House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 1 - Consolidation: providing greater flexibility

Outline of chapter

1.1 Schedule 1 to this bill contains the following modifications to the consolidation regime:

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membership rules to ensure that when a member is in liquidation or under administration that member is not precluded from being a member of a consolidated group;

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cost setting rules to ensure that entities which are subject to a finance lease and enter a consolidated group are provided an appropriate tax cost in order to obtain the appropriate deductions under the uniform capital allowance regime;

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cost setting rules to ensure that appropriate allowance is given for expenditure relating to mining or quarrying activities;

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cost setting rules to ensure that entities that have low-value pools and software development pools receive the appropriate tax costs to enable them to maintain their entitlement to deductions for those pools;

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source of profit distributions in working out the allocable cost amount (ACA) and cost setting process;

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ensuring that the undistributed profits of a joining entity are appropriately included in working out the ACA;

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adjusting for changes in deferred tax liabilities in working out the ACA and for capital gains tax (CGT) purposes;

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technical amendments to clarify the application of certain trust cost setting provisions;

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inter-entity loss multiplication rules to alleviate notice requirements; and

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allowing entities to revoke irrevocable choices or elections when they consolidate, join consolidated groups and/or leave consolidated groups. The rules provide a number of distinct treatments for these choices or elections which act as modifications to the entry history and exit history rules.

1.2 All references to legislative provisions in this chapter are references to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

1.3 Unless otherwise stated, a reference in this chapter to a consolidated group should be read as including a multiple entry consolidated group.

Context of amendments

1.4 With the introduction of the consolidation regime, a number of modifications, are being made to provide greater flexibility, further clarify certain aspects of the regime and to ensure that it interacts appropriately with other areas of the income tax law.

Summary of new law

Clarifying beneficial ownership for consolidation membership rules

1.5 Part 2 of Schedule 1 to this bill clarifies the meaning of beneficial ownership in section 703-30 for the purposes of the consolidation membership rules. The amendment ensures that entities under external administration will not be prevented from being or remaining members of consolidated groups.

Cost setting rules for assets subject to a finance lease

1.6 Part 3 of Schedule 1 to this bill provides special rules for setting the tax cost of assets where an entity that is subject to a finance lease becomes a member or ceases to be a member of a consolidated group. These rules ensure that the cost setting rules apply appropriately taking into account the different treatment of finance leases under accounting standards and the income tax law.

Application of cost setting rules to certain types of mining expenditure

1.7 Part 4 of Schedule 1 to this bill contains rules that clarify the operation of the cost setting rules and the inherited history rules for assets that have arisen from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure.

Low-value pools

1.8 Part 5 of Schedule 1 to this bill amends the income tax law dealing with low-value pools to ensure that the head company of a consolidated group receives the appropriate allowances for the decline in value of these pools. The rules also ensure that the head company and a leaving entity receive the appropriate allowances for the decline in value of the pools where the leaving entity takes part of the pool with it upon leaving the consolidated group.

Software development pools

1.9 Part 5 of Schedule 1 to this bill also amends the income tax law dealing with software development pools to ensure that the head company of a consolidated group receives the appropriate allowances for the decline in value of these pools. The rules also ensure that the head company and a leaving entity receive the appropriate allowances for the decline in value of the pools where the leaving entity takes part of the pool with it upon leaving the consolidated group.

Source of certain distributions for allocable cost amount purposes

1.10 Part 7 of Schedule 1 to this bill contains rules to simplify the method of working out the ACA by accepting a last-in-first-out method of accounting for profits in appropriate circumstances where the entity must determine which prior year's profits were used to pay a particular dividend.

Adjustment to step 3 of allocable cost amount to take account of certain losses

1.11 Part 8 of Schedule 1 to this bill contains rules to ensure that the full amount of undistributed profits, that have accrued to a consolidated group before the joining time, is included when calculating the ACA for a joining entity.

Transitional treatment of deferred tax liabilities

1.12 Part 9 of Schedule 1 to this bill contains rules that reduce compliance costs in applying the consolidation cost setting rules for transitional entities which have a change in the amount of deferred tax liabilities associated with assets that have their tax cost reset.

Technical amendments to certain trust cost setting rules

1.13 Part 11 of Schedule 1 contains minor technical amendments to the method of working out the ACA where a discretionary trust joins a consolidated group. It also clarifies the application of section 713-25 by making it clear that this section applies to both discretionary and non-discretionary trusts.

Inter-entity loss multiplication rules

1.14 Part 6 of Schedule 1 to this bill amends the income tax law to alleviate the notice requirements under the inter-entity loss multiplication rules during the consolidation transitional period for entities that are in the same consolidatable group. The amendments also give the Commissioner of Taxation (Commissioner) a discretion to extend the time for giving notices or to waive the notice requirement in appropriate circumstances.

Treatment for irrevocable entity-wide elections

1.15 Part 10 of Schedule 1 to this bill provides special rules for irrevocable elections or choices made by entities in respect of:

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attribution of income in respect of controlled foreign corporations, foreign investment funds and foreign limited partnerships;

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valuation of interests in foreign investment funds that are trading stock;

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functional currency rules;

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reinsurance with non-residents;

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short-term forex realisation gains and losses; and

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rules about disregarding certain forex realisation gains and losses.

1.16 The rules set out three distinct treatments for these elections which act as modifications to the entry and exit history rules in Part 11-90.

Comparison of key features of new law and current law

Detailed explanation of new law

Clarifying beneficial ownership for consolidation membership rules

1.17 The meaning of 'beneficial ownership' in section 703-30 is clarified for the purposes of the consolidation membership rules. The amendment ensures that entities under external administration will not be prevented from being or remaining members of consolidated groups. [Schedule 1, item 2, subsection 703-30(3)]

1.18 Section 703-30 outlines when an entity is a wholly-owned subsidiary of another entity. A fundamental requirement is that all the membership interests of that subsidiary be 'beneficially owned' by:

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the holding entity;

•

one or more wholly-owned subsidiaries of the holding entity; or

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the holding entity and one or more wholly-owned subsidiaries of the holding entity.

1.19 The terms 'beneficially owned' and 'beneficial ownership' are not defined terms for the purposes of the ITAA 1997. Therefore, they have their ordinary meaning.

1.20 Provisions in the Corporations Act 2001 may have the effect of vesting the property of an externally administered entity in the person undertaking the external administration (e.g. section 474 of the Corporations Act 2001 ). Where such provisions operate it may be arguable that ownership of the beneficial interest and the legal interest in the property of the insolvent entity are potentially alterable.

1.21 Case law has considered beneficial ownership as meaning the real owner of the property and, in a case where the legal and equitable ownership is divided, the owner of the property in equity.

1.22 While Santow J in Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (1995)
13 ACLC 40 held that the appointment of a liquidator did not operate to divest the insolvent company of its assets, later cases have referred to the line of reasoning first espoused in Re Oriental Inland Steam Company (1874) LR9 ChApp 557 that there is a notional vesting of the beneficial ownership of property in the liquidator.

1.23 The intent of this amendment is to ensure that the appointment of an external administrator will not force the exit of the entity from the consolidated group. In Review of Business Taxation: A Platform for Consultation Discussion Paper 2: Building on a strong foundation Volume II it was contemplated that members of consolidated groups could enter liquidation without causing changes to the membership of the group. Consolidation is intended to ease corporate restructures by allowing a company to be liquidated without triggering a deemed dividend, or a capital gain or loss.

1.24 This amendment operates to ensure that beneficial ownership is not affected by a member of a consolidated group being or becoming an externally administered body corporate, or having similar status under a foreign law.

1.25 'Externally-administered body corporate' is defined in section 9 of the Corporations Act 2001 to mean a body corporate:

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that is being wound up, whether voluntarily or by court order;

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with property to which a receiver, or a receiver and manager, has been appointed (whether or not by a court) and is acting;

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that is under administration;

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that has executed a deed of company arrangement that has not yet terminated; or

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that has entered into a compromise or arrangement with another person the administration of which has not been concluded.

1.26 This means that where a subsidiary entity is, for example, being wound up, it will remain a wholly-owned subsidiary of another entity. The effect of this is that the entity remains a member of the consolidated group and is not forced to deconsolidate.

1.27 The amendment also extends to non resident entities who may wholly-own membership interests in members of consolidated or multiple entry consolidated (MEC) groups, such as top companies of MEC groups or interposed non resident entities. [Schedule 1, item 2, paragraph 703-30(3)(b)]

1.28 The amendment clarifies the meaning of 'beneficial ownership' for the consolidation membership rules only and not for any other purposes. The concept of beneficial ownership is used elsewhere in the tax laws however, this amendment does not imply that beneficial ownership has any meaning other than its ordinary meaning where it is used elsewhere in the tax law. This amendment is not intended to impact on the meanings associated with those concepts.

Cost setting rules for assets subject to a finance lease

1.29 Part 3 of Schedule 1 to this bill amends the cost setting rules to enable the lessor and lessee, that are subject to a finance lease recognised under accounting standards, to determine which assets and liabilities are recognised and which assets are not recognised for cost setting purposes.

1.30 The interaction of the treatment of finance leases under the accounting standards and its treatment under the income tax law raised a number of issues for the operation of the cost setting rules in Division 705. These issues arise because the tax law, depending on the circumstances, may provide that either the lessor or lessee of an asset that is subject to a finance lease is entitled to deductions for the decline in value of the asset. Under the accounting standards, the lessee under a finance lease recognises the leased asset not the lessor.

1.31 An asset, for the purposes of the cost setting rules, represents anything of economic value, which is brought into a consolidated group when an entity becomes a subsidiary member of a consolidated group. In working out the amount of tax cost to allocate to the assets of the joining entity, step 2 of the calculation of the ACA adds amounts that can or must be recognised as liabilities in accordance with the accounting standards.

1.32 Under Accounting Standard AASB 1008 (Leases) and AAS 17 (Accounting for Leases), a lessor of an item of plant which is leased under a finance lease is effectively treated as having sold the plant to the lessee and provided finance for the acquisition. The lessor does not, therefore, recognise the plant as an asset but rather, recognises it as an asset consisting of the right to receive lease payments equal to the aggregate of the present value of the minimum lease payments and the present value of any unguaranteed residual value.

1.33 For income tax purposes, deductions for the decline in value of a depreciating asset are only available to the person who 'holds' the depreciating asset for the purposes of Division 40. The general rule for depreciating assets that are subject to a lease is that the owner is the 'holder of the asset' (i.e. the lessor) under certain items in the table in section 40-40. However, the lessee can also be the 'holder of the asset' under other items in the table in section 40-40.

What happens when the joining entity is the lessor or lessee and 'holds' the asset under Division 40?

1.34 Where an entity that is a lessor or lessee, under a finance lease, joins a consolidated group there was uncertainty as to what assets they have for cost setting purposes. In relation to the lessor, does the lessor, in determining the tax cost, have two assets (being the actual plant and the right to receive lease payments). In relation to the lessee, it was uncertain whether the lessee should have an amount included in step 2 of the ACA calculation in respect of the lease liability, as recognised under accounting standards, and whether the lessee also has an asset recognised under the finance lease to which the ACA needs to be allocated. Amendments are made to Division 705 (the general cost setting rules) to ensure that they apply appropriately where the joining entity is a lessor or lessee subject to a finance lease. Amendments are also made to the calculation of the ACA where a subsidiary member that is a party to a finance lease ceases to be a member of a consolidated group.

1.35 These rules ensure that the cost setting rules apply appropriately to an entity that is either the lessor or lessee under a finance lease by specifying which:

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assets in relation to the lessor or lessee will have their tax cost set when the entity joins a consolidated group;

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liabilities arising from a finance lease will be taken into account in step 2 of the ACA calculation; and

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tax cost is applied when the leaving entity is a lessor or lessee.

[Schedule 1, item 5, section 705-56]

1.36 The rules contained in this bill do not deal with how assets subject to an operating lease should be treated under the cost setting rules. It is limited to assets subject to a finance lease in accordance with accounting standards.

What happens when an entity that is subject to a finance lease joins a consolidated group?

1.37 The object of the amendments is to clarify how the tax cost setting amount is calculated for certain types of assets that are subject to a finance lease. How this is achieved depends on whether at the joining time, the joining entity is:

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a lessor who is the holder of the asset; or

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a lessee who is the holder of the asset.

[Schedule 1, item 5, subsections 705-56(2) to (4)]

1.38 Subsection 705-56(1) ensures that the amendments only apply to underlying assets subject to a finance lease which give rise to deductions for decline in value under Division 40. This then ensures that an entity which holds the underlying asset for the purposes of Division 40 is able to allocate the ACA to the underlying asset. [Schedule 1, item 5, subsection 705-56(1)]

1.39 This subsection is also consistent with paragraph 5.1 of Accounting Standard AASB 1008 which states that a lease must be classified either as an operating lease or as a finance lease at the inception of the lease. The new rules will also cover arrangements subject to Division 240 in circumstances where the hire purchase agreement is also a finance lease. [Schedule 1, item 5, subsection 705-56(1)]

Modifications where the joining entity is a lessor

Where a lessor 'holds' a depreciating asset

1.40 Where a lessor 'holds' a depreciating asset, that is subject to a finance lease for Division 40 purposes, the underlying asset (i.e. depreciating asset) will be recognised for cost setting purposes. ACA will be allocated to the underlying asset and the asset consisting of the right to receive lease payments is not taken into account in setting the tax cost of assets and is taken to have a tax cost of nil. [Schedule 1, item 5, subsections 705-56(2) and (5)]

1.41 The asset that is the joining entity's right to receive lease payments under the finance lease reflects paragraph 12.1 of Accounting Standard AASB 1008 which requires that "where a lease is classified by the lessor as a direct financing lease, the lessor must recognise, as at the beginning of the lease term, an asset (lease receivable) at an amount equal to the aggregate of the present value of the minimum lease payments and the present value of any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term". The amendments provide a consistent treatment.

Example 1.1

Assume a joining entity (Lessor Co) that has entered into a finance lease has two assets which consist of plant and right to receive lease payments, which it brings into a consolidated group. The head company of the consolidated group will recognise for cost setting purposes the underlying asset of plant because it 'holds' the asset for Division 40 purposes. However the right to receive lease payments will not be recognised for cost setting purposes.

Where a lessor does not 'hold' a depreciating asset

1.42 Where a joining entity that is a lessor does not hold a depreciating asset, for Division 40 purposes, that is subject to a finance lease at joining time, there is no recognition of the underlying asset under subsection 705-56(5). However, there is recognition of the asset consisting of the right to receive lease payments. The tax cost for the right to receive lease payments is set equal to its market value. [Schedule 1, item 5, subsections 705-56(3) and (5)]

Example 1.2

Assume a joining entity (Lessor Co) that has entered into a finance lease has two assets consisting of plant and the right to receive lease payments, which it brings into a consolidated group. The head company (Head Co) will not recognise for cost setting purposes the underlying asset (plant) because it no longer holds the asset for Division 40 purposes. However, Head Co is required to allocate the ACA to the right to receive lease payments. The tax cost for the right to receive lease payments will be its market value.

1.43 Paragraph 705-56(3)(b) ensures consistency between the tax cost of the right to receive lease payments when the lessor joins the group, and the tax cost for the right to receive lease payments at their market value when a lessor exits a group under subsection 711-30(3). [Schedule 1, item 5, paragraphs 705-56(3)(a) and (b); item 6, section 711-30]

1.44 A note is inserted into subsection 705-25(5) to alert the reader that a right to receive lease payments under a finance lease may, in some circumstances, be treated as a retained cost base asset. [Schedule 1, items 3 and 4]

Modifications where the joining entity is the lessee

Where the lessee 'holds' the depreciating asset

1.45 Where the lessee holds a depreciating asset that is subject to a finance lease the lessee will, for cost setting purposes, recognise the underlying asset (as an asset that has its tax cost set) and the obligation to make lease payments will be a liability for the purposes of step 2 in working out the ACA. The obligation to make lease payments under a finance lease is a liability that is recognised in accordance with Accounting Standard AASB 1008 or AAS 17. [Schedule 1, item 5, subsection 705-56(3)]

Example 1.3

Assume a joining entity (Lessee Co) that has entered into a finance lease has an asset consisting of plant together with an obligation to make lease payments, which it brings into the consolidated group. The head company (Head Co) of the consolidated group will recognise for cost setting purposes the underlying asset of plant as it holds the asset for the purposes of Division 40. Head Co will add at step 2 of the ACA calculation an amount for the liability to make lease payments. Head Co will allocate ACA to the plant.

Where the lessee does not 'hold' the depreciating asset

1.46 Where the lessee does not hold the depreciating asset that is subject to a finance lease the lessee will not recognise the underlying asset for tax cost setting purposes and the liability to make lease payments is not taken into account under step 2 in working out the ACA. [Schedule 1, item 5, subsections 705-56(3) and (4)]

Example 1.4

Assume, a joining entity (Lessee Co) that has entered into a finance lease has an asset which consist of, plant and an obligation to make lease payments, which it brings into the consolidated group. The head company (Head Co) of the consolidated group will not recognise for cost setting purposes the underlying asset of plant because it does not hold the depreciating asset for the purposes of Division 40, and will not recognise the obligation to make lease payments.

What happens when an entity that is subject to a finance lease leaves a consolidated group?

Modifications where the leaving entity is the lessor

1.47 Section 711-30 specifies how to work out the head company's 'terminating value' for any asset a leaving entity takes with it when it ceases to be a subsidiary member of a consolidated group. In circumstances where paragraph 705-56(3)(b) has applied subsection 711-30(3) ensures that if an entity does not 'hold' an underlying asset, that is the subject of a finance lease, the cost base of the right to receive lease payments is set at their market value when the entity exits. This is because when the entity leaves, some payments may already have been received and it would no longer be appropriate to use the original tax cost for the right to receive lease payments that was set when the entity joined the group. [Schedule 1, item 6, subsection 711-30(3)]

Modifications where the leaving entity is the lessee

1.48 Subsection 711-45(2) ensures that a liability consisting of an obligation to make lease payments, in certain circumstances, is not included in step 4 in working out the old group's ACA. Section 711-45 reduces the old group's ACA by the amount of liabilities which an entity takes with it when it leaves a consolidated group. In the circumstances where subsection 705-56(4) has applied, an issue arises on exit because the liability under the finance lease will be taken into account in reducing the old group's ACA. This is because the liability under the lease will be recognised for accounting purposes and therefore is included in subsection 711-45(1). However, there is no corresponding asset that will be taken into account under step 1 of the old group's ACA calculation on leaving (in relation to the corresponding asset of the entity under the lease) because this asset did not have its tax cost set due to paragraph 705-56(4)(b). [Schedule 1, item 7, section 711-45]

Application of cost setting rules to certain types of mining expenditure

1.49 Part 4 of Schedule 1 to this bill contains rules that clarify the operation of the cost setting rules and the inherited history rule for assets that have arisen from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure. Specifically, the rules will:

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determine the cost, adjustable value and terminating value of an asset created from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure to enable its tax cost to be set appropriately;

•

determine the remaining effective life of depreciating assets that have resulted from allowable capital expenditure or transport capital expenditure where the tax cost setting amount of such assets does not exceed their terminating value;

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deem any previous deductions in relation to the cost of allowable capital expenditure, transport capital expenditure and exploration or prospecting assets to have been calculated under the prime cost method;

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deem any previous deductions in relation to the cost of allowable capital expenditure, transport capital expenditure and exploration or prospecting assets to be deductions for the decline in value of the depreciating asset;

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allow the head company any to choose to reduce the tax cost of an allowable capital expenditure or transport capital expenditure asset to an amount equal to its terminating value in order to retain the concessional rates of depreciation previously available to the joining entity in respect of the asset;

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reduce the adjustable value of the head company's notional asset if that notional asset has resulted in a depreciating asset that has had its tax cost reset; and

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reduce the adjustable value of the head company's notional asset if a leaving entity takes with it some or all of a notional asset relating to 'other property'.

Prime cost method for working out decline in value of certain exploration or prospecting assets

1.50 Subject to satisfying certain criteria, section 40-80 allows a deduction for the decline in value of an asset, that is used for exploration and prospecting, equal to the asset's cost.

1.51 Where an entity joins a consolidated group, the cost setting rules apply such that the head company is taken to have purchased, at the joining time, all of the joining entity's depreciating assets for their tax cost. This includes exploration or prospecting assets for which the joining entity did (or could) deduct the decline in value under subsection 40-80(1).

1.52 Section 701-55 applies to set out for the head company a depreciating asset's tax cost, effective life and method for working out its decline in value. If the head company satisfies the criteria in subsection 40-80(1) for such an asset (e.g. the head company's first use of the asset after the joining time is for exploration or prospecting), it will be entitled to a deduction for a decline in value equal to the asset's tax cost.

1.53 If the head company does not satisfy subsection 40-80(1), it may be entitled to deductions for decline in value of the asset worked out using the effective life of the asset under other parts of Subdivision 40-B (such as section 40-70 or 40-75). In these circumstances, paragraphs 701-55(2)(c) to (e) become relevant.

1.54 In order for paragraphs 701-55(2)(c) to (e) to work appropriately, the joining entity would need to have used either the prime cost method or diminishing value method to calculate the asset's decline in value before the joining time. As section 40-80 does not require a taxpayer to choose a method for calculating the decline in value of the asset, it could be argued that no method applied for working out the asset's decline in value before the joining time.

1.55 Section 716-300 ensures that, where an asset's decline in value was deducted under subsection 40-80(1), section 701-55 applies as if the joining entity had applied the prime cost method for working out the decline in value of the asset just before the joining time [Schedule 1, item 8, section 716-300]. This means that, depending on whether the asset's tax cost exceeds its terminating value at the joining time, paragraph 701-55(2)(c) or (d) will apply to these assets to set their effective life. Further, paragraph 701-55(2)(b) will operate so that the prime cost method applies for working out any future deductions for the decline in value of such assets.

1.56 Section 716-300 only applies to assets whose decline in value is deducted under section 40-80. Therefore, if a joining entity deducted the decline in value of an exploration or prospecting asset under any other part of Subdivision 40-B (such as section 40-70 or 40-75), section 716-300 does not override the method previously used under that section. Section 716-300 is only intended to apply where section 40-80 did not require the joining entity to apply a particular method. [Schedule 1, item 8, paragraph 716-300(1)(c)]

Allowable capital expenditure, transport capital expenditure and exploration or prospecting assets - tax cost setting amount

Background

1.57 Prior to 1 July 2001, expenditure formerly known as allowable capital expenditure and transport capital expenditure was previously deducted through a pooling mechanism under Division 330, and prior to this under Divisions 10, 10AA and 10AAA of the Income Tax Assessment Act 1936 (ITAA 1936). For expenditure incurred after 30 June 2001, allowable capital expenditure (now known as mining capital expenditure) and transport capital expenditure are now deducted under Division 40 of the ITAA 1997.

1.58 Allowable capital expenditure and transport capital expenditure may have resulted in the creation or acquisition of assets, such as roads, fixtures, plant and equipment. Alternatively, the expenditure may have related to other capital advantages that are not such assets.

1.59 To facilitate the transition from Division 330 to Division 40 (which commenced on 1 July 2001), each 'pool' of expenditure was deemed to be a depreciating asset (called a 'notional' asset). The adjustable value of the notional asset is deemed to be equivalent to the undeducted allowable capital expenditure or transport capital expenditure as at 30 June 2001 and deductions for the decline in value of the notional asset are claimed under Division 40 (based on the concessional write-off period available under Division 330, generally 10 or 20 years). Additionally, any 'depreciating' assets that are reflected in the allowable capital expenditure or transport capital expenditure (e.g. roads, fixtures) are deemed to have a cost and adjustable value of nil at the start of 1 July 2001. Further transitional provisions were introduced to ensure that capital expenditure incurred after 30 June 2001 on such depreciating assets (held on 1 July 2001) would be included in the asset's cost and be eligible for decline in value deductions under Division 40 based on the assets' concessional write-off period.

1.60 Expenditure on exploration or prospecting assets incurred after 30 June 2001 is immediately deductible under Division 40 where those assets meet certain criteria as set out in subsection 40-80(1). However, prior to 1 July 2001, expenditure was immediately deductible under Division 330 and prior to this under Division 10 or 10AA of the ITAA 1936 (regardless of whether the expenditure was capital or revenue). If the expenditure related to depreciable plant, and the taxpayer elected, the asset could have been depreciated under Division 42 (for expenditure incurred between 1 July 1997 and 30 June 2001).

1.61 Since expenditure on exploration or prospecting assets was immediately deductible under the former Division 330 (or its predecessor provisions), there was no need to transition this expenditure into Division 40. However, in order to ensure that expenditure incurred after 30 June 2001 on exploration or prospecting assets held at 1 July 2001 continued to be immediately deductible, transitional provisions were introduced. These transitional provisions also have the effect of setting the cost and adjustable value of such exploration or prospecting assets at zero (this is to ensure that the correct balancing adjustments can be calculated for these assets).

1.62 Sections 705-40, 705-50 and 705-57 require a head company to adjust the tax cost of a reset cost base asset where certain conditions are satisfied. However, in order for these sections to apply, the reset cost base asset must have a cost, adjustable value and terminating value greater than nil. Additionally, section 705-50 will only apply if an entity has claimed deductions for the decline in value in respect of the depreciating asset.

1.63 To ensure that these provisions operate as intended with respect to the depreciating assets created from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure, it is necessary to determine the cost, adjustable value and terminating value of these assets (which are deemed, under the transitional provisions, to be nil at the start of 1 July 2001). It is also necessary to deem deductions for allowable capital expenditure, transport capital expenditure and exploration or prospecting expenditure that relate to a depreciating asset to be deductions for the decline in value of that asset. By giving the depreciating assets these attributes, the rules in sections 705-40, 705-50 and 705-57 apply appropriately to the depreciating assets.

1.64 In addition to determining the cost, adjustable value, terminating value and decline in value of the depreciating asset, the new rules will also determine the effective life and method of depreciation for the depreciating assets. The rules ensure that subsection 701-55(2) operates appropriately with respect to the depreciating assets. The new rules also allow a head company to retain the concessional rates of depreciation available to the joining entity prior to it consolidating in respect of allowable capital expenditure and transport capital expenditure assets, provided the tax cost of the depreciating asset does not exceed its terminating value. This aligns the treatment of allowable capital expenditure and transport capital expenditure assets with that available to other accelerated depreciation assets whose tax cost does not exceed its terminating value.

1.65 When a leaving entity ceases to be a subsidiary member of a consolidated group and, as a consequence of the exit history rule, takes with it some or all of the head company's notional asset, the new rule in Subdivision 712-E requires the head company to reduce the adjustable value of its notional asset by the adjustable value of the leaving entity's notional asset. This rule ensures that only one entity (the leaving entity) gets a deduction for the notional asset that leaves the old group.

Application and object of Subdivision 705-E

1.66 The rules in Subdivision 705-E of the Income Tax (Transitional Provisions) Act 1997 apply to a joining entity to which section 40-75 of the Income Tax (Transitional Provisions) Act 1997 applied [Schedule 1, item 9, subsection 705-300(1)]. This means that, if a joining entity has incurred expenditure on an asset and that expenditure was, or could have been deducted under Division 330 as allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure (assuming it had been incurred prior to 1 July 2001), the rules in new Subdivision 705 E of the Income Tax (Transitional Provisions) Act 1997 will apply (regardless of when the expenditure was actually incurred). Examples of such expenditure include (but are not limited to):

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expenditure on a depreciating asset fully deducted under Divisions 10, 10AA or 10AAA that would have been deductible under Division 330 as either allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure;

•

expenditure on the depreciating asset that was actually deducted under Division 330 as allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure; and

•

expenditure on a depreciating asset that was deducted under Subdivision 40-B as part of a 'notional asset' created under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997.

1.67 The main object of Subdivision 705-E is to:

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clarify the interaction between the cost setting rules and the inherited history rules with respect to depreciating assets and any related notional assets arising from allowable capital expenditure or transport capital expenditure;

•

ensure that the rules in sections 705-40, 705-50 and 705-57 apply appropriately to depreciating assets that have arisen from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure; and

•

ensure that the treatment of a joining entity's allowable capital expenditure and transport capital expenditure depreciable assets is aligned, where appropriate, with other depreciable assets.

[Schedule 1, item 9, subsection 705-300(2)]

Consequences for the head company of recognising depreciating allowable capital expenditure, transport capital expenditure and exploration or prospecting assets

1.68 The main object of section 705-305 is to:

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provide rules to set the cost, adjustable value and terminating value of a depreciating asset that has resulted from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure;

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provide rules to set the effective life of allowable capital expenditure and transport capital expenditure depreciating assets, which may allow a head company to maintain the concessional rates of depreciation available to the joining entity prior to it joining the consolidated group (where the asset's tax cost does not exceed its terminating value);

•

provide a method of depreciation for depreciating assets that have arisen from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure; and

•

ensure that the adjustable value of a head company's notional asset is reduced by an appropriate amount if a depreciating asset has resulted from the notional asset.

[Schedule 1, item 9, subsection 705-305(1)]

Working out the cost of a depreciating asset

1.69 As discussed above, under the transitional provisions, the cost of any depreciating asset that arose from pre 1 July 2001 allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure was deemed to be nil at the start of 1 July 2001. Therefore, in order for the tax cost setting rules to apply appropriately to these depreciating assets, a 'cost' must be determined for these assets.

1.70 Subsection 705-305(5) provides that, if the joining entity incurred expenditure that would have been included in the cost of the depreciating asset under Division 40, assuming it was incurred just before the joining time, this expenditure increases the cost of the depreciating asset. In order to apply this section, the joining entity is assumed to have incurred the expenditure after 30 June 2001 under a contract entered into after 30 June 2001, regardless of when the expenditure was actually incurred. However, if the expenditure was already included in the asset's cost under Division 40, it is not included under this section again. [Schedule 1, item 9, subsection 705-305(5)]

1.71 It may be the case that a joining entity has incurred expenditure under a number of different provisions in respect of the one depreciating asset. Further, it may be the case that any such expenditure has been fully deducted prior to the joining time. In either case, if the expenditure reasonably relates to the depreciating asset, it will increase the depreciating asset's cost.

Example 1.5: Amounts to be included in the cost of a depreciating asset

The original expenditure may have given rise to deductions for different income years under different provisions of the ITAA 1997 and the ITAA 1936. For example, allowable capital expenditure incurred in the 1995-1996 income year may have given rise to deductions:

•

for the 1995-1996 and 1996-1997 income years under section 122DG of the ITAA 1936;

•

for the 1997-1998, 1998-1999, 1999-2000 and 2000-2001 income years under former section 330-80 of the ITAA 1997; and

•

for the 2001-2002 and 2002-2003 income years under Subdivision 40-B of the ITAA 1997 for the decline in value of a notional asset that arose under section 40-35 of the Income Tax (Transitional Provisions) Act 1997 from the amount of the original allowable capital expenditure that had not been recouped by the end of 30 June 2001.

1.72 It is important to note that, in order to test whether expenditure is included in the cost of the depreciating asset, the test time is just before the joining time, not the time the expenditure was actually incurred. This means that, even if at the time the expenditure was actually incurred it did not relate to a depreciating asset, it can still be included in the cost of a depreciating asset, provided it would be able to be included in the cost under Division 40 if it was incurred just before the joining time. This is particularly relevant for expenditure that forms part of a notional asset under sections 40-37 and 40-43 of the Income Tax (Transitional Provisions) Act 1997, as those sections do not apply to expenditure on a depreciating asset. It is recognised that expenditure deducted under these sections may relate to a depreciating asset, even though at the time of the deduction there was no such asset.

Working out the adjustable value of a depreciating asset

1.73 As discussed above, in order for the tax cost setting rules to apply appropriately to depreciating assets created from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure, an adjustable value and a terminating value must be established for the asset. Section 705-30 defines a depreciating asset's terminating value to be equal to its adjustable value just before the joining time. Therefore, it is only necessary to determine the depreciating asset's adjustable value.

1.74 If the expenditure that gave rise to the depreciating asset has been fully deducted, then it follows that the adjustable value of the depreciating asset is nil. Therefore, a depreciating asset will only have an adjustable value greater than nil if there is still some amount of expenditure relating to the asset yet to be deducted by the joining entity. Accordingly, the adjustable value of the depreciating asset just before and at the joining time is increased by so much of any notional asset (that arose because of section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997) that the joining entity holds at the joining time that reasonably relates to the depreciating asset. [Schedule 1, item 9, subsections 705-305(3) and (4)]

1.75 If a joining entity does not hold any notional asset(s) at the joining time, the adjustable value of any associated depreciating asset would not be increased.

Earlier deductions for decline in value of a depreciating asset

1.76 Once the cost and adjustable value of an allowable capital expenditure, transport capital expenditure, exploration or prospecting asset have been calculated, subsection 705-305(6) is necessary so that any deductions claimed by the joining entity, prior to joining, that were in relation to the asset's cost, are taken to be deductions for the decline in value of the depreciating asset [Schedule 1, item 9, subsection 705-305(6)]. This is to ensure that the tax cost setting rules, in particular section 705-50 (the over depreciation adjustment), apply appropriately to the depreciating asset.

1.77 Examples of deductions for expenditure claimed by the joining entity that would be covered by this section include:

•

deductions under former Subdivision 330-A, 330-C or 330-H of the ITAA 1997, or a corresponding previous law, for the expenditure;

•

deductions under Subdivision 40-B for the decline in value of a notional asset that arose under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997; and

•

deductions under subsection 40-75(2) of the Income Tax (Transitional Provisions) Act 1997) for expenditure incurred after 30 June 2001 on exploration or prospecting assets held at 1 July 2001.

Prime cost method of working out decline in value of a depreciating asset

1.78 In order to apply subsection 701-55(2), it is necessary for the joining entity to have been applying either the prime cost method or diminishing value method immediately before the joining time in respect of a depreciating asset. There may be circumstances because of the way deductions are claimed for expenditure on allowable capital expenditure, transport capital expenditure and exploration or prospecting assets, where the joining entity may not have applied either the prime cost or diminishing value method prior to the joining time. Consequently, subsection 705-305(2) deems the prime cost method to have applied just before the joining time to the depreciating assets that have arisen from allowable capital expenditure, transport capital expenditure, exploration or prospecting expenditure [Schedule 1, item 9, subsection 705-305(2)]. As a result, paragraphs 701-55(2)(c) to (e) will apply appropriately to these depreciating assets and any future deductions will be calculated based on the prime cost method. As discussed above, paragraphs 701-55(2)(c) to (e) will not be relevant if the head company satisfies subsection 40-80(1) for an exploration or prospecting assets.

Effective life of a depreciating asset where its tax cost setting amount does not exceed its terminating value

1.79 In order to ensure that the rules in subsection 701-55(2) work correctly and to allow a head company the ability to retain the concessional rates of depreciation available to the joining entity in respect of allowable capital expenditure and transport capital expenditure assets prior to consolidating (where appropriate), an effective life must be set for such depreciating assets.

1.80 If the tax cost of an allowable capital expenditure, transport capital expenditure, exploration or prospecting asset is greater than its terminating value (as determined under subsections 705-305(3) and (4)), the head company will be required (except where it satisfies subsection 40-80(1)) to determine an effective life for the asset at the joining time in accordance with subsections 40-95(1) and (3). This is the same as any other depreciating asset.

1.81 If the tax cost of an allowable capital expenditure or a transport capital expenditure asset is equal to or less than its terminating value, the head company is required to choose an effective life for the asset equal to the remainder of the effective life of the asset just before the joining time. However, as discussed above, allowable capital expenditure and transport capital expenditure assets will generally not have a 'remaining effective life' as these assets were never depreciated in the 'normal' way. Instead, the expenditure that gave rise to them was deducted over a concessional period (generally 10 or 20 years).

1.82 In these circumstances subsection 705-305(7) sets the effective life of the depreciating asset as being such a period as is reasonable having regard to:

•

the remainder of the effective life of the depreciating asset just before the joining time where capital expenditure has been incurred on the asset after 30 June 2001 and the asset's effective life was set under subsection 40-75(4) of the Income Tax (Transitional Provisions) Act 1997;

•

the remainder of the effective life of any related notional asset; and

•

any other relevant factors (for example, the proportion of the adjustable value of the depreciating asset that is reflected in each of the related notional assets.

[Schedule 1, item 9, subsection 705-305(7)]

1.83 The intention of this subsection is to allow the head company the ability (where the asset's tax cost does not exceed its terminating value) to maintain the same effective life for the depreciating asset as that which would have applied to the asset prior to the joining entity joining the consolidated group. This ensures that allowable capital expenditure and transport capital expenditure assets receive the same treatment as other depreciating assets in this respect.

Example 1.6: Setting the effective life of an allowable capital expenditure or transport capital expenditure asset whose tax cost does not exceed its terminating value

Assume that Sub A incurred the following expenditure in each of the following income years and that it joined a consolidated group on 1 July 2003:

(i)

$1,000 incurred in the 1999-2000 income year, of which $600 remains undeducted at 30 June 2003. All of this expenditure relates to a transport capital expenditure asset which has its tax cost reset when Sub A joins a consolidated group. As at 1 July 2003 the notional asset has a remaining effective life of six years.

(ii)

$5,000 incurred in the 2000-2001 income year, of which $3,500 remains undeducted at 30 June 2003. Of this undeducted expenditure, $2,000 reasonably relates to the same transport capital expenditure asset. As at 1 July 2003, the notional asset's remaining effective life is seven years.

(iii)

$600 incurred in the 2002-2003 income year on improvements to the same transport capital expenditure asset. The effective life of this 'asset' worked out under subsection 40-75(4) of the Income Tax (Transitional Provisions) Act 1997 at the time the expenditure was incurred was 10 years. As at 1 July 2003, the remaining effective life of this asset is nine years and the undeducted amount is $540.

In order to work out the remaining effective life of the transport capital expenditure asset, regard will need to be had to the remaining effective lives of all three of the above 'assets'. An example of an acceptable method of calculating its effective life may be to use a weighted average approach (note that other methods may be acceptable, provided they are reasonable). If a weighted average approach were used the effective life of the above asset would be:

(($600 / $3,140)) * 6 years) + (($2,000 / $3,140) * 7 years) + (($540 / $3,140) * 9 years) = approximately 7 years.


Therefore the remaining effective life of the transport capital expenditure asset would be seven years. This is a logical outcome as the majority of the undeducted expenditure in relation to the asset relates to the 2000-2001 year and as such the remaining effective life of the true asset should equate to the remaining effective life of the 2000-2001 'notional asset' that is, seven years.

Choosing to reduce the tax cost setting amount of a depreciating asset

1.84 In order to preserve accelerated depreciation, a head company has the ability under section 705-45 to choose to reduce the tax cost of an asset to equal its terminating value (any tax cost 'foregone' is not reallocated to other reset cost base assets). A similar rule is required for allowable capital expenditure and transport capital expenditure assets so that a head company has the ability to maintain the concessional write-off period (generally 10 or 20 years) available to the joining entity for these assets prior to consolidation.

1.85 Subsection 705-305(8) is the allowable capital expenditure and transport capital expenditure asset equivalent of section 705-45. This rule allows the head company to reduce the tax cost of the allowable capital expenditure, transport capital expenditure, exploration and prospecting asset to equal its terminating value (as determined under subsection 705-305(3)) [Schedule 1, item 9, subsection 705-305(8)]. As a result, the head company can apply subsection 705-305(7) which allows the head company to maintain the concessional write-off period for the depreciating asset that would have applied to the joining entity had it not joined the consolidated group. However, as for the rule for accelerated depreciation assets, any tax cost that is foregone is not reallocated to other reset cost base assets.

1.86 Subsection 705-305(9) has been inserted so that the ordering rule in section 705-55 works appropriately. Subsection 705-305(9) has the effect of including subsection 705-305(8) in section 705-45, and therefore including it within section 705-55. [Schedule 1, item 9, subsection 705-305(9)]

Adjustable value of head company's notional asset on entry

1.87 In order to ensure that a consolidated group only deducts an appropriate amount in respect of expenditure incurred on an allowable capital expenditure or transport capital expenditure asset, section 705-310 reduces the adjustable value of the head company's notional asset by an amount that is reasonably attributable to the depreciating asset [Schedule 1, item 9, subsection 705-310(3)]. The amount of the adjustment under this subsection is equal to the increase in the depreciating asset's adjustable value determined under subsection 705-305(3).

1.88 This section will only apply if the joining entity holds a notional asset at the joining time that arose under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 and, as a consequence, the head company is taken to hold such an asset (because of the entry history rule). [Schedule 1, item 9, subsection 705-310(1)]

1.89 The intention of section 705-310 is to prevent a head company from deducting both the tax cost of the allowable capital expenditure or transport capital expenditure asset as well as the related notional asset. [Schedule 1, item 9, subsection 705-310(2)]

Adjustable value of head company's notional asset on exit

1.90 Where an entity (the leaving entity) leaves a consolidated group, it is possible for the leaving entity to take with it allowable capital expenditure or transport capital expenditure assets. As these assets have had their tax costs set on entry and have subsequently been depreciated under Division 40, the exit rules in Division 711 will apply appropriately to these assets and no modifications are required.

1.91 It is also possible for a leaving entity to take with it 'other property' that was part of the head company's notional asset. These are assets that are not depreciating assets but were part of the notional asset that arose because of section 40-35, 40-7, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997.

1.92 If a leaving entity takes with it any of the 'other property' when it exits the group and, as a consequence, some or all of the head company's notional asset relating to the other property also leaves, the adjustable value of the head company's notional asset is reduced [Schedule 1, item 10, section 712-305]. This ensures that the head company and the leaving entity both do not get a deduction for the same notional asset.

Low-value pools

1.93 Pooling of depreciating assets was first introduced to reduce compliance costs in the 1997-1998 income year. The current low-value pools were introduced as part of the uniform capital allowances regime, which started on 1 July 2001.

1.94 In order to reduce compliance costs companies can elect to form a low-value pool for depreciating assets whose cost is less than $1,000. Once a company elects to form a low-value pool, it must allocate each asset that costs less than $1,000 to the pool. The pool is then effectively 'written off' for tax purposes at a particular rate. Compliance costs are reduced because once an asset goes into the pool, the entity is no longer required to track the asset for tax purposes, it simply tracks the pool balance from year to year in order to depreciate the pooled assets. Each year the pool balance will vary to reflect the addition of new assets, deductions for decline in value and disposal of assets that were in the pool.

1.95 Generally, when an entity joins a consolidated group, it is required to reset the tax cost of each of its assets. Without these amendments contained in this bill, companies would be required to pull apart their low-value pools when they join a consolidated group and set the tax cost for each asset in the pool. This would undo the compliance savings that these pools were designed to achieve. In order to maintain the policy underlying low-value pools, the entire low-value pool of a joining entity will be treated as a single 'hypothetical asset' for cost setting purposes.

1.96 These amendments also ensure an appropriate cost setting outcome when low-value assets leave a consolidated group. This is achieved by amending the law in order to remove the potential for both the head company and the leaving entity to claim deductions for the decline in pool value in the leaving year.

1.97 This could happen in the leaving year because the head company can deduct an amount for assets that have been purchased in the leaving year that subsequently leave with the leaving entity (because the amount of the head company's deduction is not based on assets being 'on hand' at the end of the year). The leaving entity may also be able to claim a deduction for any assets it takes with it (despite the fact that the head company has also included these assets when calculating its own deduction). In this regard, there is no balancing adjustment event in relation to assets that cease to be in a head company's low-value pool because an entity ceases to be a subsidiary member.

1.98 The amendments change the cost setting rules so that only the head company can claim a deduction in the leaving year in respect of the leaving assets that were purchased by the group in the leaving year. The leaving entity will, however, be entitled to deductions for assets it purchases after the leaving time. The leaving entity will then be entitled to deductions as normal in future years.

Low-value pools - entry

Setting the tax cost setting amount of assets in low-value pools

1.99 The operation of certain cost setting provisions are modified where an entity becomes a subsidiary member of a consolidated group after having allocated a depreciating asset (a 'previous pool asset') to its low-value pool. Compliance costs associated with setting the tax cost of these assets are reduced by treating all the previous pool assets in the joining entity's low-value pool as a single depreciating asset (the hypothetical asset). The hypothetical asset is also used to simplify how the head company's deductions for the decline in value of the pooled assets are worked out. [Schedule 1, item 11, subsections 716-330(1) and (2)]

1.100 Sections 701-10 and 701-60 and Division 705 operate as if all the previous pool assets are combined to form the single hypothetical asset. Section 701-10 sets the head company's tax cost for assets that a joining subsidiary brings with it into the group. Section 701-60 determines how the asset's tax cost is worked out. Broadly, Division 705 sets the tax cost of assets where entities become subsidiary members of consolidated groups. Modifications are made to sections 705-40 and 705-57 within Division 705 in order to apply appropriately to the hypothetical asset. These sections are about reducing an asset's tax cost to an amount that may be affected by the joining entity's terminating value for the asset.

1.101 Specifically, the operation of sections 705-40 and 705-57 are modified depending on when the joining time occurs. If the joining time is the first day of an income year of the joining entity, sections 705-40 and 705-57 operate as if the joining entity's terminating value for the hypothetical asset were the closing pool balance for the joining entity's low-value pool for the previous income year. Where the joining time is not the first day, sections 705-40 and 705-57 operate as if the joining entity's terminating value for the hypothetical asset were the closing pool balance for the joining entity's low-value pool for the non membership period described in section 701-30 that ends just before the joining time. [Schedule 1, item 11, subsections 716-330(7) and (8)]

1.102 To reduce the cost of compliance, no adjustments need to be made for over-depreciation in setting the tax cost for the assets in the low-value pool. [Schedule 1, item 11, subsection 716-330(9)]

Allocating assets to the head company's low-value pool

1.103 The previous pool assets are allocated to a low-value pool in the head company's income year in which the joining time occurs for the purpose of allocating depreciating assets to a low-value pool and in working out the decline in value of assets allocated to a low-value pool. This will occur in both situations where the head company already has an existing low-value pool and where the head company must create a low-value pool if one does not exist. At any one time the head company can only operate one low-value pool.

1.104 Treating the assets in the low-value pool as a hypothetical asset is designed to reduce compliance costs on setting the tax cost of assets. However, each asset is then recognised and allocated to the low-value pool at the joining time in order to work out the decline in value of the pool and the closing pool balance. Each asset is treated as being allocated to the head company's low-value pool at the joining time (not when the asset was originally allocated to the joining entity's pool). [Schedule 1, item 11, subsection 716-330(3)]

1.105 When an asset is allocated to the low-value pool a reasonable estimate of the percentage of taxable use must be made for each asset as set out under section 40-435. This percentage affects the amount allocated to the pool and consequently the decline in value for the pool under the method statement in subsection 40-440(1). In determining the taxable use percentage for each asset in a low-value pool on entry it would be appropriate, having regard to compliance costs, to make an estimate for each asset based on a reasonable estimate of the taxable use of the pool of assets. This taxable use percentage (i.e. for the pool of assets) is required for the purposes of applying the method statement in subsection 40-440(1).

1.106 The requirement to allocate all low-cost assets to the pool once the taxpayer chooses to allocate one low-cost asset to the pool is not limited by the hypothetical asset. Each low-cost asset that the head company starts to hold in the joining or later income years are allocated to a low-value pool whether or not the asset is the hypothetical asset and whether or not the head company began to hold the asset because of the single entity rule. Low cost assets are added to the low-value pool going forward regardless of whether or not they arise on the first day of an income year of the joining entity as either a low-cost or a low-value asset. [Schedule 1, item 11, subsection 716-330(4)]

Determining the decline in value deductions

1.107 To determine the decline in value deductions the operation of section 40-440 is modified depending on when the joining entity joins the consolidated group.

1.108 If the joining time is the first day of an income year of the joining entity, section 40-440 operates as if all the previous pool assets were low-value assets and the sum of their opening adjustable values at the joining time equalled the tax cost for the hypothetical asset. Where the joining time is the first day of an income year these modifications allow the head company to depreciate the hypothetical asset at 37.5% in the first and subsequent income years. [Schedule 1, item 11, subsection 716-330(5)]

1.109 If the joining time is not the first day of the joining entity's income year section 40-440 operates as if all the previous pool assets were low-value assets and the sum of their costs equalled the total of the tax cost for the hypothetical asset and any expenditure incurred after the joining time (but in the income year that includes that time) and included in the second element of the costs of the previous pool assets. Where the joining time is not the first day of an income year these modifications allow the hypothetical asset to be depreciated at 18.75% in the first year and 37.5% in later years. The lower percentage in the first year is a simple way of apportioning the first year's deduction given that it is not a full income year. [Schedule 1, item 11, subsection 716-330(6)]

Low-value pools - exit

An asset leaving the head company's low-value pool when an entity leaves the group

1.110 Where an entity disposes of an asset that was part of a low-value pool, the value of the pool is reduced by the asset's terminating value. However, where an entity leaves a consolidated group and takes with it assets that were part of the head company's low-value pool special rules apply. These special rules affect the head company and the leaving entity of a consolidated group at the leaving time if a depreciating asset becomes an asset of the leaving entity at that time because the single entity rule ceases to apply and where the asset was in the head company's low-value pool. [Schedule 1, item 11, subsection 716-335(1)]

1.111 The special rules are required to ensure that the decline in value of assets in the head company's and leaving entity's low-value pools are worked out so that:

•

for the leaving year, the depreciating asset is only taken into account in working out the decline in value of assets in the head company's low-value pool; and

•

for later income years, the depreciating asset is only taken into account in working out the decline in value of assets in the leaving entity's low-value pool.

The adjustable value of the depreciating assets just before the leaving time is specified in order to perform the push-up process within the leaving entity. [Schedule 1, item 11, subsection 716-335(2)]

Consequences for the head company of assets leaving the low-value pool

1.112 In working out the cost to the head company of membership interests in an entity that leaves the group, the adjustable value (as discussed in the next paragraph) of the leaving assets just before and at the leaving time, is the amount of the reduction to the head company's closing pool balance for the leaving year reduced to reflect the taxable use percentage estimated for the depreciating asset by the head company under section 40-435. For each membership interest the head company holds in the leaving entity, the interest's tax cost is set just before the leaving time at the interest's tax cost by reference to the head company's terminating value of the asset. This is worked out by reference to the adjustable value of the asset for the head company just before the leaving time. The adjustable value of the asset for the leaving entity at the leaving time is the same as the adjustable value of the asset for the head company under section 701-40. [Schedule 1, item 11, subsection 716-335(5)]

1.113 Where an asset, that had been allocated a taxable use percentage of less than 100%, leaves a low-value pool in a leaving entity that asset will be allocated its full value upon pushing-up the asset's tax cost in setting the tax cost for the interests in the leaving entity. For example, an asset with a tax cost of $100 is purchased by a consolidated group and allocated a taxable use percentage of 80%. The next day the asset leaves the group with a leaving entity, the push up value will be $100 for the purposes of setting the tax cost for interests held by the consolidated group in the leaving entity.

1.114 In order to achieve a tax neutral consequence for the head company when reducing the low-value pool balance where a leaving entity takes assets from the pool, an amount that reasonably relates to the leaving assets will be deducted from the closing pool balance. The head company may take into account the leaving assets in working out deductions for the decline in value of the low-value pool in the leaving year (rather than the leaving entity). This means that the head company's low-value pool deductions will not be reduced until the next year to reflect the assets which have left the pool. In doing this, companies will work out the decline in value of assets in the head company's low-value pool, in later years, as if the closing pool balance for the leaving year were reduced by an amount that reasonably relates to the depreciated asset. [Schedule 1, item 11, subsection 716-335(4)]

Consequences for the leaving entity of assets leaving the low-value pool

1.115 As a result of each asset being recognised in the pool under subsection 716-330(3), leaving entities will receive an adjustable value via the exit history rule (section 701-40) for the purposes of working out the cost to the entity upon leaving the consolidated group.

1.116 A leaving entity cannot deduct an amount for the leaving year for the assets it is taken to have allocated to the low-value pool that it brought from the head company's pool. The leaving entity may take the leaving asset into consideration in later income years for the purpose of working out the decline in value of its low-value pool. The leaving entity may also deduct any second elements of cost incurred after the leaving time in respect of the assets it brought from the head company's pool.

1.117 The leaving entity may also deduct the decline in value of new assets purchased after the leaving time in the leaving year. The exit history rule gives the leaving entity the information needed to continue depreciating the leaving assets. This occurs because the leaving assets were allocated the same cost, taxable use percentage and prior depreciation deductions as they had for the head company. For example, the exit history rule treats the asset as having been allocated to the leaving entity's low-value pool, with the taxable use percentage estimated by the head company, for the income year for which the head company allocated the asset to the head company's low-value pool. [Schedule 1, item 11, subsection 716-335(3)]

1.118 Where the leaving entity immediately joins another consolidated group the above mentioned entry rules will apply, including the hypothetical asset provisions in such a way so that the acquiring consolidated group would depreciate its hypothetical asset at 18.75% in the first year and 37.5% in later years.

Software development pools

Depreciating assets arising from expenditure in the joining entity's software development pool

1.119 Part 5 of Schedule 1 to this bill ensures that the operation of certain consolidation cost setting provisions and certain capital allowance provisions operate correctly so that the head company of a consolidated group can deduct an appropriate amount for assets arising from expenditure on in-house software development.

1.120 Under Subdivision 40-E of the uniform capital allowance regime, an entity may elect to allocate amounts of expenditure on in-house software to a software development pool where that expenditure relates to developing, or having another entity develop, computer software. The entity is entitled to deductions for the expenditure over a period of three years following the year in which the expenditure is made. A separate pool is created for each income year in which the expenditure is made.

Modifications where an entity that has a software development pool joins a consolidated group

1.121 Certain consolidation cost setting provisions and certain capital allowance provisions relevant to software development are modified if:

•

an entity had incurred expenditure which it allocated to a software development pool;

•

that entity becomes a subsidiary member of a consolidated group at the joining time; and

•

some or all of the expenditure reasonably relates to the in-house software asset that became an asset of the head company at the joining time because of the single entity rule.

[Schedule 1, item 11, subsection 716-340(1)]

1.122 The modified provisions are:

•

Subdivision 40-B provides for deductions for the decline in value of depreciating assets;

•

section 40-455 provides for the deduction of expenditure allocated to a software development pool;

•

section 701-10 provides that, for each asset the joining entity has at the joining time, the asset's tax cost is set at the joining time;

•

section 701-55, amongst other things, specifies how to work out the head company's deductions for the decline in value of depreciating assets that became assets of the head company;

•

section 701-60 defines the 'tax cost' of an asset; and

•

Division 705 works out the tax cost for assets that a subsidiary member brings into a consolidated group.

1.123 Where an entity that has at least one software development pool joins a consolidated group, the head company will be entitled to continue to deduct the remaining pool balances as a result of the entry history rule (section 701-5).

1.124 The amendments will ensure that to the extent that the expenditure has resulted in the creation of in-house software assets then those assets will have their tax cost set on becoming assets of the head company and the balance of the software development pools will be reduced to the extent that the expenditure in the pools relates to those in-house software assets. In setting the tax cost for the in-house software assets, regard is also had to deductions for the expenditure on the asset that were allowed under the pool to ensure that the over depreciation adjustment in section 705-50 is able to apply.

Setting the tax cost setting amount for in-house software assets

1.125 In-house software assets arising from expenditure in a software development pool are given a tax cost under Division 705 upon becoming assets of the head company of a consolidated group. Paragraph 701-55(2)(a) deems the in-house software to have been acquired at the joining time for a payment equal to its tax cost.

1.126 The tax cost is calculated to take account of deductions for the period before the joining time for the expenditure reasonably related to the in-house software. Previously, the head company's deductions would have been worked out under section 40-455 on the basis of the entry history rule treating the expenditure on the software as being the head company's expenditure. [Schedule 1, item 11, subsection 716-340(2)]

1.127 In applying certain cost setting provisions, it is necessary to determine the cost and deductions for the decline in value in relation to certain depreciating assets. Subsections 716-340(6) to (8) ensure that appropriate amounts are worked out in relation to in-house software assets. For the purposes of doing these calculations, the cost of the in-house software asset is equal to the total amount of the joining entity's expenditure that reasonably relates to the software and that was allocated to a software development pool. A reasonable approach will be accepted in determining the amount of expenditure that relates to an in-house software asset. This recognises the fact that the expenditure may have been allocated to separate software development pools over a number of years. [Schedule 1, item 11, subsections 716-340(6) to (8)]

1.128 In order for sections 705-40, 705-50 and 705-57 to apply appropriately to an in-house software asset, the joining entity must have claimed deductions for the decline in value of the asset. Due to the nature of software development pools, any deductions associated with the pool are not deductions for the 'decline in value' of the pool, but are instead deductions for 'expenditure allocated to the pool'. Therefore, without amendment, sections 705-40, 705-50 and 705-57 will not apply appropriately to in-house software assets.

1.129 It is therefore necessary to determine the decline in value and deductions for the decline in value of in-house software assets for a period before the joining time. This is done having regard to the amount of deductions available under section 40-455 that reasonably relate to the software. Given that these amounts may arise from a number of software development pools, it may be necessary to add up the relevant amounts from each pool. This calculation is required to enable such things as the terminating value of the software to be determined (via the application of section 40-85 to work out the adjustable value of the asset).

Working out the decline in value of in-house software assets for the head company

1.130 The head company will work out deductions for in-house software under Subdivision 40-B based on the reset cost for the depreciating assets. Subsection 716-340(4) assumes the prime cost method is used. Therefore, paragraphs 701-55(2)(c) and (d) will specify how deductions are to be determined. In working out the deductions for decline in value of the in-house software, an effective life for the in-house software equal to the period specified for in-house software in subsection 40-95(7) is to be used. [Schedule 1, item 11, subsections 716-340(4) and (5)]

Working out deductions for the remaining software development pool balance

1.131 The amount of the inherited software development expenditure is reduced by the amount that reasonably relates to the in-house software. This prevents a deduction being claimed for the decline in value of the software development expenditure pool in addition to the decline in value of the in-house software. This does not prevent the head company from deducting under section 40-455 expenditure that is not reasonably related to the in-house software and that the head company is treated by section 701-5 as having incurred and allocated the expenditure to a software development pool. [Schedule 1, item 11, subsection 716-340(3)]

Modifications where an entity that leaves a consolidated group takes with it a software development pool

1.132 Where an entity (the leaving entity) exits a consolidated group and, because of the exit history rule, is taken to have allocated expenditure to a software development pool (at the same time that the head company allocated such expenditure), rules have been inserted that affect both the leaving entity's deduction for its software development pool in the leaving year and the head company's deduction for its software development pool for income years after the leaving year. [Schedule 1, item 11, subsection 716-345(1)]

1.133 For the leaving year, the leaving entity cannot deduct amounts for expenditure that have been allocated to a software development pool [Schedule 1, item 11, subsection 716-345(3)]. Instead, the head company is entitled to these deductions in the leaving year. This ensures that a deduction is only available to the head company of the consolidated group and not to both the head company and the leaving entity in the leaving year.

1.134 For income years after the leaving year, the leaving entity can continue to deduct amounts for expenditure in its software development pool(s) in the usual manner. However, the head company will no longer be entitled to deduct an amount for the software development pool that leaves with a leaving entity for income years after the leaving year. The head company is treated as if it never incurred these deductions. [Schedule 1, item 11, subsection 716-345(2)]

Source of certain distributions for allocable cost amount purposes

1.135 Part 7 of Schedule 1 to this bill contains rules that simplify the method of working out the ACA by accepting a last-in-first-out method of accounting for profits in appropriate circumstances where the entity must determine which prior year's profits were used to pay a particular dividend.

1.136 Sourcing dividends to the profits of individual years is important in working out the ACA because steps 3 and 4 of the cost allocation process require identification of the retained profits accruing to membership interests that were held continuously by the consolidated group. Sourcing dividends to the profits of individual years is also an important part of the ACA process that limits the deferral of tax on profits that were not subject to tax because of over-depreciation. Steps 3 and 4 together with the over-depreciation adjustment are explained below.

1.137 Continuously held profits must be identified because profits earned by an entity before it becomes a subsidiary member of the consolidated group are treated differently in allocating cost to the assets of the subsidiary that earned the profits.

1.138 Historical records that would precisely identify profits that should be included in cost allocation calculations may not be available to the consolidated group. The cost setting rules recognise that the necessary records may not be available and therefore provide for taxpayers to use the most reliable basis for estimation that is available.

1.139 A last-in-first-out approach will simplify determining what proportion of a dividend was sourced from profits earned by a subsidiary while it was owned by the group. It does this by allocating an entity's most recent profits to the dividend before allocating the next most recent year's profits and so on until all available profits earned by the group have been included in the calculation.

1.140 The last-in-first-out approach is to be applied in allocating profit between the years over which the profits were earned. Where it is necessary to identify the source of profits within a year a proportional (or pooling) approach is to be applied.

1.141 Steps 3 and 4 in working out a group's ACA for a joining entity require identification of the retained profits at the joining time that accrued to membership interests held continuously by a consolidated group.

1.142 Step 3 involves adding the sum of fully franked dividends the head company would have received from the joining entity. The purpose of this step is, consistent with the imputation system, to prevent double taxation by allowing a consolidated group a cost for retained taxed profits that accrued to membership interests when the consolidated group held the membership interests.

1.143 Step 3 will be amended by modifying section 705-90 to allow for a last-in-first-out method. Under this method the amount of profit that accrued to the joined group during a particular period is worked out by assuming that profits were distributed in order from the most recent to the earliest income years. Once profits are allocated between years for which distributions were made it is first assumed that unfranked distributions are sourced from untaxed profits. This rule provides consistency between steps 3 and 4 and the over-depreciation adjustment by ensuring that taxpayers allocate profits in a consistent way regardless of which step is being applied. [Schedule 1, item 22, subsection 705-90(10)]

1.144 Step 4 subtracts distributions to the head company by the joining entity, out of profits that did not accrue to membership interests continuously held by members of the joined group, until joining time.

1.145 The purpose of step 4 is to prevent the resetting of costs for a joining entity's assets reflecting an amount paid for the membership interests in the entity that was later recovered through distributions.

1.146 The provision that determines how to calculate step 4 (paragraph 705-95(b)) refers to subsection 705-90(7) which allows for a most reliable basis for estimation to be used. The insertion of subsection 705-90(10) will allow a last-in-first-out basis to be used under step 4. A note is inserted after paragraph 705-95(b) to explain that subsection 705-90(7), paragraph 705-90(9)(b) and subsection 705-90(10) are relevant to working out whether or not profits accrued to the joined group before the joining time under step 4. [Schedule 1, item 23, note at the end of paragraph 705-95(b)]

1.147 The over-depreciation adjustment limits the deferral of tax on profits (that were not subject to tax because of the over-depreciation of assets) that were distributed to recipients untaxed because of their entitlement to the inter-corporate dividend rebate. The deferral of income tax is limited by reducing the tax cost setting amount allocated to the over-depreciated asset where certain conditions are satisfied.

1.148 Subsection 705-50(3A) allows for a last-in-first-out method to be used in calculating the over-depreciation adjustment. [Schedule 1, item 21, subsection 705-50(3A)]

Adjustment to step 3 of allocable cost amount to take account of certain losses

1.149 Section 705-90 (step 3 of the ACA calculation) provides that undistributed profits accruing to direct or indirect membership interests that the consolidated group held continuously in a joining entity are to be added when working out the joining entity's ACA. This amount is known as the joining entity's 'step 3 amount'.

1.150 For the purposes of section 705-90, undistributed profits of the joining entity is defined as being the retained profits of the entity as at the joining time (as determined by Australian Accounting Standards) that could be recognised in the joining entity's statement of financial position if that statement was prepared at the joining time.

1.151 Where profits have accrued to the consolidated group before the joining time and pre-acquisition accounting losses have also been incurred, the joining entity's retained profits balance will be understated (as it will have been reduced by the pre-acquisition losses). Accordingly, the retained profits balance at the joining time will not accurately reflect the amount of profit that has accrued to the joined group. This could result in the joining entity's ACA being understated and consequently reduce the tax cost of the joining entity's assets.

1.152 Amendments contained in Part 8 of Schedule 1 to this bill ensure that the full amount of undistributed profits that have accrued to a consolidated group before the joining time are included when calculating the joining entity's ACA.

1.153 Subsection 705-90(2A) provides that, where an accounting loss has arisen prior to the consolidated group acquiring membership interests in the joining entity, and that loss would normally be taken into account in working out the joining entity's undistributed profits amount under section 705-90, that loss is not taken into account. [Schedule 1, item 24, subsection 705-90(2A)]

1.154 However, it is only those losses that have reduced the joining entity's undistributed profits amount that are able to be disregarded. In other words, if there are unrealised (accounting) losses that have not reduced the undistributed profits amount, the disregarding of those losses will not affect the balance of retained profits.

1.155 Further, the new rule does not mean that every accounting loss ever incurred by the joining entity that did not accrue to the consolidated group will be disregarded under subsection 705-90(2A). Instead, it is the accumulated retained losses that did not accrue to the consolidated group that are disregarded when working out the step 3 amount for the joining entity.

Example 1.7: Retained losses that have not accrued to membership interests and the subsidiary member has retained profits at the joining time

30 June 2000 - retained loss = $100 of Entity A

1 July 2000 - Head Co purchases 100% membership interests in Entity A

30 June 2001 - retained profit = $200 of Entity A

30 June 2002 - retained profit = $400 of Entity A

1 July 2002 - group consolidates (Entity A becomes a subsidiary member)

In this example, Entity A has accumulated retained losses at 30 June 2000 of $100. None of this loss accrued to the consolidated group because the group did not hold membership interests in Entity A (subsection 705-90(8) states what it means for a loss to accrue to the joined group). On 1 July 2000, Head Co purchased 100% of the membership interests in Entity A. Assume Entity A made a net accounting profit in the year ended 30 June 2001 of $300. As a consequence, the accumulated retained profits balance at 30 June 2001 would be $200 ($300 - $100). Assume also that in the year ended 30 June 2002, Entity A made a net accounting profit of $200, giving a retained profits balance at 30 June 2002 of $400. Head Co and Entity A form a consolidated group on 1 July 2002.

Prior to applying subsection 705-90(2A), the group's step 3 amount would be $400, being the undistributed retained profits of the joining entity at the joining time. However, this amount is understated because the pre-acquisition retained loss of $100 has been taken into account (it was offset against later year profits that accrued to the consolidated group).

As the $100 loss did not accrue to the joined group (it is a pre-acquisition loss) and it would otherwise be taken into account in working out the undistributed profits of Entity A, subsection 705-90(2A) will apply. As a result the $100 loss is not taken into account when determining the undistributed profits amount of Entity A. In other words, the joined group's step 3 amount is $500, representing the total profits that have accrued to the joined group during the 2000-2001 and 2001-2002 financial years ($300 and $200 respectively).

Example 1.8: Retained losses that have not accrued to membership interests and the subsidiary member has retained losses at the joining time

30 June 2000 - retained loss = $200 of Entity B

1 July 2000 - Head Co purchases 100% membership interests in Entity B

30 June 2001 - retained loss = $100 of Entity B

30 June 2002 - retained loss = $50 of Entity B

1 July 2002 - group consolidates (Entity B becomes a subsidiary member)

In this example, Entity B has a retained loss at 30 June 2000 of $200. None of this loss accrued to the consolidated group because the group did not hold membership interests in Entity B (subsection 705-90(8) states what it means for a loss to accrue to the joined group). On 1 July 2000, Head Co purchased 100% of the membership interests in Entity B.

Assume Entity B made a net accounting profit in the year ended 30 June 2001 of $100. As a consequence, Entity B would have a retained loss at 30 June 2001 of $100 ($200 - $100). Assume also that in the year ended 30 June 2002, Entity B made a net accounting profit of $50, giving a retained loss at 30 June 2002 of $50. Head Co and Entity B form a consolidated group on 1 July 2002.

Prior to applying subsection 705-90(2A), the group's step 3 amount would be nil as Entity B has no retained profits at the joining time. However, as the $200 loss incurred in the year ended 30 June 2000 did not accrue to the joined group and it has been taken into account in working out the undistributed profits of Entity B (i.e. it reduced them), subsection 705-90(2A) will apply.

As a result of not taking the pre-acquisition loss into account, Entity B's retained profits are increased to $150. This amount correctly reflects the profits that have accrued to the joined group in the 2000-2001 and 2001-2002 years ($100 and $50 respectively).

Transitional treatment of deferred tax liabilities for allocable cost amount and capital gains tax purposes

1.156 Part 9 of Schedule 1 to this bill contains rules to reduce compliance cost in applying the consolidation cost setting rules for transitional entities which have a change in the amount of deferred tax liabilities associated with assets that have their tax cost set.

1.157 Step 2 in working out the ACA adds the value of all accounting liabilities at the time an entity joins a consolidated group. This includes the amount of deferred tax liability under section 705-70(1A) associated with assets of a joining entity as recognised under the accounting standards.

1.158 Where an entity joins a consolidated group, the amount of deferred tax liability is added in working out the ACA of the joining entity. However, it is the amount of the deferred tax liability arising for the head company rather than the amount of the deferred tax liability recorded by the joining entity that is taken into account. This is because when a head company acquires an entity, it will adjust its purchase price to take into account any change in the deferred tax liability as a result of the consolidation cost setting rules.

1.159 In the case of a consolidated group forming during the transitional period (i.e. between 1 July 2002 and 30 June 2004), it is unlikely that the head company will have adjusted the purchase price to take into account the change in the deferred tax liability as a consequence of consolidation. This is because the purchase is likely to have occurred before the introduction of the consolidation regime.

1.160 Section 701-32 of the Income Tax (Transitional Provisions) Act 1997 reduces compliance costs in applying the cost setting rules by excluding entities that join a consolidated group during the transitional period from having to adjust the ACA calculation for changes in the amount of deferred tax liability associated with assets that have their tax cost reset. [Schedule 1, item 25, section 701-32]

1.161 Section 701-34 of the Income Tax (Transitional Provisions) Act 1997 reduces compliance costs by not requiring the consolidated group to determine a capital gain or capital loss (under CGT event L7) arising from changes in the value of a deferred tax liability of entities that join a consolidated group during the transitional period. [Schedule 1, item 25, section 701-34]

1.162 Without the amendments taxpayers would have to compare the value of the liability at the time the entity became a member of a consolidated group with the value when the liability is discharged. Requiring entities to track these changes would result in significant compliance costs.

Technical amendments to certain trust cost setting rules

1.163 Part 11 of Schedule 1 to this bill contains technical amendments to clarify the application of certain cost setting provisions applying to trusts which become members of a consolidated group.

1.164 Section 713-25 includes an amount in the ACA calculation for undistributed, realised profits that accrue to the joined group before joining time that could be distributed tax-free in respect of both discretionary and non-discretionary trusts.

1.165 A technical change to the wording of subparagraph 713-25(1)(c)(ii) ensures that non-discretionary trusts that have profits which could be distributed tax-free prior to joining a consolidated group are allocated cost on joining the group. This is achieved by removing a reference to non-assessable parts that would "...not be taken into account..." in working out whether or not a capital gain had been made because of CGT event E4. Instead, the subparagraph will refer to non-assessable parts that would be disregarded in working out whether or not a capital gain had been made because of CGT event E4. This technical correction ensures consistency with the references to disregarding certain amounts in sections 104-70 and 104-71. [Schedule 1, item 32, subparagraph 713-25(1)(c)(ii)]

1.166 A minor technical correction is made to the heading to section 713-25 to remove the reference to profits that could be distributed tax-free "...in respect of discretionary interests..." in order to appropriately reflect the scope of section 713-25 which applies to both discretionary and non-discretionary trusts. [Schedule 1, item 31, section 713-25]

1.167 Similar references have been removed from step 3 in the table within section 705-60. [Schedule 1, items 29 and 30, section 705-60]

Inter-entity loss multiplication rules

1.168 Part 6 of Schedule 1 to this bill amends the notice requirements under the inter-entity loss multiplication rules. Subdivision 165-CD prevents inter-entity loss multiplication by reducing tax attributes (i.e. cost bases, reduced cost bases or allowable deductions) for significant equity and debt interests in a loss company that has an alteration. Broadly, an alteration arises if there is a change in the company's ownership or control or a liquidator declares that the company's shares are worthless.

1.169 Depending on the circumstances, subsections 165-115ZC(4) and (5) require an entity that has a controlling stake in the loss company, or the loss company itself, to give a notice to associates that have a relevant interest in the loss company. The notice must contain information on the nature and extent of the loss company's losses. Failure to give the notice is a criminal offence.

1.170 Currently, the notice must be given within six months of the alteration time. However, if the alteration time was before 24 October 2002, the notice was not required to be given until 24 April 2003.

1.171 The purpose of the notice is to ensure that recipients have sufficient information to comply with their obligations under Subdivision 165-CD. The recipient entity is required to comply with Subdivision 165-CD even though it does not receive the notice.

Notice requirement waived or notice period extended for members of the same consolidatable group

1.172 A key feature of consolidation is that transactions between entities within a consolidated group are ignored for income tax purposes. When an entity joins a consolidated group, the cost bases and reduced cost bases of its assets are generally reset. In these circumstances, the notice requirements under Subdivision 165-CD are unnecessary and impose significant compliance costs.

1.173 Therefore, the notice requirements will be alleviated during the consolidation transitional period for entities that are in the same consolidatable group. That is, the notice requirements in subsections 165-115ZC(4) and (5) will be modified if:

•

the alteration time is between 10 November 1999 and 1 July 2004;

•

apart from these amendments, an entity (the notifying entity) would be required to give a notice to another entity (the receiving entity) in relation to the alteration time; and

•

just before the alteration time, the notifying entity and the receiving entity were members of the same consolidatable group.

[Schedule 1, item 20, subsection 165-115ZC(4) of the Income Tax (Transitional Provisions) Act 1997]

1.174 The notice requirements will not apply if the notifying entity and the receiving entity become members of the same consolidated group before 1 July 2004. [Schedule 1, item 20, subsection 165-115ZC(5) of the Income Tax (Transitional Provisions) Act 1997]

1.175 If the notifying entity and the receiving entity do not become members of the same consolidated group before 1 July 2004, a notice must be given before the end of six months after the date of Royal Assent of this bill. [Schedule 1, item 20, subsection 165-115ZC(6) of the Income Tax (Transitional Provisions) Act 1997]

1.176 The amendments will also insert a note at the end of subsection 165-ZC(1) to guide readers to these modifications to the notice requirements in the Income Tax (Transitional Provisions) Act 1997. [Schedule 1, item 13, subsection 165-115ZC(1)]

Commissioner of Taxation's discretion to extend the notice period or waive the notice requirement

1.177 The notice that is required to be given under subsection 165-115ZC(4) or (5) is essentially an administrative mechanism for providing information to affected taxpayers. Failure to give the notice within the specified time period is a criminal offence.

1.178 Unforeseen or unusual circumstances might arise where the notice requirements cannot be reasonably complied with. For example, the notifying entity may be having particular difficulty in obtaining the required information to complete the notice within the specified time frame due to circumstances beyond its control (such as a fire or other unforeseen event that destroys or damages the necessary records). Currently in these circumstances, failure to provide the notice within the specified time period will result in the notifying entity being subject to a criminal penalty.

1.179 In addition, there may be some circumstances when the information required to be given in the notice is already known by the intended recipient. In these circumstances, to avoid a criminal penalty, a notice must still be given even though it serves no useful purpose.

1.180 Therefore, to allow some flexibility in relation to the notice requirements, the Commissioner may:

•

extend the period within which a notice must be given by specifying, in writing, a later time than the alteration time as the start of the six month period within which the notice is required to be given; or

•

by written declaration, waive the notice requirement in relation to a particular alteration time.

[Schedule 1, items 14 to 18, subsections 165-115ZC(4), (5), (7A) and (7B)]

1.181 In making a decision, the Commissioner must consider the consequences of extending the period for giving a notice or of waiving the notice requirement for both the notifying entity and the receiving entity and any other factors that are relevant. [Schedule 1, item 18, subsection 165-115ZC(7C)]

1.182 The Commissioner's decision to extend the notice period or waive the notice requirement is not subject to review by the Administrative Appeals Tribunal. The information contained in the notice is required to assist the receiving entity to meet its taxation obligations. It is not directly connected to the imposition of tax on either the notifying entity or the receiving entity. A taxpayer who is dissatisfied with the Commissioner's decision can pursue any complaint through the Australian Taxation Office's internal dispute handling process or by taking the matter up with the Commonwealth Ombudsman.

Treatment for irrevocable entity-wide elections

Head company's choice overrides the entry history rules

1.183 The standard entry history rules result in a choice by any entity which joins a consolidated group, either at consolidation or by later joining, being attributed to the head company. The new rules allow the head company to modify elections/choices that are irrevocable or not immediately revocable to suit the circumstances of the consolidated group.

1.184 The first treatment is the resettable elections treatment (i.e. it allows the head company to reset the elections or choices) where irrevocable choices subject to these provisions made by entities that join a consolidated group are not inherited by the head company under the entry history rule contained in section 701-5. Instead, the head company may decide whether or not to make the irrevocable elections/choices at the joining /consolidation time according to its preferences rather than be bound by decisions made by joining entities over which it may have had no control at the time those decisions were made. Any choices thus made are effective from the consolidation time or joining time.

1.185 This treatment is applicable to choices made in respect of irrevocable or not immediately revocable elections:

•

A provision of Part X or XI of the ITAA 1936 - attribution of income in respect of controlled foreign corporations, foreign investment funds and FLPs.

•

Subsection 70-70(2) - valuing interests in foreign investment funds that are trading stock.

•

Item 1 in the table in subsection 960-60(1) - choosing to use a functional currency.

•

Any other matter prescribed by regulations.

1.186 This is intended to be a list and it is expected that additional items will be added to this list as more elections are recognised which require this treatment. It is envisaged that companies and groups going through consolidation transitions will be able to refer to this list (along with the lists for other treatments) to determine what elections they may need to remake at consolidation.

1.187 Part X of the ITAA 1936 ensures Australian shareholders are taxed on their share of a controlled foreign corporation's 'tainted income' as it is earned, unless that income is comparably taxed offshore. In particular, taxpayers can elect how they wish to treat income from investments or arrangements such as dividends, interest, royalties or amounts arising from related party transactions. Part XI of the ITAA 1936 is similar to Part X except it ensures Australian shareholders are taxed on their share of a foreign investment fund's income. In particular, taxpayers can elect how they wish to treat their interest in the foreign investment fund.

1.188 Subsection 70-70(2) provides for the valuation of an interest in a foreign investment fund. In particular, it provides that an interest in a foreign investment fund that is an item of trading stock can be valued at market value. Once made, an election to use market value applies to the taxpayer in respect of all later years of income. Item 1 in the table in subsection 960-60(1) allows an Australian resident that is required to prepare financial reports under section 292 of the Corporations Act 2001 to work out its taxable income or loss using a functional currency.

What happens when entities form a consolidated group or an entity joins a consolidated group

General rule

1.189 On consolidation or joining, certain irrevocable elections/choices made by entities prior to the notification of consolidation or prior to the time an entity joins a consolidated group (excluding the head company) are disregarded for head company core purposes and the head company is permitted to make a new election should it choose to do so. The provisions allow the head company in some cases to modify the time the election/choice takes effect and also extends the time the head company has to make the election/choice. [Schedule 1, item 26, subsections 715-660(2) and (3)]

1.190 The irrevocable elections/choices of the joining entities that are disregarded ought to have been relevant to these entities' taxation affairs for the income year prior to consolidation/joining. That is, the entities must have been eligible to make such election/choice under the relevant provisions. A choice covers both where a decision is made to have the relevant election provision apply to it as well a decision not to make a choice under the election provisions. [Schedule 1, item 26, paragraph 715-660(1)(a)]

Exception - functional currency

1.191 An exception to this rule is the choice/election made under item 1 of the table in subsection 960-60(1) - functional currency. This election is designed as a compliance cost saving measure and as such it only applies to the whole of the income year and has effect for the income year following that in which the choice is made unless the choice is a backdated start-up choice. Therefore, an election/choice made by the head company at consolidation/joining time in regard to functional currency will have effect from the start of the income year following the one in which the choice is made unless the choice is a backdated start-up choice. [Schedule 1, item 26, paragraph 715-660(1)(b)]

Example 1.9

On 16 January 2004 Company A elects to make an item 1 in the table in a subsection 960-60(1) election, under which its applicable functional currency is Japanese Yen. The election does not take effect until 1 July 2004 (income year 2004-2005). On 1 April 2004, Company A joins a consolidated group with Company C as the head company. At Company A's joining time, Company C makes a valid functional currency election under which the group's applicable functional currency is US$. The head company's choice, although made in April 2004, will take effect for the income year 2004-2005.

1.192 The head company will not, however, be permitted to make a choice if it is prevented from making such a choice. In other words, the election or choice provisions listed under paragraph 1.185 ought to be relevant to the head company at the joining time or at consolidation.

Time for making elections

1.193 Making a choice will be permitted even if, for example, the time period for making the underlying election has lapsed or a contradictory election had previously been made by one of the entities joining the group. For example, a head company may (if otherwise permitted) elect to adopt US$ as its functional currency even if a joining member had selected earlier in the year to use NZ$ as a functional currency. The making of such an election sets a new effective time for the election/choice - the choice starts to have effect from the joining or the consolidation time.

1.194 The head company is given 90 days from the joining time or the notification of consolidation within which to make the choice. However, the Commissioner has the discretion to extend this period. The 90 days time limit is not intended to limit the rights of the entities involved, but extend their ability to make the relevant election/choice. It is acknowledged that extra time is necessary for the head company after consolidation or joining time as the choice/election to be dealt with will often be a choice/election which it is not currently possible for the members of the consolidated group to make independently. Where the head company of the consolidated group is otherwise eligible to make a choice, this rule will not derogate from its right to do so. [Schedule 1, item 26, subsection 715-660(4)]

1.195 If the notification took effect prior to the commencement of these provisions then the head company is given 90 days from the date of effect of these provisions within which to make a choice. [Schedule 1, item 26, subsection 715-659(2)]

1.196 The choice the head company makes takes effect from the joining/consolidation time or if the choice relates to one or more whole income years - from the income year in which the consolidation/joining took effect. This ensures that for prospective elections (e.g. the functional currency choice) where the availability of the election is at an unconventional time (i.e. a time other than the beginning of the income year), the election is allowed independently of the election status of the joining entities (consistent with the treatment at consolidation). [Schedule 1, item 26, subsection 715-660(5)]

Choices a leaving entity can make ignoring the exit history rule

1.197 All irrevocable choices/elections made by, or taken to have been made by, the head company for the purposes of elections listed in paragraph 1.185 do not become the elections/choices of the leaving entity under the exit history rule contained in section 701-40. Any irrevocable election/choice made by the head company, or taken to have been made by the head company, is disregarded for leaving entity core purposes. This allows the leaving entity to make an irrevocable election/choice as to whether it wants the underlying election to apply to it once it becomes a separate entity for income tax purposes. [Schedule 1, item 26, subsections 715-700(1) to (3)]

1.198 The leaving entity will not, however, be permitted to make a choice if it is prevented from making such a choice by some other factors. In other words, the election or choice provisions as listed under paragraph 1.185 ought to apply to the leaving entity at that time to enable it to make a choice at the leaving time. [Schedule 1, item 26, subsection 715-700(4)]

1.199 An entity leaving a consolidated group is given 90 days after the leaving time within which to make an election. It is possible that at the leaving time an entity may not be aware that it could make a fresh election/choice and so fails to make an election within the allowed time limit. Therefore, provision has been made for the Commissioner to permit an election to be made beyond 90 days where the loss of an election at leaving was an unintended consequence. Where an entity has left a group prior to the commencement of these provisions the entity can make a choice within 90 days of the commencement of these provisions. Again, this time limit is not intended to in any way limit the rights of the entities involved, to make these choices/elections under the existing provisions. [Schedule 1, item 26, subsections 715-700(5) and 715-699(2)]

Choices a head company can make ignoring the entry history rule to overcome inconsistencies

Head company's choice overrides inconsistency

1.200 The second treatment is the limited resettable elections which permits the choice attributed to the head company of a consolidated group, or to an entity leaving a consolidated group, to change only in circumstances where there would otherwise be inconsistency. The rule to be applied is that when all entities in the group that are eligible to make an election have made a uniform election prior to the notification of consolidation, that election will continue to be in force for the consolidated entity. It is only when elections conflict that a new election/choice is available. [Schedule 1, item 26, subsection 715-665(2)]

1.201 This treatment is applicable to irrevocable elections/choices made in respect of:

•

section 148 of the ITAA 1936 - reinsurance with non-residents;

•

section 775-80 - forex realisation gains and losses; and

•

any other matter prescribed by regulations.

1.202 This is intended to be a list and it is expected that additional items will be added as more elections are recognised which appropriately use this treatment. It is envisaged that companies and groups going through a transition to consolidation will be able to refer to the list (along with those for other treatments) to determine what elections they may need to remake at consolidation or joining time.

1.203 Subsection 148(1) denies a deduction for reinsurance premiums paid by an Australian insurance company to a non-resident reinsurer. Consequently, reinsurance recoveries received from the non-resident reinsurer are not assessable income. However, an Australian insurance company can change this outcome by making an election under subsection 148(2). If an election is made, the Australian insurance company is entitled to a deduction for reinsurance premiums it pays to a non-resident reinsurer and is assessable on reinsurance recoveries received. In addition, the Australian insurance company is liable to tax on 10% of the gross premiums paid to the non-resident reinsurer.

1.204 A subsection 148(2) election made by an Australian insurance company is irrevocable. The election applies to relevant reinsurance contracts that are entered into after the election is made. This ensures that the approach taken in relation to relevant reinsurance arrangements in a particular year has an appropriate impact on the treatment of reinsurance recoveries in subsequent years.

1.205 Section 775-80 allows an entity to elect to not have sections 775-70 and 775-75 (dealing with tax consequences of certain short-term forex realisation gains and losses) apply. Once the election has been made it cannot be revoked.

What happens when entities form a consolidated group or an entity joins a consolidated group?

General rule

1.206 If the choices in force for the head company and the joining entities are inconsistent, the choices of the head company and all the entities joining the consolidated group are disregarded. Likewise, where one or more entities join an existing consolidated group, any choices made by the joining entities prior to the joining time that are inconsistent with the group are disregarded and the head company is allowed to make a new choice. However, a pre-existing choice made by the head company for the group will override the choices of any entities joining the group. In other words, where the head company of an existing consolidated group is eligible to make a choice and the election is relevant to the group (i.e. the head company is taken to have made a considered decision as to whether or not a choice is appropriate) - that choice will override the choices made by any joining entities. [Schedule 1, item 26, subsection 715-665(1)]

1.207 A choice is permitted only in circumstances where there is an inconsistency between the choices of the entities joining the group (including the future head company at consolidation) immediately prior to those companies notifying the Commissioner of their choice to consolidate. Therefore, if there is an inconsistency, all prior elections/choices are disregarded and a new choice permitted. As with the first resettable elections treatment, a choice is permitted when the only things that would prevent a choice being made, apart from these provisions, are the issues of timing and history - beyond this the head company must be eligible to make an election. [Schedule 1, item 26, subsection 715-665(3)]

Exception - foreign reinsurance

1.208 An exception to the above rule is where a subsection 148(2) election is made. These elections are irrevocable and continue to have application in regard to their respective reinsurance contracts with non-resident reinsurers. Basically, the rule is that all subsection 148(2) elections made prior to joining time/consolidation, are taken to have been made by the head company for head company core purposes even though the head company has chosen not to make a subsection 148(2) election at consolidation/joining time. This means that if the head company chooses not to make a subsection 148(2) election, then the head company's choice not to elect applies to only the new reinsurance contracts entered into after the joining time/consolidation with non-resident reinsurers.

[Schedule 1, item 26, subsections 715-665(4) and (7)]

Example 1.10

Head company (H Co) has two wholly-owned subsidiaries (Subsidiaries A and B) that are general insurance companies and the entities form a consolidated group. Prior to consolidation, only Subsidiary A had made a subsection 148(2) election - hence there is an inconsistency at consolidation.

If H Co chooses to make a subsection 148(2) election at consolidation, then the impact of making the election will apply to all reinsurance contracts with non-resident reinsurers entered into after consolidation by H Co.

If H Co chooses not to make a subsection 148(2) election, then the choice not to elect applies to all reinsurance contracts with non-resident reinsurers entered into after consolidation by H Co. However, the impact of the subsection 148(2) election will continue to apply to Subsidiary A's contracts that were entered into prior to consolidation.

1.209 If the head company is not eligible to make a choice under the underlying election either at the joining time or at the time consolidation is notified, it can make a choice within 90 days of notification or joining time, or such longer time as the Commissioner permits, effective from either the joining time or the time consolidation took effect. Where the consolidation or joining time took effect prior to the commencement of these provisions, the extended time for making a choice is 90 days from the commencement of these provisions. The time limit is necessary as the elections/choices to be dealt with will often be choices which it is not currently possible for the members of the consolidated group to make independently. The 90-day limit may be shorter than the period of time permitted to make the election when it was first available. Some flexibility is permitted by the Commissioner's discretion to allow further time to those entities who fail to make the choice in this time. Where the head company is otherwise eligible to make a choice, this rule will not derogate from its right to do so. [Schedule 1, item 26, subsections 715-665(5) and 715-659(2)]

1.210 The head company's choice (or no choice) made at the joining/consolidation time takes effect from the joining time or the income year in which the joining/consolidation took effect where the choice relates to one or more whole income years. [Schedule 1, item 26, subsection 715-665(6)]

What is meant by inconsistent choices?

1.211 Inconsistency will occur when consolidating entities have made conflicting choices, when some consolidating entities have made a choice and others have chosen not to in circumstances where they would be expected to have considered doing so. Inconsistency will also occur where the election status an entity would have on leaving a consolidated group would be different to the status it had just before joining the group.

1.212 An inconsistency will occur any time when these relevant companies which are eligible to make the election have not all made the same choice. This may occur because:

•

they have made different choices under an election where more than one option is possible;

•

they have made the same choice, but due to circumstances the choices have different effects; or

•

where one or more companies choose to make a choice under the election and one or more others have not done so despite the fact that the election was available and relevant to them. For instance, where a group contains two insurance companies, one of which has chosen to include offshore reinvestment amounts in its tax returns and the other has not.

1.213 Two or more choices will result in an 'inconsistency' if the entities making the choices have chosen different things, or at least one of them has made a choice, while others to which the election has been relevant at times when they were able to make a choice have not done so. The existence or otherwise of an inconsistency will generally be judged at the time the entities notify the Commissioner that they are consolidating. However, where there is evidence that the members of the group were making choices under the relevant election on a consolidated basis prior to the notification time, the existence of a conflict will be judged immediately prior to the time at which they began making decisions on a consolidated basis.

Choices a leaving entity can make ignoring the exit history rule to overcome inconsistencies

General rule

1.214 At leaving, the irrevocable election/choice status of the head company will be disregarded for the leaving entity core purposes and a new irrevocable election/choice made available, only if the irrevocable election/choice status of the head company at leaving is inconsistent with the status that the leaving entity had prior to joining the group. This means that, where the leaving entity has only ever been a member of the group (i.e. it did not have a choice in place prior to joining the group), it will adopt the election status of the head company. Also, if the head company had an election in place that was consistent with the election the leaving entity had in place prior to joining the group, that election/choice will be applied to the leaving entity. [Schedule 1, item 26, subsections 715-705(1) and (2)]

1.215 This treatment is considered necessary in so much as it accepts that, while a particular choice may be appropriate as a compromise for a consolidated entity that does not mean that it will continue to be appropriate for each entity that has been part of the group when that entity is operating separately.

Exception - foreign reinsurance

1.216 An exception to the above rule applies when a subsection 148(2) election is made by the head company. At leaving, any subsection 148(2) election/choice status of the head company will not be disregarded for the leaving entity core purposes. This is because these elections are irrevocable and, where made, continue to have effect in regard to their respective reinsurance contracts with non-resident reinsurers. For example, if at leaving the head company did not have any subsection 148(2) election in place, but the leaving entity had a subsection 148(2) election prior to the joining/consolidation time, then the reinsurance contracts in respect of which the leaving entity had made an election prior to joining/consolidating will continue to have effect as if the leaving entity had never joined a consolidated group. [Schedule 1, item 26, subsections 715-705(4) and (8)]

1.217 If the leaving entity is not, at the leaving time, eligible to make a choice under the underlying election, it may, within 90 days after the leaving time or such longer time as the Commissioner permits, make a fresh choice. However, where an entity leaves a group prior to the commencement of these provisions, the entity has 90 days from the commencement of these provisions to make a choice. The 90-day limit is seen to be adequate when an entity leaves a group. This time limit is not to derogate from the right of the leaving entity to make a choice at any time when it would be able to disregarding this 90-day period. [Schedule 1, item 26, subsections 715-705(6 ) and 715-699(2)]

1.218 The leaving entity will not, however, be permitted to make a choice if it is prevented from making such a choice by some other factors. In other words, the election or choice provisions as listed in paragraph 1.201 ought to be relevant to the leaving entity and the leaving entity eligible at the time to make such a choice. [Schedule 1, item 26, subsection 715-705(5)]

1.219 An election/choice made by the leaving entity takes effect from the time it left the group, or if the choice relates to one or more whole income years, it takes effect for the income year and later income years in which it left the group. [Schedule 1, item 26, subsection 715-705(7)]

Choices with ongoing effect

1.220 This treatment deals with irrevocable elections/choices that are made entity wide but essentially affect the entity's assets and liabilities and/or transactions. The head company is taken to have made the same choice as the entity that held the asset, right, liability or obligation immediately prior to consolidation. Therefore, despite consolidation, all assets of the head company which were held prior to consolidation will be treated as though the head company had made the same choice, (or as applicable not made a choice) as that made by the entity that held the asset/right/liability/obligation immediately prior to consolidation. [Schedule 1, item 26, subsection 715-670(1)]

1.221 This treatment is designed to prevent a choice/election ceasing to be in place with respect to a specific asset/liability/obligation, as this could potentially mean that that asset/obligation/liability ceases to be within the scope of the election that has previously governed its taxation. Elections of the type mentioned in paragraph 1.222 essentially 'see through' consolidation and continue to apply to assets, obligations or liabilities as they did prior to consolidation. That is, the election continues to apply with respect to assets, obligations or liabilities that, before consolidation, were held by entities that had made a choice, but not to assets/obligations/liabilities that were held by entities that had not made a choice. This treatment will govern transitional choices/elections, so there is no need to determine the status of assets, obligation or liabilities that come to be held or entered into subsequent to consolidation.

1.222 The irrevocable elections/choices to which this treatment is applicable are those that are made under:

•

section 775-150; and

•

any other matter prescribed by regulations.

1.223 As part of the transitional arrangements for the introduction of the foreign currency provisions in Division 775, section 775-150 allows an entity to elect to disregard certain forex realisation gains and losses in accordance with sections 775-160 and 775-165. The election must be made within 60 days after the applicable commencement date or within 30 days after the commencement of subsection 775-150(3). The election may not be revoked.

1.224 As stated earlier, this is intended to be a list and it is expected that additional items may be added as either more elections are added or recognised that should appropriately use this treatment. It is envisaged that companies and groups going through a transition to consolidation will be able to refer to this list (along with those for other treatments) to determine what elections/choices they may need to remake at consolidation.

1.225 If prior to the time consolidation is notified, any member of the consolidated group had made a choice under the irrevocable election, the head company may, within 90 days of that time or such longer time as the Commissioner allows, make an irrevocable choice to treat all assets, liabilities, rights or obligations it holds as being covered by the underlying election. Where the notification of consolidation was given prior to the commencement of these provisions, the head company is given 90 days from the commencement of these provisions within which to make a choice. Such a choice will continue to have effect if any further entities join the group - applying the election to the liabilities, assets, rights or obligations of those entities even if they have not previously chosen to do so. When an entity leaves a consolidated group, the choices/elections continue to apply to assets, liabilities, rights or obligations as they applied prior to leaving. If the election was made originally by the head company, the leaving entity will simply inherit the election status of the head company per the normal exit history rule. [Schedule 1, item 26, subsections 715-675(1) and 715-659(2)]

1.226 Where the head company of a consolidated group joins another consolidated group, this choice will itself be treated as a choice with ongoing effect. That is, the choice will continue to apply to those companies which, prior to the consolidated group joining another such group, were members of a consolidated group the head company of which had made a choice under this section. [Schedule 1, item 26, subsection 715-675(2)]

Application and transitional provisions

1.227 Part 1 of Schedule 1 to this bill provides that the amendments discussed in this chapter will take effect on 1 July 2002 (being the commencement date of the consolidation regime). Having the amendments apply from this date will provide maximum certainty and minimise the risk of arbitrary outcomes which may arise if a later commencement date is chosen. [Schedule 1, item 28]

1.228 All of the amendments are either beneficial to taxpayers or correct unintended outcomes. The amendments to address unintended outcomes are consistent with the original policy intent for the consolidation regime and therefore have the same commencement date as the consolidation regime.

Software development pools

Modifications where expenditure incurred before 1 July 2001

1.229 The amendments that this bill makes under sections 716-340 and 716-345 operate in relation to the former software development pool provisions in the same way that they operate for the provisions in Subdivision 40-E. Former section 46-90 that dealt with calculating deductions for pooled expenditure on software operated in a similar manner to the current section 40-455. The former provisions that created a software pool, determined what expenditure would go into a software pool, and calculated deductions for pooled expenditure on software which are within former Subdivision 46-D operate in the same way as under sections 716-340 and 716-345. [Schedule 1, item 12, section 716-340 of the Income Tax (Transitional Provisions) Act 1997]

Inter-entity loss multiplication rules

1.230 The amendments relating to the notice requirements under the inter-entity loss multiplication rules will apply to notices in relation to alteration times that happen after 10 November 1999. This will ensure that amendments apply to any notice required under those rules. [Schedule 1, item 19]