ATO Interpretative Decision

ATO ID 2005/346

Income Tax

Income Tax: Consolidation: single entity rule and tax cost setting amount of intra-group debt asset
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does the single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) prevent the use of the tax cost setting amount that has been set under section 701-10 of the ITAA 1997 for an intra-group debt asset when the debt is extinguished or otherwise comes to an end in the group?

Decision

Yes. The single entity rule in section 701-1 of the ITAA 1997 will prevent the use of the tax cost setting amount of an intra-group asset, including a debt asset.

Facts

Finance Co and Borrower Co are wholly owned by Head Co.

Prior to Head Co's election to form a consolidated group, Finance Co lent $100 to Borrower Co.

Head Co and its subsidiaries, including Finance Co and Borrower Co, formed a consolidated group. An ACA (allocable cost amount) was calculated for Finance Co and $100 was allocated to the debt asset, which is a retained cost base asset under section 705-25 of the ITAA 1997.

The debt is subsequently forgiven.

Reasons for Decision

Due to the operation of the single entity rule contained in section 701-1 of the ITAA 1997, the intra group debt asset does not become an asset of the head company. This is because the single entity rule deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group (an entity cannot transact with itself).

Section 701-55 of the ITAA 1997 sets the tax cost of each asset of a joining entity at the asset's tax cost setting amount. This includes assets that do not become assets of the head company because they are not recognised as a consequence of the single entity rule (subsection 701-10(2) of the ITAA 1997).

As a consequence of the non-recognition of these intra-group assets, their tax cost setting amounts cannot be taken into account for the purposes of other provisions of the income tax law. This is expressly reinforced by subsection 701-58(2) of the ITAA 1997, for the avoidance of doubt.

Date of decision: 29 November 2005

Year of income: Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 701-1
   section 701-10
   subsection 701-10(2)
   section 701-55
   subsection 701-58(2)
   section 705-25

Related ATO Interpretative Decisions
ATO ID 2004/3
ATO ID 2005/344
ATO ID 2005/345

Other References:
Consolidation Reference Manual C2-4-245; C9-1-220; C9-1-110

Keywords
Consolidation
Consolidated group
Commercial debt forgiveness
Single entity rule
Tax cost setting amount

Siebel/TDMS Reference Number: 4848785

Business Line: Consolidation Centre of Expertise

Date of publication: 2 December 2005

ISSN: 1445-2782

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