Consolidation Reference Manual

C2 Assets

C2-5 Worked examples - cost setting on exit

Pre-CGT assets on exit

C2-5-710 Pre-CGT membership interests in a leaving entity

Note:

Description

This example shows how a proportion of the membership interests in an entity leaving a consolidated group are treated as pre-CGT assets by reference to the pre-CGT factors of assets in the leaving entity.

Commentary

Where an entity joins a consolidated group before 10 February 2010 (and the head company does not make a choice to apply the pre-CGT proportion rules to that entity ' 'Pre-CGT status of membership interests in a joining entity - pre-CGT proportion rules', C2-4-813 , the pre-CGT status of membership interests in the joining entity is preserved by attaching a pre-CGT factor to its assets (other than current assets). → 'Pre-CGT factor for assets of a joining entity', C2-4-810

When an entity leaves a consolidated group with pre-CGT factors attached to some or all of its assets, a pre-CGT proportion of its membership interests is calculated as follows:

subsection 711-65(5), Income Tax Assessment Act 1997 (ITAA 1997)

The result is then multiplied by the number of membership interests in the leaving entity (100 shares in the example below), to give the number of pre-CGT membership interests (rounded down to the nearest whole number or zero if the number is less than 1). → subsections 711- 65(3) and (4), ITAA 1997

Example 1

Facts

Of ACo's 100 shares in BCo, 60 are pre-CGT membership interests. The financial positions on consolidation are shown in tables 1 and 2.

Notes: MV = market value

Asset 2 is not a Current asset.

The pre-CGT factor attached to Asset 2 and Land is 0.6. → Worked example: 'Pre-CGT factor for assets of a joining entity', C2-4-810

BCo leaves the group on 30 November 2003, and market values have not changed in the interim.

Calculation

Pre-CGT proportion of BCo's membership interests on leaving

a) Calculate the leaving entity's pre-CGT proportion - using s. 711-65(5) of the ITAA 1997 (as it stood at 30 November 2003)

Step 1

Multiply the market values of assets by their pre-CGT factors:

Land: $500 x 0.6 = $300


Asset 2: $100 x 0.6 = $60


Step 2

Add the results of step 1 to give a result of $360.

Step 3

Work out the market value of all assets that the head company holds in the leaving entity:

Asset 2 ($100) + Land ($500) = $600


Step 4

$360 (step 2) / $600 (step3) = 0.6


Therefore, the pre-CGT proportion of BCo leaving the group is 0.6.

b) Calculate the number of pre-CGT membership interests - using s. 711-65(4) of the ITAA 1997 (as it stood at 30 November 2003)

100 shares x 0.6 = 60 shares


c) Round down to nearest whole number of pre-CGT membership interests - s. 711-65(3) of the ITAA (if applicable)

In this example the result (60 shares) does not change.

Therefore, 60 of the 100 shares in BCo disposed of are treated as pre-CGT membership interests. The remaining 40 shares will be subject to the CGT provisions.

Example 2

Facts

A consolidated group holds all the shares in ACo. The financial position of ACo at the joining time is shown in table 3.:

The pre-CGT factor attached to Land is 0.51. → Worked example: 'Pre-CGT factor for assets of a joining entity', C2-4-810

After the joining time, additional liabilities are transferred in and machinery is acquired. Then on 30 December 2003, the group decides to dispose of all its membership interests in ACo. The financial position of ACo is shown in table 4:

Calculation

Pre-CGT proportion of ACo's membership interests on leaving

a) Calculate the leaving entity's pre-CGT proportion - using s. 711-65(5) of the ITAA 1997 (as it stood at 31 December 2003)

Step 1

Multiply the market value of Land by its pre-CGT factor:

$3,000 * 0.51 = $1,530


Note: The pre-CGT factor is attached to each of the joining entity's assets at the joining time (other than Current assets). Machinery is an asset that has been acquired after the joining time and is therefore not included in step 1 because it does not have any pre-CGT factor attached.

Step 2

Add the results of step 1 to give a result of $1,530.

Step 3

Work out the market value of all assets that the head company holds in the leaving entity:

Land ($3,000) + Machinery $600) = $3,600


Step 4

$1,530 (step 2) / $3,600 (step 3) = 0.425


Therefore, the pre-CGT proportion of ACo leaving the group is 0.425.

b) Calculate the number of pre-CGT membership interests - using s. 711-65(4) of the ITAA 1997 (as it stood at 31 December 2003)

100 shares * 0.425 = 42.5 shares


c) Round down to nearest whole number of pre-CGT membership interests - of the ITAA 1997 (if applicable)

= 42


Therefore, 42 of the 100 shares in ACo that are disposed will be treated as pre-CGT membership interests.

The gain or loss on disposal of these 42 shares is treated as the sale of pre-CGT assets. Consideration would need to be given to the possible application of CGT event K6, where the post-CGT assets of the leaving entity are equal to or greater than 75% of the net value of the entity. The remaining 58 shares will be subject to the CGT provisions.

References

Income Tax Assessment Act 1997 , section 711-65 ; as inserted by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1 and amended by Tax Laws Amendment (2010 Measures No. 1) Act 2010 (No. 56 of 2010), Schedule 5, Part 3

Explanatory Memorandum to New Business Tax System (Consolidation) Bill 2002 (No. 1), paragraphs 5.147-153

Explanatory Memorandum to Tax Laws Amendment (2010 Measures No. 1) Bill 2010, paragraphs 5.111 to 5.142

History

Revision history

Section C2-5-710 first published (excluding drafts) 2 December 2002.

Further revisions are described below.

Current at 6 May 2011