New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (90 of 2002)

Schedule 2   Consolidation: miscellaneous changes to asset cost provisions

Income Tax Assessment Act 1997

28   Section 705-90

Repeal the section, substitute:

705-90 Undistributed, frankable profits accruing to joined group before joining time - step 3 in working out allocable cost amount

(1) For the purposes of step 3 in the table in section 705-60, the step 3 amount is worked out in accordance with this section.

Undistributed profits

(2) First work out the undistributed profits of the joining entity at the joining time. These are the amounts that, in accordance with*accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, are retained profits of the joining entity that could be recognised in the joining entity's statement of financial position if that statement were prepared as at the joining time.

Extent to which dividends paid out of undistributed profits would be frankable

(3) Then work out the extent to which the undistributed profits, if they had been distributed as dividends at the joining time, could have been franked in accordance with section 160AQF of theIncome Tax Assessment Act 1936on the assumptions in subsection (4) of this section.

Assumptions for purposes of subsection (3)

(4) The assumptions are that the joining entity's franking account balance at the end of the income year that ends, or, if section 701-30 applies, of the income year that is taken by subsection (3) of that section to end, at the joining time had been adjusted to take account of franking credits or franking debits that would arise if the following were paid just before the joining time:

(a) the income tax, or*refund of income tax, on the joining entity's taxable income for that income year; and

(b) any income tax, or refund of income tax, that has not yet been paid (regardless of whether it has become payable or due for payment) on the joining entity's taxable income for any earlier income year, other than one excluded by subsection (5).

Exclusion of certain income years where previous membership of a consolidated group

(5) If the joining entity was previously a*subsidiary member of a*consolidated group, any income year earlier than the one that started, or, if section 701-30 applies, the one that is taken by subsection (3) of that section to have started, when the joining entity ceased to be a subsidiary member of that group is excluded for the purposes of paragraph (4)(b) of this section.

Undistributed profits must have accrued to joined group and not recouped losses

(6) Next:

(a) work out the extent to which the undistributed profits that, if they had been distributed as dividends at the joining time, could have been so franked accrued to the joined group before the joining time (subsection (7) states what it means for a profit to accrue to the joined group before the joining time); and

(b) then exclude those that recouped losses of any*sort that accrued to the joined group before the joining time (subsection (8) states what it means for a loss to accrue to the joined group before the joining time).

The result is the step 3 amount.

Profit accruing to the joined group before the joining time

(7) A profit accrued to the joined group before the joining time if, on the following assumptions:

(a) that it was distributed to holders of*membership interests as it accrued; and

(b) that entities interposed between the*head company and the joining entity successively distributed any of it immediately after receiving it;

it would have been received by the entity that is the head company at the joining time, in respect of membership interests that it held continuously until that time either directly or indirectly through interposed entities.

Loss accruing to the joined group before the joining time

(8) A loss accrued to the joined group before the joining time if and to the extent that, assuming that as it arose it were instead a profit that was accruing, a distribution of that profit would have been a distribution made to the joined group out of profits that accrued to the joined group before the joining time.

Use of reliable estimates

(9) In working out:

(a) for the purposes of subsection (4), the amount of income tax, or*refund of income tax, on the joining entity's taxable income for a particular income year and the extent to which it has not yet been paid; or

(b) for the purposes of subsection (7), the amount of a profit that accrued to the joined group during a particular period; or

(c) for the purposes of subsection (8), the amount of a loss that accrued to the joined group during a particular period;

use the most reliable basis for estimation that is available.