Consolidation Reference Manual

The Consolidation reference manual was last updated on 15 July 2011. It does not contain any changes to consolidation legislation that has occurred since that time and will not be updated in future. It cannot be relied on for currency of content. For any future consolidation changes, you will be able to access information from our consolidation home page or by visiting our 'New legislation' page.
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.

C2 Assets

C2-4 Worked examples - cost setting on entry

Entry step A (ACA calculation)

C2-4-240 Reduction for intragroup liabilities on entry (in ACA step 2)

Description

This example shows how an amount added at step 2 of the allocable cost amount (ACA) calculation (which involves adding the joining entity's liabilities) is determined where the liability is owed by the joining entity to a member of the joined group (an intragroup liability).

Commentary

The second step in determining the ACA for a joining entity is to add all of its accounting liabilities at the joining time. → section 705-70, Income Tax Assessment Act 1997 (ITAA 1997)

The amount taken into account for a joining entity's liability that is a debt or other liability owed to the joined group depends on the market value of the corresponding asset of the joined group.

If the market value of the corresponding asset is equal to or more than the group's cost base for the asset, the amount to be added is the group's cost base. If the market value is less than or equal to the group's reduced cost base for the asset, the amount to be added is the group's reduced cost base. If the market value falls between the group's cost base and reduced cost base, the amount to be added is the market value of the asset.

Example

Facts

ACo is acquired by HeadCo (the head company of a consolidated group) on 1 July 2002 for $200. The financial position of ACo on joining the group is:

•: assets at a cost of $300 (market value)
•: liability: $100 loan from BCo (100% subsidiary of HeadCo)

In the books of BCo, the asset (loan to ACo) shows a cost base of only $80. (This could arise where the liability has been assigned - market value is $100, purchased for $80.)

Calculation

The ACA after adding the ACA step 2 result will be $280 - the price paid for membership interests of $200 plus the liability of $80. In this example, the market value of the member's asset constituted by the accounting liability is greater than the asset's cost base. Therefore, the amount to be added will equal the member's cost base of $80. → subsection 705-75(2), ITAA 1997

Note: The liability of $80 is added at ACA step 2 (to determine the group's cost of acquiring ACo) → section 705-70. However, the intragroup debt to BCo does not become a liability of the joined group, and the group's asset (the $80 loan to ACo) will not be treated as an asset of the group for income tax purposes. This is because all intragroup transactions in a consolidated group are ignored.

Note

Proposed changes to consolidation rules

The tax cost setting rules will be modified to clarify both the valuation of liabilities, and that the accounting principles must be used consistently - see Assistant Treasurer's media release no. 50 of 8 May 2007.

References

Income Tax Assessment Act 1997, sections 705-70 and 705-75 ; as amended by:

•: New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1
•: New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (No. 90 of 2002), Schedule 2

Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, paragraph 5.71

History

Revision History

Section C2-4-240 first published (excluding drafts) 2 December 2002.

Further revisions are described below.

Date	Amendment	Reason
14.7.04	Note on recent changes to consolidation rules, p. 1.	Legislative amendments.
26.6.07	Note on proposed changes to clarify both the valuation of liabilities and the accounting principles to be used, p. 2.	Reflect announcement on 8 May 2007 by Assistant Treasurer in media release no. 50.
28.2.08	Change to calculation description.	Clarification.

Proposed changes to consolidation

Proposed changes to consolidation announced by the Government are not incorporated into the Consolidation reference manual until they become law.

In the interim, information about such changes can be viewed at:

•: http://assistant treasurer.gov.au (Assistant Treasurer's press releases)
•: www.treasury.gov.au (Treasury papers on refinements to the consolidation regime).

Current at 28 February 2008

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).