Assessment Act 1997.

5   Subsection 6(1)

Insert:

subsidiary member of a consolidated group or a MEC group has the same meaning as in theIncome Tax Assessment Act 1997.

6   Subsection 6(1)

Insert:

tax cost is set has the same meaning as in theIncome Tax Assessment Act 1997.

7   After section 73B

Insert:

73BAA Effect of consolidation

The purpose of sections 73BAB, 73BAC, 73BAD, 73BAE and 73BAF is to ensure that the research and development concession interacts properly with the consolidation regime in Part 3-90 of theIncome Tax Assessment Act 1997.

73BAB Head company treated as registered

Sections 73B to 73Z (inclusive) of this Act apply to the head company of a consolidated group or MEC group as if the head company:

(a) were an eligible company; and

(b) were registered under section 39J of theIndustry Research and Development Act 1986 in relation to particular activities in respect of a year of income;

during any period that a subsidiary member of the group is an eligible company and registered under section 39J of that Act in relation to those activities in respect of that year of income.

73BAC Expenditure history: joining entity

(1) For the purposes of sections 73P to 73Z (inclusive), where a company (the joining company ) becomes a member of a consolidated group or MEC group, those provisions have effect after the joining company became a member as if:

(a) any incremental expenditure (see section 73P) incurred by the joining company before it became a member had been incurred by the head company of the group; and

(b) any amounts the joining company has deducted or can deduct for that expenditure had been deducted by the head company.

(2) Subsection (1) has effect after any application of subsection 73R(3) or (4) (exceptions to R&D membership period rules).

Note: This provision overrides section 701-5 of theIncome Tax Assessment Act 1997 (the consolidation entry history rule) for the purposes of the incremental expenditure provisions.

73BAD Expenditure history: leaving entity

(1) For the purposes of sections 73P to 73Z (inclusive), where a company (the leaving company ) ceases to be a member of a consolidated group or MEC group, those provisions have effect after the leaving company ceased to be a member as if:

(a) any incremental expenditure (see section 73P) actually incurred by the leaving company while it was a member of the group had been incurred by it rather than by any other member of the group; and

(b) any amounts the head company of the group has deducted or can deduct for that expenditure had been deducted by the leaving company.

(2) Subsection (1) has effect before any application of subsection 73R(3) or (4) (exceptions to R&D membership period rules).

Note: This provision overrides section 701-40 of theIncome Tax Assessment Act 1997 (the consolidation exit history rule) for the purposes of the incremental expenditure provisions.

73BAE Recoupment where entity leaves group

(1) All or part of an amount that would, apart from this subsection, be allowable as a deduction to the head company of a consolidated group or MEC group under section 73B or 73BA for a year of income is not allowable as such a deduction if:

(a) the expenditure that would have given rise to the deduction was incurred by another company that was a subsidiary member of the group; and

(b) the other company ceased, during or after that year of income, to be a subsidiary member of the group; and

(c) the other company would have been denied a deduction for all or that part of the amount for that year of income because it received a recoupment or grant to which section 73C would apply if the other company had never been a subsidiary member of the group.

(2) The other company must, within 60 days after the end of the financial year in which it received or became entitled to receive the recoupment or grant, give the head company details in the approved form of the part of the initial clawback amount for the recoupment or grant (see section 73C) to be applied by the head company in determining the reduction in the amount referred to in subsection (1).

73BAF Preventing double deductions

(1) This section applies to the head company of a consolidated group or MEC group if, after the tax cost is set for a depreciating asset, the company can deduct an amount (the reduction amount ) for expenditure in relation to the asset under section 73B for a year of income.

(2) The company's deduction for the decline in value of the asset under Division 40 of theIncome Tax Assessment Act 1997, and its notional Division 40 deduction under section 73BC of this Act, for the year of income are reduced (but not below nil) by the reduction amount.

(3) Any part of the reduction amount remaining after that reduction is applied to reduce the company's deductions for the decline in value of the asset under Division 40 of theIncome Tax Assessment Act 1997, and its notional Division 40 deduction under section 73BC of this Act, for later years of income.

Income Tax Assessment Act 1997

8   Section 701-5 (note)

Omit "Note", substitute "Note 1".

9   At the end of section 701-5

Add:

Note 2: Section 73BAC of theIncome Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.

10   At the end of subsection 701-40(1)

Add:

Note: Section 73BAD of theIncome Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.

11   After paragraph 701-40(2)(c)

Insert:

(d) any registration under section 39J of theIndustry Research and Development Act 1986 for particular research and development activities;

Taxation Administration Act 1953

12   Section 286-1 of Schedule 1

Omit "to the Commissioner".

13   Section 286-25 of Schedule 1

Omit "to the Commissioner".

14   At the end of section 286-75 of Schedule 1

Add:

(3) You are also liable to an administrative penalty if:

(a) you are required under subsection 73BAE(2) of theIncome Tax Assessment Act 1936 to give written details of an initial clawback amount (see section 73C of that Act) to another company by a particular day; and

(b) you do not give the details to the other company by that day.

15   Subsection 286-80(2) of Schedule 1

Repeal the subsection, substitute:

(2) The base penalty amount is:

(a) for failing to lodge a return, notice or other document on time or in the*approved form - 1 penalty unit for each period of 28 days or part of a period of 28 days starting on the day when the document is due and ending when you give it to the Commissioner (up to a maximum of 5 penalty units); or

(b) for failing to give written details as mentioned in subsection 286-75(3) - 1 penalty unit for each period of 28 days or part of a period of 28 days starting on the day when the details are due and ending when you give the details.

Note: See section 4AA of theCrimes Act 1914 for the current value of a penalty unit.

Example: An entity lodges a return 31 days late. The base penalty amount under subsection (2) is 2 penalty units.

Schedule 12   Consolidation: amendments relating to Division 170

Income Tax Assessment Act 1997

1   At the end of section 170-15

Add:

(3) Despite subsection (1), if the*tax loss is transferred because the conditions in section 170-32 are met, the*income company is taken to have incurred the tax loss for the income year for which the first prior transferor mentioned in that section incurred the tax loss.

(4) Despite subsection (1), if the*tax loss is transferred because the condition in subsection 170-42(4) is met, the*income company is taken to have incurred the tax loss for the income year for which that subsection assumes the income company incurred the tax loss.

2   Section 170-30 (heading)

Repeal the heading, substitute:

170-30 Companies must be in existence and members of the same wholly-owned group etc.

3   At the end of subsections 170-30(1) and (2)

Add:

Note: In some cases, this condition may not apply, or may be taken to be met even if it is not actually met. See sections 170-32 and 170-33.

4   After section 170-30

Insert:

170-32 Tax loss incurred by the loss company because of a transfer under Subdivision 707-A

When the conditions in this section apply

(1) The conditions in this section apply instead of the conditions in subsections 170-30(1) and (2) if:

(a) the*income company is an Australian branch (as defined in Part IIIB of theIncome Tax Assessment Act 1936) of a*foreign bank; and

(b) the*loss company incurred the*tax loss because of one or more transfers of the tax loss under Subdivision 707-A.

Conditions

(2) Each transferor ( prior transferor ) of the*tax loss under Subdivision 707-A must have been a company.

(3) It must have been possible to meet the conditions in subsections 170-30(1) and (2) in relation to the*loss company and the*income company assuming:

(a) the*loss year were so much of the income year in which the*tax loss was transferred to the loss company under Subdivision 707-A as occurred after the transfer; and

(b) so much (if any) of the*deduction year as occurred before the transfer were disregarded.

(4) The*income company and each prior transferor must both be*in existence during at least part of each of these periods:

(a) the period consisting of:

(i) if the prior transferor incurred the*tax loss apart from Subdivision 707-A - the*loss year; or

(ii) if the prior transferor incurred the tax loss because of a transfer under Subdivision 707-A (other than a transfer from the prior transferor to itself) - so much of the income year in which the transfer occurred as was after the transfer (but before any later transfer of the loss from the prior transferor under that Subdivision);

(b) so much of the income year during which the tax loss was transferred under Subdivision 707-A from the prior transferor to another company as occurs before the transfer (but after the start of the period described in paragraph (a));

(c) any intervening income year.

(5) The*income company must be a member of the same*wholly-owned group as each prior transferor during the whole or part of the periods described in subsection (4) for the prior transferor when both were*in existence.

170-33 Alternative test of relations between the loss company and other companies

(1) The conditions in subsections 170-30(1) and (2) are taken to be met in relation to the*loss company and the*income company if:

(a) the loss company is an Australian branch (as defined in Part IIIB of theIncome Tax Assessment Act 1936) of a*foreign bank; and

(b) the income company is covered by item 1 or 2 of the table in subsection 170-30(4) (because the company is the*head company of a*consolidated group or*MEC group at the time described in that item); and

(c) the relevant circumstances in this section exist.

Circumstances

(2) One circumstance is that there is another company (the first link company ) in relation to which all these conditions are met:

(a) the first link company became a*subsidiary member of a*consolidated group or*MEC group after the start of the*loss year but before the time described in the item of the table in subsection 170-30(4) that covers the*income company;

(b) the*tax loss could have been transferred from the*loss company to the first link company under this Subdivision (apart from subsection 170-30(4) and this section) for a*deduction year consisting of the*trial year for the first link company becoming a subsidiary member of that group had:

(i) the first link company continued to be*in existence as a separate entity (rather than being part of the head company of that group) when it was a subsidiary member of that group; and

(ii) the trial year not started before the start of the loss year; and

(iii) thefirst link company had enough assessable income for the trial year;

(c) the tax loss would have been incurred by the income company because of one or more transfers under Subdivision 707-A assuming the tax loss had been made by the first link company (apart from that Subdivision) for the loss year.

(3) If the condition in paragraph (2)(c) could be met only if there had been a transfer described in that paragraph involving a company other than the first link company and the*income company, another circumstance is that the other company and the*loss company were*in existence and members of the same*wholly-owned group for the period:

(a) starting when the*tax loss would have been transferred under Subdivision 707-Ato the other company as described in that paragraph; and

(b) ending when the tax loss would have been transferred under Subdivision 707-Afrom the other company as described in that paragraph.

(4) It does not matter whether or not any of the transfers mentioned in subsection (3) would have involved the first link company or the*income company as well as the other company.

(5) Another circumstance is that the conditions in subsections 170-30(1) and (2) would have been met for the*loss company and the*income company assuming:

(a) the*loss year consisted of the part of the income year in which the*tax loss would have been transferred to the income company under Subdivision 707-A as described in paragraph (2)(c) occurring after the time the transfer would have occurred; and

(b) so much (if any) of the*deduction year as occurred before the time the transfer would have occurred were disregarded.

5   Subsection 170-35(3) (note)

Omit "Note:", substitute "Note 1:".

6   At the end of subsection 170-35(3)

Add:

Note 2: Division 707 affects the operation of Subdivision 165-A if the loss company incurred the tax loss because of a transfer under Subdivision 707-A.

7   Subsection 170-40(2) (note)

Omit "Note:", substitute "Note 1:".

8   At the end of subsection 170-40(2)

Add:

Note 2: The condition in subsection (2) may not apply in some cases. See section 170-42.

9   After section 170-40

Insert:

170-42 If the income company has become the head company of a consolidated group or MEC group

(1) The condition in subsection (2) of this section applies to the*income company instead of the condition in subsection 170-40(2) if the conditions in subsections 170-30(1) and (2) are met in relation to the*loss company and the income company apart from section 170-33 and either:

(a) both these circumstances exist:

(i) after the start of the*loss year but before the relevant time described in subsection 170-30(4), the income company became the*head company of a*consolidated group or of a*MEC group that came into existence after the start of the loss year;

(ii) the loss year and*deduction year are not the same; or

(b) all these circumstances exist:

(i) the income company is, at the relevant time described in subsection 170-30(4), the head company of a MEC group;

(ii) before that time but after the end of the loss year, the MEC group was involved in an application event described in section 719-300 (but not covered by subsection 719-300(4) or (5));

(iii) the income company would be taken under section 719-305 to have transferred losses to itself under Subdivision 707-A, assuming it had made losses while head company of the group or of a consolidated group involved in the event;

(iv) the MEC group or consolidated group came into existence before the start of the*loss year.

Note: An application event involves either expanding an existing MEC group by including extra eligible tier-1 companies of the top company for the group or creating a MEC group because more companies become eligible tier-1 companies of the top company of which the head company of a consolidated group is an eligible tier-1 company.

(2) The*income company must have been able to deduct the*tax loss in the*deduction year assuming that it had incurred the tax loss for the*loss year.

(3) The condition in subsection (4) of this section applies to the*income company instead of the condition in subsection 170-40(2) if the conditions in subsections 170-30(1) and (2) are met in relation to the*loss company and the income company because of section 170-33.

(4) The*income company must have been able to deduct the*tax loss in the*deduction year assuming that it had incurred the tax loss, for the income year in which the loss would have been transferred to it as described in paragraph 170-33(2)(c), because of one or more transfers under Subdivision 707-A described in that paragraph.

10   At the end of section 170-45

Add:

(4) Subsections (2) and (3) do not apply if the transfer occurs because either or both of the conditions in subsections 170-42(2) and (4) are met. In that case, the amount transferred also cannot exceed the amount worked out as follows:

Method statement

Step 1. Identify each*bundle of losses that, on the assumption in subsection 170-42(2) or (4) (as appropriate), would have included the*tax loss or*film loss (as appropriate).

Note 1: There will be 2 or more bundles of losses identified if both of the conditions in subsections 170-42(2) and (4) are met.

Note 2: There will be more than 1 bundle of losses identified on the basis of the assumption in paragraph 170-42(4) if the conditions in subsections 170-30(1) and (2) are met in relation to the loss company and the income company because of multiple applications of section 170-33 each involving a different first link company.

Step 2. For each*bundle identified, work out how much of the*tax loss or*film loss (as appropriate) the*income company would have been able to deduct in the*deduction year assuming that:

(a) the loss could have been deducted in that year only after the deduction in that year of any other losses of that*sort that would have been included in the bundle, other than losses (the transferable losses ) that could be transferred from the*loss company to the income company for that year; and

(b) if the bundle would have included 2 or more transferable losses of that sort - those losses could have been deducted only in the order in which the loss company incurred them.

Note 1: If the assumption in subsection 170-42(2) is relevant to the bundle, it would have included losses incurred by the income company and transferred (or taken to be transferred) to the company (from itself) under Subdivision 707-A.

Note 2: If the assumption in paragraph 170-42(4) is relevant to the bundle, it would have included losses actually incurred by the first link company and transferred (by one or more transfers under Subdivision 707-A) to the income company.

Step 3. Total every result of step 2 for the*tax loss or*film loss (as appropriate).

11   At the end of section 170-55

Add:

(3) If:

(a) the*loss company has 2 or more*tax losses, or 2 or more*film losses, it can transfer for the*deduction year; and

(b) it incurred at least one of those losses apart from Subdivision 707-A and at least one of those losses because of a transfer under that Subdivision;

it can transfer under this Subdivision the losses it incurred because of a transfer under Subdivision 707-A onlyafter transferring under this Subdivision the losses it incurred apart from that Subdivision.

(4) For the purposes of subsection (3), treat a loss incurred by the company both apart from that Subdivision and because of a transfer under that Subdivision as a loss incurred because of a transfer under that Subdivision.

(5) Subsections (1) and (2) have effect subject to subsection (3).

12   Application of amendments of Subdivision 170-A

The amendments of Subdivision 170-A of theIncome Tax Assessment Act 1997 made by this Schedule apply in relation to deduction years ending after 1 July 2002.

13   At the end of section 170-115

Add:

(3) Despite subsection (1), if the*net capital loss is transferred because the conditions in section 170-132 are met, the gain company is taken to have made the net capital loss for the income year for which the first prior transferor mentioned in that section made the net capital loss.

(4) Despite subsection (1), if the*net capital loss is transferred because the condition in subsection 170-142(4) is met, the gain company is taken to have made the net capital loss for the income year for which that subsection assumes the gain company made the net capital loss.

14   Section 170-130 (heading)

Repeal the heading, substitute:

170-130 Companies must be in existence and members of the same wholly-owned group etc.

15   At the end of subsections 170-130(1) and (2)

Add:

Note: In some cases, this condition may not apply, or may be taken to be met even if it is not actually met. See sections 170-132 and 170-133.

16   After section 170-130

Insert:

170-132 Net capital loss made by the loss company because of a transfer under Subdivision 707-A

When the conditions in this section apply

(1) The conditions in this section apply instead of the conditions in subsections 170-130(1) and (2) if:

(a) the gain company is an Australian branch (as defined in Part IIIB of theIncome Tax Assessment Act 1936) of a*foreign bank; and

(b) the*loss company made the*net capital loss because of one or more transfers of the net capital loss under Subdivision 707-A.

Conditions

(2) Each transferor ( prior transferor ) of the*net capital loss under Subdivision 707-A must have been a company.

(3) It must have been possible to meet the conditions in subsections 170-130(1) and (2) in relation to the*loss company and the gain company assuming:

(a) the capital loss year were so much of the income year in which the*net capital loss was transferred to the loss company under Subdivision 707-A as occurred after the transfer; and

(b) so much (if any) of the application year as occurred before the transfer were disregarded.

(4) The gain company and each prior transferor must both be*in existence during at least part of each of these periods:

(a) the period consisting of:

(i) if the prior transferor made the*net capital loss apart from Subdivision 707-A - the capital loss year; or

(ii) if the prior transferor made the net capital loss because of a transfer under Subdivision 707-A (other than a transfer from the prior transferor to itself) - so much of the income year in which the transfer occurred as was after the transfer (but before any later transfer of the loss from the prior transferor under that Subdivision);

(b) so much of the income year during which the net capital loss was transferred under Subdivision 707-A from the prior transferor to another company as occurs before the transfer (but after the start of the period described in paragraph (a));

(c) any intervening income year.

(5) The gain company must be a member of the same*wholly-owned group as each prior transferor during the whole or part of the periods described in subsection (4) for the prior transferor when both were*in existence.

170-133 Alternative test of relations between the loss company and other companies

(1) The conditions in subsections 170-130(1) and (2) are taken to be met in relation to the*loss company and the gain company if:

(a) the loss company is an Australian branch (as defined in Part IIIB of theIncome Tax Assessment Act 1936) of a*foreign bank; and

(b) the gain company is covered by item 1 or 2 of the table in subsection 170-130(4) (because the company is the*head company of a*consolidated group or*MEC group at the time described in that item); and

(c) the relevant circumstances in this section exist.

Circumstances

(2) One circumstance is that there is another company (the first link company ) in relation to which all these conditions are met:

(a) the first link company became a*subsidiary member of a*consolidated group or*MEC group after the start of the capital loss year but before the time described in the item of the table in subsection 170-130(4) that covers the gain company;

(b) the*net capital loss could have been transferred from the*loss company to the first link company under this Subdivision (apart from subsection 170-130(4) and this section) for an application year consisting of the*trial year for the first link company becoming a subsidiary member of that group had:

(i) the first link company continued to be*in existence as a separate entity (rather than being part of the head company of that group) when it was a subsidiary member of that group; and

(ii) the trial year not started before the start of the capital loss year; and

(iii) the first link company had enough*capital gains for the trial year;

(c) the net capital loss would have been made by the gain company because of one or more transfers under Subdivision 707-A assuming the net capital loss had been made by the first link company (apart from that Subdivision) for the capital loss year.

(3) If the condition in paragraph (2)(c) could be met only if there had been a transfer described in that paragraph involving a company other than the first link company and the gain company, another circumstance is that the other company and the*loss company were*in existence and members of the same*wholly-owned group for the period:

(a) starting when the*net capital loss would have been transferred under Subdivision 707-Ato the other company as described in that paragraph; and

(b) ending when the net capital loss would have been transferred under Subdivision 707-Afrom the other company as described in that paragraph.

(4) It does not matter whether or not any of the transfers mentioned in subsection (3) would have involved the first link company or the gain company as well as the other company.

(5) Another circumstance is that the conditions in subsection 170-130(1) and (2) would have been met for the*loss company and the gain company assuming:

(a) the capital loss year consisted of the part of the income year in which the*net capital loss would have been transferred to the gain company under Subdivision 707-A as described in paragraph (2)(c) occurring after the time the transfer would have occurred; and

(b) so much (if any) of the application year as occurred before the time the transfer would have occurred were disregarded.

17   Subsection 170-135(3) (note 2)

Repeal the note, substitute:

Note 2: Division 707 affects the operation of Subdivision 165-CA if the loss company made the net capital loss because of a transfer under Subdivision 707-A.

Note 3: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5 or 102-10.

18   At the end of subsection 170-140(2)

Add:

Note 3: The condition in subsection (2) may not apply in some cases. See section 170-142.

19   After section 170-140

Insert:

170-142 If the gain company has become the head company of a consolidated group or MEC group

(1) The condition in subsection (2) of this section applies to the gain company instead of the condition in subsection 170-140(2) if the conditions in subsections 170-130(1) and (2) are met in relation to the*loss company and the gain company apart from section 170-133 and either:

(a) both these circumstances exist:

(i) after the start of the capital loss year but before the relevant time described in subsection 170-130(4), the gain company became the*head company of a*consolidated group or of a*MEC group that came into existence after the start of the capital loss year;

(ii) the capital loss year and application year are not the same; or

(b) all these circumstances exist:

(i) the gain company is, at the relevant time described in subsection 170-130(4), the head company of a MEC group;

(ii) before that time but after the end of the capital loss year, the MEC group was involved in an application event described in section 719-300 (but not covered by subsection 719-300(4) or (5));

(iii) the gain company would be taken under section 719-305 to have transferred losses to itself under Subdivision 707-A, assuming it had made losses while head company of the group or of a consolidated group involved in the event;

(iv) the MEC group or consolidated group came into existence before the start of the capital loss year.

Note: An application event involves either expanding an existing MEC group by including extra eligible tier-1 companies of the top company for the group or creating a MEC group because more companies become eligible tier-1 companies of the top company of which the head company of a consolidated group is an eligible tier-1 company.

(2) The gain company must have been able to apply the*net capital loss in working out its*net capital gain for the application year assuming that it had made the net capital loss for the capital loss year.

(3) The condition in subsection (4) of this section applies to the gain company instead of the condition in subsection 170-140(2) if the conditions in subsections 170-130(1) and (2) are met in relation to the*loss company and the gain company because of section 170-133.

(4) The gain company must have been able to apply the*net capital loss in working out its*net capital gain for the application year assuming that it had made the net capital loss, for the income year in which the loss would have been transferred to it as described in paragraph 170-133(2)(c), because of one or more transfers under Subdivision 707-A described in that paragraph.

20   At the end of section 170-145

Add:

(7) Subsection (6) does not apply if the transfer occurs because either or both of the conditions in subsections 170-142(2) and (4) are met. In that case, the amount transferred also cannot exceed the amount worked out as follows:

Method statement

Step 1. Identify each*bundle of losses that, on the assumption in subsection 170-142(2) or (4) (as appropriate), would have included the*net capital loss.

Note 1: There will be 2 or more bundles of losses identified if both of the conditions in subsections 170-142(2) and (4) are met.

Note 2: There will be more than 1 bundle of losses identified on the basis of the assumption in paragraph 170-142(4) if the conditions in subsections 170-130(1) and (2) are met in relation to the loss company and the gain company because of multiple applications of section 170-133 each involving a different first link company.

Step 2. For each*bundle identified, work out how much of the*net capital loss the gain company would have been able to apply in working out its*net capital gain for the application year assuming that:

(a) the loss could have been applied in that year only after the application in that year of any other losses of that*sort that would have been included in the bundle, other than losses (the transferable losses ) that could be transferred from the*loss company to the gain company for that year; and

(b) if the bundle would have included 2 or more transferable losses of that sort - those losses could have been applied only in the order in which the loss company made them.

Note 1: If the assumption in subsection 170-142(2) is relevant to the bundle, it would have included losses made by the gain company and transferred (or taken to be transferred) to the company (from itself) under Subdivision 707-A.

Note 2: If the assumption in paragraph 170-142(4) is relevant to the bundle, it would have included losses actually made by the first link company and transferred (by one or more transfers under Subdivision 707-A) to the gain company.

Step 3. Total every result of step 2 for the*net capital loss.

21   At the end of section 170-155

Add:

(2) If:

(a) the*loss company has 2 or more*net capital losses it can transfer for the application year; and

(b) it made at least one of those losses apart from Subdivision 707-A and at least one of those losses because of a transfer under that Subdivision;

it can transfer under this Subdivision the losses it made because of a transfer under Subdivision 707-A onlyafter transferring under this Subdivision the losses it made apart from that Subdivision.

(3) For the purposes of subsection (2), treat a loss made by the company both apart from Subdivision 707-A and because of a transfer under that Subdivision as a loss made because of a transfer under that Subdivision.

(4) Subsection (1) has effect subject to subsection (2).

22   Application of amendments of Subdivision 170-B

The amendments of Subdivision 170-B of theIncome Tax Assessment Act 1997 made by this Schedule apply in relation to application years ending after 1 July 2002.

23   At the end of section 707-315

Add:

(5) If, had a loss been made by a company as assumed under a provision of Division 170, the loss would have been transferred under Subdivision 707-A, this Subdivision and other provisions that relate to or may affect the*available fractions for one or more*bundles of losses (including sections 707-140 and 719-325) operate as if the transfer had occurred.

Note: Section 707-140 provides for a choice to cancel a transfer under Subdivision 707-A. Section 719-325 provides for a choice to cancel all losses in certain bundles of losses. A choice under one of those sections may result in a bundle not coming into existence, or not being in existence after a certain time.

(6) To avoid doubt, a choice under section 707-145 or 719-325, as it operates because of subsection (5) of this section, relating to the loss does not affect or prevent:

(a) a transfer of the loss that would have occurred under Subdivision 707-A as described in another application of that subsection involving a different company; or

(b) *utilisation of the loss by the company that actually made the loss and is different from the company assumed under Division 170 to have made the loss.

Note: Therefore a choice under section 707-145 or 719-325, as operating because of subsection (5) of this section, will be able to cause only one bundle not to exist, and will not affect the existence of other bundles that are treated as existing because of other operations of that subsection.

Income Tax (Transitional Provisions) Act 1997

24   Before Subdivision 170-B

Insert:

Subdivision 170-A - Transfer of tax losses within certain wholly-owned groups of companies

Table of sections

170-45 Special rules affecting utilisation of losses in a bundle do not affect the amount of a tax loss that can be transferred

170-55 Ordering rule for losses previously transferred under Subdivision 707-A oftheIncome Tax Assessment Act 1997

170-45 Special rules affecting utilisation of losses in a bundle do not affect the amount of a tax loss that can be transferred

In working out an amount under subsection 170-45(4) of theIncome Tax Assessment Act 1997 (which may limit the amount of a tax loss that can be transferred under Subdivision 170-A of that Act), disregard these sections of this Act:

(a) section 707-325 (which lets the available fraction for a bundle of losses be greater than it would otherwise be);

(b) section 707-327 (which effectively lets the available fraction relevant to the utilisation of a loss be chosen in some cases);

(c) section 707-350 (which sets the limit on utilising certain losses in a bundle).

170-55 Ordering rule for losses previously transferred under Subdivision 707-A of the Income Tax Assessment Act 1997

If 2 or more losses that a company can transfer for an income year under Subdivision 170-A of theIncome Tax Assessment Act 1997 were previously transferred to it under Subdivision 707-A of that Act, it must transfer first those losses (if any) covered by subsection 707-350(1).

25   Application of Subdivision 170-A of the Income Tax (Transitional Provisions) Act 1997

Subdivision 170-A of theIncome Tax (Transitional Provisions) Act 1997 applies to income years ending after 1 July 2002.

26   Subdivision 170-B (heading)

Repeal the heading, substitute:

Subdivision 170-B - Transfer of net capital losses within certain wholly-owned groups of companies

27   At the end of Subdivision 170-B

Add:

170-145 Special rules affecting utilisation of losses in a bundle do not affect the amount of a net capital loss that can be transferred

In working out an amount under subsection 170-145(7) of theIncome Tax Assessment Act 1997 (which may limit the amount of a net capital loss that can be transferred under Subdivision 170-B of that Act), disregard these sections of this Act:

(a) section 707-325 (which lets the available fraction for a bundle of losses be greater than it would otherwise be);

(b) section 707-327 (which effectively lets the available fraction relevant to the utilisation of a loss be chosen in some cases);

(c) section 707-350 (which sets the limit on utilising certain losses in a bundle).

170-155 Ordering rule for losses previously transferred under Subdivision 707-A of the Income Tax Assessment Act 1997

If 2 or more losses that a company can transfer for an income year under Subdivision 170-B of theIncome Tax Assessment Act 1997 were previously transferred to it under Subdivision 707-A of that Act, it must transfer first those losses (if any) covered by subsection 707-350(1).

28   Application of amendments of Subdivision 170-B of the Income Tax (Transitional Provisions) Act 1997

The amendments of Subdivision 170-B of theIncome Tax (Transitional Provisions) Act 1997 made by this Schedule apply to income years ending after 1 July 2002.

Schedule 13   Consolidation: thin capitalisation

Income Tax Assessment Act 1997

1   Section 820-10 (table item 3)

Repeal the item, substitute:

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.

3   After Subdivision 820-F

Insert:

Subdivision 820-FA - How the thin capitalisation rules apply to consolidated groups and MEC groups

Guide to Subdivision 820-FA

820-579 What this Subdivision is about

This Subdivision tells you:

• how to classify the head company of a consolidated group or MEC group (in terms of which Subdivision of this Division to apply to the head company); and

• how to apply this Division to the head company (including how the application is modified).

Table of sections

Operative provisions

820-581 How this Division applies to head company for income year in which group comes into existence or ceases to exist

820-583 Classification of head company

820-585 Exemption for consolidated group headed by foreign-controlled Australian ADI or its holding company

820-587 Additional application of Subdivision 820-D to MEC group that includes foreign-controlled Australian ADI

820-589 How Subdivision 820-D applies to consolidated group or MEC group

820-591 Effect on safe harbour capital amount if group member is foreign-controlled Australian ADI and on-lends section 128F amounts

[This is the end of the Guide.]

Operative provisions

820-581 How this Division applies to head company for income year in which group comes into existence or ceases to exist

If a*consolidated group or*MEC group:

(a) comes into existence at a time during an income year that is not the start of the income year; or

(b) ceases to exist at a time during an income year that is not the end of the income year;

then, for each of the following periods during that income year:

(c) a period throughout which a company is the*head company of that group; or

(d) a period throughout which that company is the head company of a different consolidated group or MEC group; or

(e) a period throughout which that company is a*member of no consolidated group or MEC group;

this Division (except this section) is to have either:

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

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

Example: Austco Ltd is not a member of a consolidated group for the first 6 months of an income year, but then becomes the head company of a consolidated group which continues in existence for the rest of the income year.

For those first 6 months Austco is an outward investor (general) under section 820-85. For the rest of the income year Austco is an outward investor (general) under subsection 820-583(2).

This section ensures that section 820-120 (about part year periods) applies to Austco instead of section 820-85, so that Subdivision 820-B has 2 separate applications to Austco: one for the first 6 months and the other for the rest of the income year. Under the second application, account is taken of the position of the subsidiary members that are taken to be part of Austco as head company of the consolidated group.

If some or all of the period of those first 6 months is before 1 July 2003, another consequence of this section is that Austco may become part of a resident TC group under Subdivision 820-F for so much of that period as is before 1 July 2003. See sections 820-455 to 820-458.

820-583 Classification of head company

Outward investing entity (non-ADI)

(1) The*head company of a*consolidated group or of a*MEC group is an outward investing entity (non-ADI) for a period that is all or part of an income year if, and only if, it is:

(a) an*outward investor (general) for that period (because of subsection (2)); or

(b) an*outward investor (financial) for that period (because of subsection (3)).

Outward investor (general)

(2) The*head company of a*consolidated group or of a*MEC group is an outward investor (general) for a period that is all or part of an income year if:

(a) for that period, the head company satisfies the condition in the second column of item 1 or 3 of the table in subsection 820-85(2); and

(b) no*member of the group is a*financial entity or*ADI at any time during that period.

Outward investor (financial)

(3) The*head company of a*consolidated group or of a*MEC group isan outward investor (financial) for a period that is all or part of an income year if:

(a) for that period, the head company satisfies the condition in the second column of item 1 or 3 of the table in subsection 820-85(2); and

(b) throughout that period, there is at least one*member of the group that is a*financial entity; and

(c) no*member of the group is an*ADI at any time during that period.

Inward investing entity (non-ADI)

(4) The*head company of a*consolidated group or of a*MEC group is an inward investing entity (non-ADI) for a period that is all or part of an income year if, and only if, it is:

(a) an*inward investment vehicle (general) for that period (because of subsection (5)); or

(b) an*inward investment vehicle (financial) for that period (because of subsection (6)).

Inward investment vehicle (general)

(5) The*head company of a*consolidated group or of a*MEC group is an inward investment vehicle (general) for a period that is all or part of an income year if:

(a) throughout that period, the head company is a*foreign controlled Australian entity; and

(b) no member of the group is a*financial entity or*ADI at any time during that period;

unless the head company is an*outward investing entity (non-ADI) for all or part of that period.

Inward investment vehicle (financial)

(6) The*head company of a*consolidated group or of a*MEC group is an inward investment vehicle (financial) for a period that is all or part of an income year if:

(a) throughout that period, the head company is a*foreign controlled Australian entity; and

(b) throughout that period, there is at least one*member of the group that is a*financial entity; and

(c) no member of the group is an*ADI at any time during that period;

unless the head company is an*outward investing entity (non-ADI) for all or part of that period.

Outward investing entity (ADI)

(7) The*head company of a*consolidated group or of a*MEC group is an outward investing entity (ADI) for a period that is all or part of an income year if, and only if:

(a) apart from Part 3-90 (about consolidation of groups) and this Subdivision, at least one*member of the group would be an*outward investing entity (ADI) for that period; or

(b) these conditions are met:

(i) at least one member of the group would, apart from that Part and this Subdivision, be an*outward investing entity (non-ADI) for that period; and

(ii) at least one member of the group is an*ADI throughout that period.

820-585 Exemption for consolidated group headed by foreign-controlled Australian ADI or its holding company

(1) This Division does not disallow any of a*debt deduction for an income year if:

(a) the debt deduction is of the*head company of a*consolidated group and the head company satisfies subsection (2) for that income year; or

(b) the debt deduction is an amount incurred by the head company of a consolidated group during a period that is part of that income year, and the head company satisfies subsection (2) for that period.

(2) The*head company satisfies this subsection for a period that is all or part of an income year if, throughout that period:

(a) the head company is both a*foreign controlled Australian company and an*ADI (and would also be an ADI apart from Part 3-90 (about consolidation of groups)); or

(b) the head company:

(i) is a*foreign controlled Australian company; and

(ii) beneficially owns all the*membership interests in a*member of the group that is both a*foreign controlled Australian entity and an*ADI throughout that period; and

(iii) would, apart from Part 3-90 (about consolidation of groups), have no other assets and no*debt capital;

unless at least one member of the group would, apart from that Part and this Subdivision, be an*outward investing entity (non-ADI) or*outward investing entity (ADI) for all or part of that period.

820-587 Additional application of Subdivision 820-D to MEC group that includes foreign-controlled Australian ADI

Subdivision 820-D applies to the*head company of a*MEC group as if it were an*outward investing entity (ADI) for a period that is all or part of an income year if:

(a) the head company isnot an outward investing entity (ADI) for that period; and

(b) throughout that period, at least one*member of the group is both a*foreign controlled Australian entity and an*ADI; and

(c) throughout that period, there is at least one*eligible tier-1 company of the*top company for the group that:

(i) is a member of the group; and

(ii) isnot an ADI; and

(iii) has no*wholly-owned subsidiary that is an ADI.

820-589 How Subdivision 820-D applies to consolidated group or MEC group

(1) This section has effect for the purposes of applying Subdivision 820-D to the*head company of a*consolidated group or of a*MEC group, in relation to a period (the test period ) that is all or part of an income year.

Note: Section 820-587 extends the application of Subdivision 820-D.

(2) The*head company's adjusted average equity capital for the test period is the average value, for the period, of the amount worked out under subsection (3).

Note: To calculate an average value for the purposes of this Division, see Subdivision 820-G.

(3) The amount worked out under this subsection as at a particular day is the total of the amounts worked out under the table below for each entity that is a*member of the group on that day. The amounts are to be worked out, so far as practicable, on the basis of the information that would be contained in a set of consolidated accounts:

(a) prepared, in accordance with the*accounting standard on consolidated accounts, as at the end of that day; and

(b) covering the members of the group as at the end of that day.

Note: This subsection does not depend on whether such a set of consolidated accounts was prepared, or had to be prepared, for other purposes.

820-591 Effect on safe harbour capital amount if group member is foreign-controlled Australian ADI and on-lends section 128F amounts

(1) Subsection (2) has effect for the purposes of working out the*safe harbour capital amount of the*head company of a*consolidated group or of a*MEC group for a period that is all or part of an income year, if:

(a) throughout that period, a*member (the ADI subsidiary ) of the group is both a*wholly-owned subsidiary of a*foreign bank and an*ADI; and

(b) the ADI subsidiary has:

(i) issued*debentures covered by section 128F (which exempts interest on the debentures from withholding tax) of theIncome Tax Assessment Act 1936; and

(ii) made proceeds of the debentures available to an*Australian permanent establishment of the foreign bank, as loans to the Australian permanent establishment, for use in its Australian business;

unless a choice by the head company under section 820-597 covers the Australian permanent establishment in relation to some or all of that period.

Note: The effect of such a choice is that the Australian permanent establishment is treated as part of the head company throughout the period covered by the choice. See subsection 820-603(3).

(2) The head company's*risk-weighted assets at a particular time during that period are reduced by the total amounts of proceeds of the debentures that are at that time so made available by the ADI subsidiary.

(3) To avoid doubt, a choice by the*head company under section 820-597 does not prevent subsection (2) of this section from having effect unless the choice covers the Australian permanent establishment in relation to some or all of that period.

(4) This section applies only to the 2002-2003 income year and to each of the next 3 income years.

Subdivision 820-FB - Grouping foreign bank branches with a consolidated group, MEC group or single Australian resident company

Guide to Subdivision 820-FB

820-595 What this Subdivision is about

If the head company of a consolidated group or MEC group is a member of the same wholly-owned group as a foreign bank, the head company can choose to treat as part of itself the foreign bank's Australian branches.

If an Australian company that cannot consolidate is a member of the same wholly-owned group as a foreign bank, the company can choose to treat as part of itself the foreign bank's Australian branches.

This Subdivision sets out the consequences of the choice for the application of the rest of this Division.

Note: Also, if an Australian company that cannot consolidate is both a wholly-owned subsidiary of a foreign bank and an ADI, the company's risk-weighted assets may be reduced by the proceeds of debentures if those proceeds have been on-lent to an Australian permanent establishment of the foreign bank, and interest on the debentures is exempt from withholding tax because of section 128F of theIncome Tax Assessment Act 1936. See section 820-617.

Table of sections

Choice to group with foreign bank branches

820-597 Choice by consolidated group or MEC group

820-599 Choice by single Australian resident company that is not part of a consolidatable group or potential MEC group

Effect of choice

820-601 Application

820-603 General

820-605 Effect on foreign bank if certain debt deductions disallowed

820-607 Effect on test periods under this Division

820-609 Effect on classification of head company or single company

820-611 Values to be based on what would be in consolidated accounts for group

820-613 How Subdivision 820-D applies if head company or single company is treated as including foreign bank branches

820-615 How Subdivision 820-E applies if head company or single company is treated as including foreign bank branches

820-617 Effect on safe harbour capital amount if single company is foreign-controlled Australian ADI and on-lends section 128F amounts

[This is the end of the Guide.]

Choice to group with foreign bank branches

820-597 Choice by consolidated group or MEC group

(1) The*head company of a*consolidated group or*MEC group may choose to have treated as part of itself, for the purposes of this Division, each*Australian permanent establishment through which a*foreign bank carried on its banking business in Australia from time to time during a period (the grouping period ) for which the conditions in subsection (2) are satisfied.

(2) The conditions are:

(a) the period began on or after 1 July 2002; and

(b) the period was all or part of an income year of the*head company; and

(c) the*consolidated group or*MEC group was in existence throughout the period; and

(d) throughout the period:

(i) the head company and the*foreign bank were members of the same*wholly-owned group; and

(ii) the foreign bank carried on its banking business in Australia through at least one*Australian permanent establishment.

(It does not matter whether or not the income year ends on the same day for the head company and the foreign bank.)

(3) The*head company cannot choose under subsection (1) a period that is part of a longer period for which the conditions in subsection (2) are satisfied.

820-599 Choice by single Australian resident company that is not part of a consolidatable group or potential MEC group

(1) A company (the single company ) may choose to have treated as part of itself, for the purposes of this Division, each*Australian permanent establishment through which a*foreign bank carried on its banking business in Australia from time to time during a period (also the grouping period ) for which the conditions in subsection (2) are satisfied.

(2) The conditions are:

(a) the period began on or after 1 July 2002; and

(b) the period was all or part of an income year of the single company; and

(c) throughout the period, the single company:

(i) was an*Australian entity; and

(ii) wasnot a*prescribed dual resident; and

(iii) wasnot a*member of a*consolidatable group; and

(iv) wasnot a member of a*potential MEC group; and

(d) throughout the period:

(i) the single company and the foreign bank were members of the same*wholly-owned group; and

(ii) the foreign bank carried on its banking business in Australia through at least one Australian permanent establishment.

(It does not matter whether or not the income year ends on the same day for the single company and the foreign bank.)

(3) The single company cannot choose under subsection (1) a period that is part of a longer period for which the conditions in subsection (2) are satisfied.

Effect of choice

820-601 Application

Sections 820-603 to 820-617 apply if a choice is made under section 820-597 or 820-599.

820-603 General

(1) The choice cannot be revoked in relation to the grouping period. It binds the*head company or the single company, as appropriate, and the*foreign bank.

(2) The rest of this section applies:

(a) to each*Australian permanent establishment through which the*foreign bank carried on its banking business in Australia at any time during the grouping period; and

(b) in relation to each time (the test time ) during the grouping period when the foreign bank carried on its banking business in Australia through that Australian permanent establishment.

(3) In the case of a choice under section 820-597, this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if, at the test time, the*Australian permanent establishment:

(a) had been part of the*head company; and

(b) hadnot been part of the*foreign bank; and

(c) were a*subsidiary member of the*consolidated group or*MEC group.

(4) In the case of a choice under section 820-599, this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if, at the test time:

(a) the*Australian permanent establishment had been part of the single company and hadnot been part of the*foreignbank; and

(b) the single company were a*consolidated group of which the single company was the*head company and the Australian permanent establishment was a*subsidiary member.

(5) In either case, without limiting subsection (3) or (4), this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if:

(a) the*Australian permanent establishment were an entity at that time; and

(b) each asset and liability of the*foreign bank at the test time that is attributable to the Australian permanent establishment were an asset or liability of the Australian permanent establishment at that time; and

(c) without limiting paragraph (b) of this subsection, each cost that:

(i) is a*debt deduction of the foreign bank incurred at the test time; and

(ii) is attributable to the Australian permanent establishment;

were a cost incurred by the Australian permanent establishment at that time;

For the effects of disallowing debt deductions, see section 820-605.

(6) However, the application of this Division because of this section is subject to the modifications set out in sections 820-607 to 820-617.

(7) For the purposes of this Division (as applying because of this Subdivision), this Act (except this Division) applies as if the matters referred to in subsections (3), (4) and (5) of this section were the case.

Note: For example, this means that a head company is treated for the purposes of this Division as if it had debt deductions based on the actual costs incurred by an Australian permanent establishment while it is treated as part of the head company because of this section.

820-605 Effect on foreign bank if certain debt deductions disallowed

If:

(a) apart from this Division, a*debt deduction would be a deduction of the*foreign bank for an income year; and

(b) this Division (as applying because of this Subdivision) disallows all or part of the deduction (treated as a deduction of the*head company or single company);

this section disallows the deduction of the foreign bank, or that part of it, as appropriate.

Note 1: This Division does not disallow a debt deduction that the foreign bank incurs during the grouping period and that consists of a cost that is:

· attributable to an Australian permanent establishment covered by the choice under section 820-597 or 820-599; and

· paid or owed to the head company or single company.

The cost is not a debt deduction of the head company or single company for the purposes of this Division as applying because of this Subdivision. This is because subsection 820-603(3) or (4) treats the Australian permanent establishment as being part of the head company or single company, so the cost is treated as being paid or owed by the head company or single company to itself.

Because subsection 820-603(3) or (4) also treats the Australian permanent establishment as not being part of the foreign bank, the cost is not a debt deduction of the foreign bank, so it is not disallowed by this Division as applying to the foreign bank.

Note 2: This Division also does not disallow a debt deduction that the head company or single company incurs during the grouping period and that consists of a cost that is:

· paid or owed to the foreign bank; and

· is attributable to an Australian permanent establishment covered by the choice under section 820-597 or 820-599.

The cost is not a debt deduction of the head company or single company for the purposes of this Division as applying because of this Subdivision. This is because subsection 820-603(3) or (4) treats the Australian permanent establishment as being part of the head company or single company, so the cost is treated as being paid or owed by the head company or single company to itself.

820-607 Effect on test periods under this Division

If, apart from this section, this Division (except this Subdivision) would have a single application to the*head company or single company, or to the*foreign bank, in relation to a period (the test period ) that:

(a) is all or part of an income year of that entity; and

(b) overlaps the grouping period;

this Division (except this section) is to have separate applications to that entity as follows:

(c) a single application in relation to the period of overlap; and

(d) a single application in relation to the part (if any) of the test period that is before the period of overlap; and

(e) a single application in relation to the part (if any) of the test period that is after the period of overlap.

820-609 Effect on classification of head company or single company

Classification as outward investing entity (ADI)

(1) The*head company or single company is an outward investing entity (ADI) for a period that is all or part of the grouping period, except:

(a) in the case of a choice under section 820-597 - a period for which subsection (2) of this section applies Subdivision 820-D to the head company as if it were an*outward investing entity (ADI); and

(b) in any case - a period for which the head company or single company is an*inward investing entity (ADI) because of subsection (3) of this section.

Foreign controlled groups treated as outward investing entity (ADI)

(2) Subdivision 820-D applies to the*head company as if it were an*outward investing entity (ADI) for a period (the test period ) that is all or part of the grouping period if, apart from this Subdivision:

(a) the head company would satisfy subsection 820-585(2) for the test period (triggering the exemption in section 820-585); or

(b) section 820-587 would apply Subdivision 820-D to the head company as if it were an*outward investing entity (ADI) for the test period.

Note: If paragraph (2)(a) is satisfied, the exemption in section 820-585 does not apply to the test period: see subsection (4) of this section.

Classification as inward investing entity (ADI)

(3) If, apart from this Subdivision, the*head company or single company would be an*inward investment vehicle (general), or an*inwardinvestment vehicle (financial), for a period (the test period ) that is all or part of the grouping period, the head company or single company is an inward investing entity (ADI) for the test period.

Section overrides other classification provisions

(4) This section has effect despite any other provision of this Division.

820-611 Values to be based on what would be in consolidated accounts for group

(1) For the purposes of this Division as applying because of this Subdivision, the value or amount of a particular matter as at a particular time during the grouping period is to be worked out, so far as practicable, on the basis of the information that would be contained in a set of consolidated accounts:

(a) prepared, in accordance with the*accounting standard on consolidated accounts, as at that time; and

(b) covering the*consolidated group,*MEC group or single company, as appropriate, and each*Australian permanent establishment that section 820-603 treats as part of the*head company or single company at that time.

Note: This subsection does not depend on whether such a set of consolidated accounts was prepared, or had to be prepared, for other purposes.

(2) To avoid doubt, subsection (1) also applies to working out the value or amount, as at a particular time, of a matter mentioned in any of sections 820-613 to 820-617 (for example, an entity's tier 1 capital (within the meaning of the*prudential standards) or*paid-up share capital).

820-613 How Subdivision 820-D applies if head company or single company is treated as including foreign bank branches

(1) This section has effect for the purposes of applying Subdivision 820-D to the*head company or single company in relation to a period (the test period ) that is all or part of the grouping period.

Note: Subdivision 820-D can apply to the head company or single company because of subsection 820-609(1) or (2).

Adjusted average equity capital

(2) The adjusted average equity capital of the*head company or single company for the test period is the average value, for the period, of the amount worked out under subsection (3).

Note 1: In the case of a choice under section 820-599, paragraph 820-603(4)(b) treats the single company and the relevant Australian permanent establishments as a consolidated group.

Note 2: To calculate an average value for the purposes of this Division, see Subdivision 820-G.

(3) The amount worked out under this subsection as at a particular day is the total of:

(a) in the case of a choice under section 820-597 - the amounts worked out under the table in subsection 820-589(3) for that day for each entity that is a*member of the group on that day; and

(b) in the case of a choice under section 820-599 - the amount worked out under the table in subsection 820-589(3) for that day for the single company; and

(c) for each*Australian permanent establishment covered by the choice - the*equity capital of the foreign bank, as at the end of that day, that:

(i) is attributable to that Australian permanent establishment; but

(ii) has not been allocated to the*OB activities of the foreign bank;

plus the total of the amounts that, as at the end of that day:

(iii) are made available by the foreign bank to the Australian permanent establishment as loans to the Australian permanent establishment; and

(iv) do not give rise to any*debt deductions of the foreign bank for the income year or any other income year.

Note: The amounts are to be worked out, so far as practicable, on the basis of the information that would be contained in a set of consolidated accounts. See section 820-611.

Risk-weighted assets

(4) For each*Australian permanent establishment that is treated covered by the choice, the*risk-weighted assets of the*head company or single company include that part of the foreign bank's*risk-weighted assets that:

(a) is attributable to that Australian permanent establishment; but

(b) is not attributable to the*OB activities of the foreign bank.

820-615 How Subdivision 820-E applies if head company or single company is treated as including foreign bank branches

(1) This section has effect for the purposes of applying Subdivision 820-E to the*head company or single company in relation to a period (the test period ) that is all or part of the grouping period.

Note: Subdivision 820-E applies to the head company or single company because of subsection 820-609(3).

Average equity capital

(2) The average equity capital of the*head company or single company for the test period is the average value, for that period, of the amount worked out under subsection 820-613(3).

Note 1: In the case of a choice under section 820-599, paragraph 820-603(4)(b) treats the single company and the relevant Australian permanent establishments as a consolidated group.

Note 2: To calculate an average value for the purposes of this Division, see Subdivision 820-G.

Safe harbour capital amount

(3) The safe harbour capital amount of the*head company or single company for the test period is worked out using the following method statement.

Method statement

Step 1. Work out the average value, for the test period, of the*head company's or single company's*risk-weighted assets.

Step 2. Multiply the result of step 1 by 4%. The result of this step is the safe harbour capital amount .

Risk-weighted assets

(4) For each*Australian permanent establishment covered by the choice, the*risk-weighted assets of the*head company or single company include that part of the*risk-weighted assets of the*foreign bank that:

(a) is attributable to that Australian permanent establishment; but

(b) is not attributable to the*OB activities of the foreign bank.

820-617 Effect on safe harbour capital amount if single company is foreign-controlled Australian ADI and on-lends section 128F amounts

(1) In the case of a choice under section 820-599, this section has effect for the purposes of working out the*safe harbour capital amount of the single company for a period (the test period ) that is all or part of the grouping period, if:

(a) throughout the test period, the single company is both a*wholly-owned subsidiary of a*foreign bank and an*ADI; and

(b) the single company has:

(i) issued*debentures covered by section 128F (which exempts interest on the debentures from withholding tax) of theIncome Tax Assessment Act 1936; and

(ii) made proceeds of the debentures available to an*Australian permanent establishment of the foreign bank, as loans to the Australian permanent establishment, for use in its Australian business;

unless that or another choice by the single company under section 820-A515 covers the Australian permanent establishment in relation to some or all of that period.

(2) The single company's*risk-weighted assets at a particular time during the test period are reduced by the total amounts of proceeds of the debentures that are at that time so made available by the single company.

(3) This section applies only to the 2002-2003 income year and to each of the next 3 income years.

4   Subsection 995-1(1) (definition of adjusted average equity capital)

Omit "and 820-562", substitute ", 820-562, 820-589 and 820-613".

5   Subsection 995-1(1) (definition of average equity capital)

Omit "and 820-575", substitute ", 820-575 and 820-615".

6   Subsection 995-1(1) (definition of inward investing entity (ADI))

Omit "section 820-395", substitute "sections 820-395 and 820-609".

7   Subsection 995-1(1) (definition of inward investing entity (non-ADI))

Omit "and 820-550", substitute ", 820-550 and 820-583".

8   Subsection 995-1(1) (definition of inward investment vehicle (financial))

Omit "and 820-550", substitute ", 820-550 and 820-583".

9   Subsection 995-1(1) (definition of inward investment vehicle (general))

Omit "and 820-550", substitute ", 820-550 and 820-583".

10   Subsection 995-1(1) (definition of outward investing entity (ADI) )

Omit "and 820-550", substitute ", 820-550, 820-583 and 820-609".

11   Subsection 995-1(1) (definition of outward investing entity (non-ADI) )

Omit "and 820-550", substitute ", 820-550 and 820-583".

12   Subsection 995-1(1) (definition of outward investor (financial) )

Omit "and 820-550", substitute ", 820-550 and 820-583".

13   Subsection 995-1(1) (definition of outward investor (general) )

Omit "and 820-550", substitute ", 820-550 and 820-583".

14   Subsection 995-1(1) (paragraph (b) of the definition of safe harbour capital amount )

Omit "section 820-405", substitute "section 820-405 or 820-615".

Income Tax (Transitional Provisions) Act 1997

15   Subsection 820-10(1)

Omit "subsection (2)", substitute "this section".

16   After subsection 820-10(1)

Insert:

(1A) Subdivisions 820-FA and 820-FB of that Act apply on and after 1 July 2002.

Schedule 14   Consolidation: consequential provisions for removal of grouping

Financial Corporations (Transfer of Assets and Liabilities) Act 1993

1   Section 18

After "applies only to", insert "certain".

2   Subparagraphs 18(b)(i), (ii) and (iii)

Repeal the subparagraphs, substitute:

(i) subsections 126-50(1), (5), (6), (7), (8) and (9) of that Act; and

(ii) section 126-55 of that Act.

Income Tax Assessment Act 1936

3   Paragraph 73E(1)(a)

After "1997", insert ", as in force before the amendments made to that Subdivision by theNew Business TaxSystem (Consolidation) Act (No. 1) 2002".

4   Paragraph 73EA(1)(a)

After "1997", insert ", as in force before the amendments made to that Subdivision by theNew Business TaxSystem (Consolidation) Act (No. 1) 2002".

5   Paragraph 73EB(1)(a)

After "1997", insert ", as in force before the amendments made to that Subdivision by theNew Business TaxSystem (Consolidation) Act (No. 1) 2002".

6   Paragraph 73F(2)(a)

After "1997", insert ", as in force before the amendments made to that Subdivision by theNew Business TaxSystem (Consolidation) Act (No. 1) 2002".

7   Paragraph 73G(1)(a)

After "1997", insert ", as in force before the amendments made to that Subdivision by theNew Business TaxSystem (Consolidation) Act (No. 1) 2002".

Income Tax Assessment Act 1997

8   Section 112-150 (table item 5)

After "between", insert "certain".

9   Subsection 114-10(5) (example)

After "wholly-owned group", insert "and a foreign resident".

10   Paragraph 115-285(3)(c)

Omit "a wholly-owned group", substitute "certain wholly-owned groups".

11   Subsection 121-20(1) (example 2)

After "wholly-owned group", insert "and a foreign resident".

12   Paragraph 124-795(2)(b)

After "original interest", insert "and the acquiring entity is a foreign resident".

13   Section 136-25 (table item 8)

Omit "a company group", substitute "certain company groups".

Taxation Administration Act 1953

14   Paragraphs 45-635(3)(c) and (d) of Schedule 1

Before "companies", insert "certain".

15   Paragraphs 45-635(7)(a) and (b) of Schedule 1

Before "companies", insert "certain".

Wool Services Privatisation Act 2000

16   Subsection 27(2) (note)

Before "transactions", insert "certain".

Schedule 15   Consolidation: foreign tax credits

Income Tax (Transitional Provisions) Act 1997

1   At the end of Division 717

Add:

717-30 Substituted accounting periods

Sections 717-15 and 717-20 have effect as if paragraphs 717-15(1)(b) and 717-20(1)(b) were omitted if the head company of the consolidated group has a substituted accounting period and the consolidated group referred to in those sections came into existence before 1 July 2004.

New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002

2   At the end of item 2 of Schedule 10

Add:

Note: If you have a substituted accounting period, item 5 or 7 may apply instead of this item.

3   At the end of item 3 of Schedule 10

Add:

Note: If you become the head company of a consolidated group on or after 1 July 2002 and before 1 July 2003 on a day that is not the start of your income year, item 6 will apply instead of this item.

4   At the end of Schedule 10

Add:

5 Modification of basic rule

(1) This item applies to a taxpayer instead of item 2 if the taxpayer:

(a) has a substituted accounting period; and

(b) is not a member of a consolidated group or a MEC group.

(2) Section 160AFE of theIncome Tax Assessment Act 1936 as amended by this Schedule applies to the taxpayer from 1 July 2003. That section applies from 1 July 2003 until the start of the taxpayer's next income year as if that period were an income year.

(3) Section 160AFE of theIncome Tax Assessment Act 1936 as in force just before the commencement of this Schedule (the old section 160AFE ) applies to the taxpayer from the start of the taxpayer's income year in which 1 July 2003 occurs until the end of 30 June 2003 as if that period were an income year.

6 Consolidation day on or after 1 July 2002 and before 1 July 2003

(1) This item applies to a taxpayer instead of item 3 if:

(a) the taxpayer becomes the head company of a consolidated group or MEC group on the day (also the consolidation day ) the group comes into existence; and

(b) the consolidation day is on or after 1 July 2002 and before 1 July 2003 and is not the start of an income year (whether or not the taxpayer has a substituted accounting period).

(2) Section 160AFE of theIncome Tax Assessment Act 1936 as amended by this Schedule applies to the taxpayer from the consolidation day. That section applies from the consolidation day until the end of the taxpayer's income year in which that day occurs as if that period were an income year.

(3) If:

(a) the consolidation day is after 1 July 2002; and

(b) the taxpayer does not have a substituted accounting period;

the old section 160AFE applies to the taxpayer from 1 July 2002 until just before the consolidation day. If the taxpayer so chooses, it applies as if that period were an income year.

(4) If the taxpayer has a substituted accounting period, the old section 160AFE applies to the taxpayer from the start of the taxpayer's income year in which the consolidation day occurred until just before the consolidation day. If the taxpayer so chooses, it applies as if that period were an income year.

7 Consolidation day on or after 1 July 2003

(1) This item applies to a taxpayer instead of item 2 if:

(a) the taxpayer has a substituted accounting period; and

(b) the taxpayer becomes the head company of a consolidated group or MEC group on the day (also the consolidation day ) the group comes into existence; and

(c) the consolidation day is on or after 1 July 2003 and is not the start of the taxpayer's next income year.

(2) Section 160AFE of theIncome Tax Assessment Act 1936 as amended by this Schedule applies to the taxpayer from 1 July 2003. That section applies from 1 July 2003 until the start of the taxpayer's next income year as if that period were an income year.

(3) The old section 160AFE applies to the taxpayer from the start of the taxpayer's income year in which 1 July 2003 occurs until the end of 30 June 2003. If the taxpayer so chooses, it applies as if that period were an income year.

8 Applying old section 160AFE to part years

(1) Subitem (2) has effect for the purposes of applying the old section 160AFE:

(a) to a taxpayer as mentioned in item 5, 6 or 7; and

(b) for a period that is shorter than an income year.

(2) The requirement in paragraph (1D)(b) of that section that the income company be a group company in relation to the credit company in relation to the current year of income has effect as if it were a requirement that the income company be a group company in relation to the credit company:

(a) continuously for a period of at least 12 months ending on the day before the day on which section 160AFE of theIncome Tax Assessment Act 1936 as amended by this Schedule starts to apply to the taxpayer; or

(b) from the time when the income company and the credit company were both in existence, if that period is shorter.

9 Applying old section 160AFE to non-membership periods

(1) Subitem (2) has effect for the purposes of applying the old section 160AFE to a taxpayer that:

(a) becomes a subsidiary member of a consolidated group or MEC group; and

(b) has a period referred to in section 701-30 as a non-membership period.

(2) The requirement in paragraph (1D)(b) of the old section 160AFE that the income company be a group company in relation to the credit company in relation to the current year of income has effect as if it were a requirement that the income company be a group company in relation to the credit company:

(a) continuously for a period of at least 12 months ending on the last day of the non-membership period; or

(b) from the time when the income company and the credit company were both in existence, if that period is shorter.

10 Parts of income years not earlier income years

Any period that is shorter than an income year and that is treated as if it were an income year for the purposes of item 5, 6 or 7 of this Schedule is taken not to be an earlier income year for the purposes of section 160AFE of theIncome Tax Assessment Act 1936 as amended by this Schedule.

Schedule 16   Application of sections 46 and 46A of the Income Tax Assessment Act 1936 after 30 June 2002

Income Tax Assessment Act 1936

1   After section 45ZB

Insert:

46AA Sections 46 and 46A do not apply to the franked part of dividends paid after 30 June 2002

(1) Sections 46 and 46A do not apply to the franked part of a dividendpaid to a taxpayer after 30 June 2002.

(2) The franked part of a dividend paid after 30 June 2002 is that part of the dividend that is equal to the amount worked out using the following formula:

where:

corporate tax rate has the same meaning as in theIncome Tax Assessment Act 1997.

franking credit on the dividend means the amount of the franking credit on the dividend, worked out under Subdivision 202-D of theIncome Tax Assessment Act 1997.

46AB Application of sections 46 and 46A to the unfranked part of dividends

(1) Sections 46 and 46A do not apply to the unfranked part of a dividend paid to a taxpayer after 30 June 2003.

(2) This section does not apply in relation to a taxpayer to which section 46AC applies.

46AC Different application for members of certain groups

(1) This section applies to a taxpayer if:

(a) the taxpayer becomes a member of a consolidated group or MEC group on the day (the consolidation day ) the group comes into existence; and

(b) the consolidation day either is before 1 July 2003 or is both:

(i) the first day of the first income year starting after 30 June 2003 of the group's head company (for a consolidated group) or provisional head company (for a MEC group) on the consolidation day; and

(ii) before 1 July 2004; and

(c) the taxpayer was not a member of a consolidated group or MEC group before the consolidation day.

(2) Sections 46 and 46A do not apply to the unfranked part of a dividend paid to the taxpayer on or after the consolidation day.

(3) In this section:

consolidated group has the same meaning as in theIncome Tax Assessment Act 1997.

head company has the same meaning as in theIncome Tax Assessment Act 1997.

MEC group has the same meaning as in theIncome Tax Assessment Act 1997.

provisional head company has the same meaning as in theIncome Tax Assessment Act 1997.

46AD The unfranked part of the dividend

For the purposes of sections 46AB and 46AC, the unfranked part of a dividend is that part of the dividend that remains after deducting the franked part of the dividend (worked out under subsection 46AA(2)) from the amount of the dividend.

46AE Who is a qualified person for the purposes of subsections 46(2B) and 46A(5B) after 30 June 2002

(1) This section applies to dividends paid after 30 June 2002.

(2) For the purposes of subsections 46(2B) and 46A(5B), a shareholder is taken to be a qualified person in relation to a dividend for the purposes of Division 1A of Part IIIAA of theIncome Tax Assessment Act 1936,if the person would have been a qualified person in relation to the dividend under that Division if that Division applied to the dividend.

2   Section 46F

Repeal the section, substitute:

46F Rebate not allowable for certain dividends

(1) In this section:

exempting entity has the same meaning as in theIncome Tax Assessment Act 1997.

group company has the same meaning as in section 160AFE of this Act.

unfranked part of a dividend (including a dividend that is unfrankable under theIncome Tax Assessment Act 1997), means that part of the dividend that is equal to the amount worked out using the following formula:

where:

corporate tax rate has the same meaning as in theIncome Tax Assessment Act 1997.

franking credit on the dividend means the amount of the franking credit on the dividend, worked out under Subdivision 202-D of theIncome Tax Assessment Act 1997.

(2) Subject to this section, a shareholder is not entitled to, and must not be allowed, a rebate under section 46 or 46A in respect of:

(a) if a dividend was paid to the shareholder by a company other than an exempting entity, or by an exempting entity and item 6 or 7 of the table in section 208-130 of theIncome Tax Assessment Act 1997 applied in relation to the dividend:

(i) the unfranked part of the dividend; or

(ii) any part of the dividend in respect of which a determination is made under Subdivision 204-D of theIncome Tax Assessment Act 1997, or under paragraph 177EA(5)(b) of this Act; or

(b) if a dividend was made to the shareholder by an exempting entity and item 6 or 7 of the table in section 208-130 of theIncome Tax Assessment Act 1997does not apply to the dividend - any part of the dividend.

(3) Subject to subsection (4), subsection (2) does not apply if:

(a) the shareholder is a group company in relation to the company paying the dividend in relation to the year of income in which the dividend is paid; or

(b) were the tests in section 160AFE for working out relationships between companies to apply to a particular time rather than in relation to a year of income - the shareholder would have been a group company in relation to the company paying the dividend at all times during the period of 12 months ending on the day on which the dividend was paid.

(4) Subsection (3) does not affect the application of subsection (2) to the extent that subsection (2) deals with the payment of the unfranked part of a dividend (whether or not under subparagraph (a)(i) of that subsection):

(a) to a shareholder that is a prescribed dual resident at the time the dividend is paid; or

(b) by a company that is a prescribed dual resident at the time the dividend is paid.

3   Application of item 2

The amendment of theIncome Tax Assessment Act 1936made by item 2 of this Schedule applies to dividends paid after 30 June 2002.

Schedule 17   Changes to the imputation system

Income Tax Assessment Act 1997

1   Paragraph 202-45(f)

Repeal the paragraph, substitute:

(f) an amount that is taken to be an unfrankable distribution under section 215-10 or 215-15;

2   Section 203-20

Repeal the section, substitute:

203-20 Application of the benchmark rule

(1) The*benchmark rule does not apply to a company in a*franking period if either:

(a) the company satisfies each of the following criteria:

(i) at all times during the franking period, the company is a*listed public company;

(ii) the company cannot make a*distribution on one*membership interest during the franking period without making a distribution under the same resolution on all other membership interests;

(iii) the company cannot*frank a distribution made on one membership interest during the franking period without franking distributions made on all other membershipinterests under the same resolution with a*franking credit worked out using the same*franking percentage; or

(b) the entity is a*100% subsidiary of a company that satisfies the criteria set out in paragraph (a).

(2) The following are examples of cases in which a company satisfies the criteria set out in paragraph (1)(a):

(a) the company is a*listed public company with a single*class of*membership interest at all times during the relevant*franking period;

(b) the company is a listed public company that, under its constituent documents, must not:

(i) make a*distribution on one membership interest during the relevant franking period without making a distribution under the same resolution on all other membership interests; or

(ii) *frank a distribution made on one membership interest during the relevant franking period without franking distributions made on all other membership interests under the same resolution with a*franking credit worked out using the same*franking percentage;

(c) the company is a listed public company with more than one class of membership interest, but the rights in relation to distributions and the franking of distributions are the same for each class of membership interest.

This is not an exhaustive list.

(3) For the purposes of subsection (1), ignore*membership interests that do not carry a right to receive*distributions (other than distributions on the winding up of the company).

3   Before section 215-1

Insert:

Subdivision 215-A - Application of the imputation system to non-share equity interests

4   After section 215-1

Insert:

Subdivision 215-B - Non-share dividends that are unfrankable to some extent

Guide to Subdivision 215-B

215-5 What this Subdivision is about

While non-share dividends are, as a general rule, frankable, all or part of some non-share dividends are taken to be unfrankable by virtue of these rules.

Table of sections

215-10 Certain non-share dividends by ADIs unfrankable

215-15 Non-share dividends are unfrankable if profits are unavailable

215-20 Working out the available frankable profits

215-25 Anticipating available frankable profits

215-10 Certain non-share dividends by ADIs unfrankable

(1) A*non-share dividend paid by an ADI (an authorised deposit-taking institution) for the purposes of theBanking Act 1959is unfrankable if:

(a) the ADI is an*Australian resident; and

(b) the non-share dividend is paid in respect of a*non-share equity interest that:

(i) by itself; or

(ii) in combination with one or more schemes that are*related schemes to the scheme under which the interest arises;

forms part of the ADI's Tier 1 capital either on a solo or consolidated basis (within the meaning of the prudential standards); and

(c) the non-share equity interest is issued at or through a permanent establishment of the ADI in a broad-exemption listed country (within the meaning of Part X of theIncome Tax Assessment Act 1936); and

(d) the funds from the issue of the non-share equity interest are raised and applied solely for one or more purposes permitted under subsection (2) in relation to the non-share equity interest.

(2) The permitted purposes in relation to the*non-share equity interest (the relevant interest ) are the following:

(a) the purpose of the business of the ADI carried on at or through the permanent establishment other than the transfer of funds directly or indirectly to:

(i) the Australian head office of the permanent establishment; or

(ii) any connected entity of the ADI that is an*Australian resident; or

(iii) a permanent establishment of the ADI, or of a connected entity of the ADI, located in Australia;

(b) the purpose of redeeming:

(i) a*debt interest; or

(ii) a non-share equity interest;

that is issued, before the relevant interest is issued, at or through the permanent establishment and is held by a connected entity of the ADI that is an Australian resident;

(c) the purpose of returning funds to:

(i) the Australian head office of the permanent establishment; or

(ii) a permanent establishment of the ADI or of a connected entity of the ADI, located in Australia;

if the funds are contributed, before the relevant interest is issued, for use in the business of the ADI carried on at or through the permanent establishment.

215-15 Non-share dividends are unfrankable if profits are unavailable

(1) If:

(a) a*corporate tax entity pays a*non-share dividend; and

(b) immediately before the payment, the amount of the*available frankable profits of the entity is nil, or less than nil;

the non-share dividend is unfrankable .

(2) If:

(a) a*corporate tax entity pays a*non-share dividend that is not one of a number of non-share dividends paid at the same time; and

(b) immediately before the payment, the amount of the*available frankable profits of the entity, although greater than nil, are less than the amount of the non-share dividend;

the entity is taken to have made a frankable distribution equal to the amount of the available frankable profits. The remainder of the dividend is taken to be an unfrankable distribution.

(3) If:

(a) a*corporate tax entity pays a*non-share dividend that is one of a number paid at the same time; and

(b) immediately before the payment, the amount of the*available frankable profits of the entity, although greater than nil are less than the sum of the amounts of the non-share dividends;

the entity is taken to have made a frankable distribution equal to the amount worked out using the formula:

The remainder of the dividend is taken to be an unfrankable distribution.

215-20 Working out the available frankable profits

(1) Use the following formula to work out the amount of a*corporate tax entity's available frankable profits at a particular time:

where:

committed share dividends means the sum of:

(a) the amounts of any*distributions that are not*non-share dividends and are paid by the entity at that time; and

(b) if the entity has announced that it will pay distributions that are not non-share dividends at a later time, or is committed or has resolved (formally or informally) to paying such distributions at a later time - the amounts of those distributions.

maximum frankable amount means the maximum amount of*frankable*distributions (other than*non-share dividends) that the*corporate tax entity could pay at that time having regard to its available profits at that time.

undebited non-share dividends means the sum of the amounts of the franked parts of the*non-share dividends (worked out under subsection (2)) that:

(a) were not debited to available profits; and

(b) were paid within the preceding 2 income years or were paid under the same scheme under which the entity pays the non-share dividend.

(2) The amount of the franked part of a*non-share dividend is worked out using the following formula:

215-25 Anticipating available frankable profits

(1) A*corporate tax entity that pays a*non-share dividend may anticipate*available frankable profits if:

(a) the entity:

(i) has announced the payment of; or

(ii) is committed or has resolved (formally or informally) to pay;

*distributions other than non-share dividends (the committed distributions ) after payment of the non-share dividend; and

(b) but for this subsection, section 215-15 would apply to the non-share dividend; and

(c) the entity's available frankable profits would be greater than nil at the relevant time if the committed distributions were ignored; and

(d) it is reasonable to expect that available profits will arise after payment of the non-share dividend and before payment of the committed distributions.

The available frankable profits immediately before the entity pays the non-share dividend are then the amount estimated by the entity, having regard to the expected profits referred to in paragraph (c).

(2) The amount estimated under subsection (1) must not exceed:

where:

actual available frankable profits is the*available frankable profits the entity would have immediately before paying the*non-share dividend apart from subsection (1).

adjusted expected profits is the lesser of:

(a) the available profits that it is reasonable to expect will arise after payment of the*non-share dividend and before payment of the committed distributions; and

(b) the difference between:

(i) in a case where the single non-share dividend is the only one paid at a particular time - the amount of the non-share dividend that would, apart from subsection (1), be*frankable under section 215-15 and the amount of the non-share dividend that would, apart from subsection (1), be frankable under that section if the committed distributions were ignored; and

(ii) in a case where the non-share dividend is one of a number of non-share dividends made at the same time - the sum of the amounts of the non-share dividends that would, apart from subsection (1), be frankable under section 215-15 and the sum of the amounts of the non-share dividends that would, apart from subsection (1), be frankable under that section if the committed distributions were ignored.

(3) A*franking debit arises for the entity if:

(a) the entity anticipates*available frankable profits under subsection (1); and

(b) the available frankable profits of the entity are less than nil:

(i) when the last of the committed distributions is made; or

(ii) immediately before the end of the income year following the income year in which the*non-share dividend is paid;

whichever is earlier.

(4) The*franking debit is equal to the lesser of:

(a) the amount by which the*available frankable profits is below nil; and

(b) the amount of the franked part of the*non-share dividend (worked out using subsection 215-20(2)) or, if more than one non-share dividend is made at the relevant time, the sum of the amounts of the franked parts of those non-share dividends.

(5) In working out the entity's*available frankable profits for the purposes of subsection (3) or (4), disregard:

(a) any*distributions that:

(i) the entity announces, or becomes committed to or resolves (formally or informally) to pay after the payment of the*non-share dividend; and

(ii) have not been paid; and

(b) any estimate made by the entity under subsection (1) after the non-share dividend is paid.

5   Subsection 995-1(1)

Insert:

available frankable profits has the meaning give by section 215-20 and affected by subsection 215-25(1).

6   Application

(1) The amendments of theIncome Tax Assessment Act 1997made by items 1, 4 and 5 of this Schedule apply to non-share dividends paid after 30 June 2002.

(2) The amendment of theIncome Tax Assessment Act 1997made by item 2 of this Schedule applies to franking periods that begin after 30 June 2002.

Schedule 18   Imputation system transitionals

Income Tax (Transitional Provisions) Act 1997

1   After Division 201

Insert:

Division 203 Benchmark rule

203-1 Franking periods straddling 1 July 2002

Where, but for this section, 1 July 2002 would fall within a franking period for a corporate tax entity, but would not be the first day of the franking period, the franking period:

(a) is taken to begin at the start of 1 July 2002; and

(b) is taken to end when it would otherwise have ended.

2   Section 205-1

Omit "(the new account )".

3   Paragraph 205-1(b)

Repeal the paragraph, substitute:

(b) then:

(i) in the case of a company whose 2001-02 franking year ends on 30 June 2002 under Part IIIAA of theIncome Tax Assessment Act 1936 - the company's franking account balances are converted under section 205-10 to a tax paid basis; and

(ii) in the case of a company whose 2001-02 franking year ends before 30 June 2002 under Part IIIAA of theIncome Tax Assessment Act 1936 - the company's franking account balances are converted under section 205-15 to a tax paid basis.

4   Section 205-10 (heading)

Repeal the heading, substitute:

205-10 Converting the franking account balance to a tax paid basis - companies whose 2001-02 franking year ends on 30 June 2002

5   Subsection 205-10(1)

Omit "that have a franking year that ends at the end of 30 June 2002", substitute "whose 2001-02 franking year ends on 30 June 2002".

6   Subsection 205-10(2)

After "franking surplus", insert "of a particular class".

7   At the end of Division 205

Add:

205-15 Converting the franking account balance to a tax paid basis - companies whose 2001-02 franking year ends before 30 June 2002

(1) This section applies to companies whose 2001-02 franking year ends before 30 June 2002 under Part IIIAA of theIncome Tax Assessment Act 1936(the 1936 Act ).

(2) If, but for this subsection, the company would have a franking surplus of a particular class under Part IIIAA of the 1936 Act at the end of 30 June 2002 (an original surplus ):

(a) a franking debit equal to the surplus is taken to arise for the company under Part IIIAA of the 1936 Act at the end of 30 June 2002; and

(b) a franking credit arises on 1 July 2002 in the franking account established under section 205-10 of theIncome Tax Assessment Act 1997(the 1997 Act ) for the company.

The amount of the franking credit is worked out under subsection (3).

(3) The franking credit generated under paragraph (2)(b) from an original surplus of a class specified in column 2 of the following table is worked out using the formula in column 3 of the table for that class.

(4) If, but for this subsection, the company would have a franking deficit of a particular class under Part IIIAA of the 1936 Act at the end of 30 June 2002 (an original deficit ):

(a) a franking credit equal to the deficit is taken to arise for the company under Part IIIAA of the 1936 Act at the end of 30 June 2002; and

(b) a franking debit arises on 1 July 2002 in the franking account established under section 205-10 of the 1997 Act for the company.

The amount of the franking debit is worked out under subsection (5).

(5) The franking debit generated under paragraph (4)(b) from an original deficit of a class specified in column 2 of the following table is worked out using the formula in column 3 of the table for that class.

205-20 A late balancing company may elect to have its FDT liability determined on 30 June

(1) This section applies after 30 June 2002.

(2) A corporate tax entity's liability to pay franking deficit tax is determined under sections 205-25 and 205-30 of this Act (the transitional provisions ), and not under sections 205-45 and 205-50 of theIncome Tax Assessment Act 1997(the ongoing provisions ), if:

(a) the entity was in existence at the end of 30 June 2002; and

(b) the entity's 2001-02 income year ends after 30 June 2002; and

(c) the entity makes a valid election to have its liability to pay franking deficit tax determined under the transitional provisions.

(3) The entity makes a valid election to have its liability to pay franking deficit tax determined under the transitional provisions if:

(a) the election is in writing; and

(b) the election is made on the day on which liability for franking deficit tax would be determined under those provisions,or earlier than that day but in the income year in which that day occurs; and

(c) the entity's liability to pay franking deficit tax has not previously been determined under the ongoing provisions.

205-25 Franking deficit tax

Object

(1) While recognising that an entity may anticipate franking credits when franking distributions, the object of this section is to prevent those credits from being anticipated indefinitely by requiring the entity to reconcile its franking account at certain times and levying tax if the account is in deficit.

Franking deficit at end of 30 June

(2) An entity is liable to pay franking deficit tax imposed by theNew Business Tax System (Franking Deficit Tax) Act 2002if its franking account is in deficit at the end of 30 June in the year 2003 or a later year.

Corporate tax entity ceases to be a franking entity

(3) An entity is liable to pay franking deficit tax imposed by theNew Business Tax System (Franking Deficit Tax) Act 2002if:

(a) it ceases to be a franking entity after 30 June 2002; and

(b) immediately before it ceases to be a franking entity, its franking account is in deficit.

Note: The tax is imposed in theNew Business Tax System (Franking Deficit Tax) Act 2002and the amount of the tax is set out in that Act.

205-30 Deferring franking deficit

Object

(1) The object of this section is to ensure that an entity does not avoid franking deficit tax by deferring the time at which a franking debit occurs in its franking account.

End of year deficit deferred

(2) If:

(a) a corporate tax entity receives a refund of income tax within 3 months after 30 June in the year 2003 or a later year; and

(b) the refund is attributable to a period of 12 months ending at the end of 30 June in that year; and

(c) the franking account of the entity would have been in deficit, or in deficit to a greater extent, at the end of 30 June in that year if the refund had been received immediately before that time;

the refund is taken to have been paid to the entity immediately before that time.

Deficit on ceasing to be a franking entity deferred

(3) If an entity ceases to be a franking entity during a period of 12 months ending on 30 June in the year 2003 or a later year, a refund of income tax is taken to have been paid to it immediately before it ceased to be a franking entity, for the purposes of subsection 205-25(3), if:

(a) the refund is attributable to a period within that 12 months during which the entity was a franking entity; and

(b) the refund is paid within 3 months after the entity ceases to be a franking entity; and

(c) the franking account of the entity would have been in deficit, or in deficit to a greater extent, immediately before it ceased to be a franking entity, if the refund had been received before it ceased to be a franking entity.

205-35 No franking deficit tax if franking account in deficit at the close of the 2001-02 income year of a late balancing entity

If:

(a) an entity's 2001-02 income year ends after 30 June 2002; and

(b) its franking account is in deficit at the end of that income year;

the entity is not liable to pay franking deficit tax under subsection 205-45(2) of theIncome Tax Assessment Act 1997because the account is in deficit at that time.