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

Schedule 7   Consolidation: application and transitional asset cost provisions

Income Tax (Transitional Provisions) Act 1997

2   After Division 700

Insert:

Division 701 - Modified application of provisions of Income Tax Assessment Act 1997 for certain consolidated groups formed in 2002-3 and 2003-4 financial years

Table of Subdivisions

701-A Preliminary

701-B Modified application of provisions

Subdivision 701-A - Preliminary

Table of sections

701-1 Transitional group and transitional entity

701-5 Chosen transitional entity

701-10 Interpretation

701-1 Transitional group and transitional entity

Group formed on 1 July 2002

(1) If a consolidated group came into existence on 1 July 2002:

(a) the group is a transitional group ; and

(b) each entity that became a subsidiary member of the group on the day it came into existence is a transitional entity .

Group formed after 1 July 2002 but before 1 July 2003

(2) If a consolidated group came into existence after 1 July 2002 but before 1 July 2003:

(a) the group is a transitional group if at least one entity that became a subsidiary member of the group on the day the group came into existence is a transitional entity ; and

(b) an entity is a transitional entity if:

(i) at no time after 1 July 2002 and before the group came into existence was the entity a wholly-owned subsidiary of the entity (the future head company ) that became the head company of the group; or

(ii) at some time during that period, the entity was a wholly-owned subsidiary of the future head company and it remained such from the earliest time after 1 July 2002 when it was a wholly-owned subsidiary of the future head company until the group came into existence.

Group formed during financial year starting on 1 July 2003

(3) If a consolidated group came into existence during the financial year starting on 1 July 2003:

(a) the group is a transitional group if at least one entity that became a subsidiary member of the group on the day the group came into existence is a transitional entity; and

(b) an entity is a transitional entity if:

(i) just before 1 July 2003, it was a wholly-owned subsidiary of the future head company; and

(ii) it remained such from the earliest time after 1 July 2002 when it was a wholly-owned subsidiary of the future head company until the group came into existence.

701-5 Chosen transitional entity

(1) If a group is a transitional group, its head company may choose that the group's transitional entity is a chosen transitional entity , or one or more of the group's transitional entities are chosen transitional entities .

Period for making choice

(2) The choice must be made by the end of the period described in subsection 703-50(3) for giving the Commissioner the choice under section 703-50 that the group is taken to be consolidated.

Choice is irrevocable

(3) The choice cannot be revoked.

701-10 Interpretation

A reference in this Division to:

(a) a provision of theIncome Tax Assessment Act 1997; or

(b) a consolidated group's allocable cost amount for an entity;

is a reference to that provision as it applies to the group, or to the allocable cost amount as it is worked out for the entity, in accordance with Subdivision 705-B of that Act and with this Division.

Subdivision 701-B - Modified application of provisions

Table of sections

701-15 Tax cost and trading stock value not set for assets of chosen transitional entities

701-20 Working out allocable cost amount on formation for subsidiary members other than chosen transitional entities

701-25 No operation of value shifting and loss transfer provisions to membership interests in chosen transitional entities

701-30 Undistributed, unfrankable pre-formation profits of non-chosen transitional entities - adjustment to allocable cost amount and tax cost setting amount reduction for over-depreciated assets

701-35 CGT event for pre-formation roll-over after 16 May 2002 to be disregarded if cost base etc. would be different

701-40 When entity leaves transitional group, head company may choose, for purposes of transitional group's allocable cost amount, to increase terminating values of over-depreciated assets

701-45 When entity leaves transitional group, head company may choose, for purposes of transitional group's allocable cost amount, to use formation time market values, instead of terminating values, for certain pre-CGT assets

701-15 Tax cost and trading stock value not set for assets of chosen transitional entities

Section 701-10 (cost to head company of assets that entity brings into group) and subsection 701-35(4) (setting value of trading stock at tax-neutral amount) do not apply to the assets of a chosen transitional entity.

Note: The fact that the head company inherits the entity's history under section 701-5 when the entity becomes a subsidiary member of the group means that the entity's assets would be treated as having the same cost as they would for the entity at that time.

701-20 Working out allocable cost amount on formation for subsidiary members other than chosen transitional entities

When section applies

(1) This section applies if any of the transitional entities in the transitional group is a chosen transitional entity.

Allocable cost amount to be worked out in special way

(2) If this section applies, the group's allocable cost amount for each of the entities, other than a chosen transitional entity, that become subsidiary members when the group comes into existence (each of which is a non-chosen subsidiary ) is worked out in a special way.

How to work out allocable cost amount

(3) The allocable cost amount for each non-chosen subsidiary is the sum of:

(a) the head company adjusted allocable amount for the non-chosen subsidiary (see subsection (4)); and

(b) for each sub-group (see subsection (6)) that exists in relation to the non-chosen subsidiary - the sub-group's notional allocable cost amount (see subsection(5)) for the non-chosen subsidiary.

Head company adjusted allocable amount

(4) The head company adjusted allocable amount for the non-chosen subsidiary is the amount that would be the transitional group's allocable cost amount for that entity if;

(a) the holding of all sub-group membership interests were disregarded; and

(b) only the following proportion of each of the step 2 to step 7 amounts in the table in section 705-60 was taken into account:

where:

market value of all membership interests in non-chosen subsidiary means the market value, at the time the group comes into existence, of all membership interests in the non-chosen subsidiary that are held by entities that become members of the group at that time.

market value of head company's direct and indirect membership interests in non-chosen subsidiary means the market value, at the time the group comes into existence, of all membership interests in the non-chosen subsidiary that the head company holds directly or indirectly through interposed entities that become subsidiary members of the group at that time and are not included in any sub-group in relation to the non-chosen subsidiary.

Sub-group's notional allocable cost amount

(5) For each sub-group that exists in relation to the non-chosen subsidiary, there is a sub-group's notional allocable cost amount . That amount is the amount that would be a consolidated group's allocable cost amount for the non-chosen subsidiary if:

(a) the consolidated group came into existence at the same time as the transitional group and consisted only of the non-chosen subsidiary and the entities comprising the sub-group; and

(b) the chosen transitional entity in the sub-group were the head company of the consolidated group; and

(c) the only membership interests that any entity in the sub-group held in any other member of the consolidated group were the sub-group membership interests (see subsection (6)) in relation to the sub-group; and

(d) only the following proportion of each of the step 2 to step 7 amounts in the table in section 705-60 was taken into account:

where:

market value of all membership interests in non-chosen subsidiary means the market value, at the time the group comes into existence, of all membership interests in the non-chosen subsidiary that are held by entities that become members of the group at that time.

market value of chosen transitional entity's direct and indirect membership interests in non-chosen subsidiary means the market value, at the time the group comes into existence, of all membership interests in the non-chosen subsidiary that the chosen transitional entity holds directly or indirectly through interposed entities that are included in the sub-group.

Sub-group and sub-group membership interests

(6) If a chosen transitional entity holds membership interests in a non-chosen subsidiary, either directly or indirectly through one or more other entities, each of which is a non-chosen subsidiary:

(a) the chosen transitional entity and each interposed non-chosen subsidiary comprise a sub-group in relation to the non-chosen subsidiary (unless the non-chosen subsidiary is included in a sub-group in relation to another non-chosen subsidiary); and

(b) the following membership interests are the sub-group membership interests in relation to the sub-group:

(i) the membership interests that the chosen transitional entity holds directly in the non-chosen subsidiary or in any of the interposed non-chosen subsidiaries;

(ii) the membership interests that each interposed non-chosen subsidiary holds directly in the non-chosen subsidiary or in any of the other interposed non-chosen subsidiaries.

701-25 No operation of value shifting and loss transfer provisions to membership interests in chosen transitional entities

If any provision of this Act would, because of events that happened before the time the transitional group came into existence, apply to a CGT event that happens after that time to change the cost base or reduced cost base ofthe members' membership interests in a chosen transitional entity, the provision does not so apply.

Note: For example, such a provision could otherwise apply where a loss transfer or value shift involving the entity has occurred.

701-30 Undistributed, unfrankable pre-formation profits of non-chosen transitional entities - adjustment to allocable cost amount and tax cost setting amount reduction for over-depreciated assets

Application of section to non-chosen transitional entities where transitional group formed before 1 July 2003

(1) This section applies if the transitional group comes into existence before 1 July 2003. It applies to each transitional entity in the transitional group, other than a chosen transitional entity. This is so even if there are no chosen transitional entities at all.

Increase in step 3 of allocable cost amount on group formation

(2) The amount to be added under section 705-90 (step 3 of allocable cost amount) of theIncome Tax Assessment Act 1997 in working out the transitional group's allocable cost amount for the transitional entity is increased by the additional undistributed profits (the step 3 unfrankable profits increase ) that would form part of the step 3 amount under that section if:

(a) subsections (3) and (4), and paragraph (6)(b), of that section were disregarded; and

(b) it were a requirement of that section that, if any additional undistributed profits resulting from paragraph (a) of this subsection were distributed as dividends just before the group came into existence, the head company and each other transitional entity interposed between the head company and the transitional entity would be entitled to a rebate of income tax under section 46 or 46A of theIncome Tax Assessment Act 1936 on the dividends.

Increase in tax deferral amount in relation to over-depreciated assets

(3) The tax deferral amount for the purposes of applying section 705-50 (reduction in tax cost setting amount for over-depreciated assets) of theIncome Tax Assessment Act 1997 in relation to an asset of the transitional entity that becomes that of the head company under subsection 701-1(1) (the single entity rule) of that Act when the transitional group comes into existence is increased by the amount worked out under subsection (4) of this section.

Amount of increase in tax deferral amount

(4) The increase is equal to the amount that would have been the step 3 unfrankable profits increase if the undistributed profits constituting that increase were also required to satisfy the following requirements:

(a) the profits were not subject to income tax because of deductions for the asset's decline in value;

(b) the decline in value represented the over-depreciation of the asset;

(c) the deductions for the decline in value do not form part of a tax loss covered by the step 5 amount mentioned in step 5 in the table in section 705-60 of theIncome Tax Assessment Act 1997 in working out the transitional group's allocable cost amount for the transitional entity.

701-35 CGT event for pre-formation roll-over after 16 May 2002 to be disregarded if cost base etc. would be different

If:

(a) after 16 May 2002 and before the transitional group came into existence, a CGT event happened in relation to an asset for which there was:

(i) a roll-over under Subdivision 126-B of theIncome Tax Assessment Act 1997; or

(ii) roll-over relief under section 40-340 of that Act in a case covered by item 4 of the table in subsection (1) of that section; and

(b) the cost base or reduced cost base of that asset or any other asset that:

(i) became an asset of the head company when the transitional group came into existence because subsection 701-1(1) (the single entity rule) of that Act applies; or

(ii) was otherwise an asset of the head company at that time;

differs at that time from what it would have been if the roll-over had not occurred or there had been no such roll-over relief;

then Part 3-90 of theIncome Tax Assessment 1997 applies as if the CGT event had not happened.

701-40 When entity leaves transitional group, head company may choose, for purposes of transitional group's allocable cost amount, to increase terminating values of over-depreciated assets

(1) This section applies if an entity ceases to be a subsidiary member of the transitional group and the requirements of subsections (2) to (5) are satisfied.

Asset held at leaving time

(2) Just before the entity ceases to be a subsidiary member, it must, disregarding subsection 701-1(1) (the single entity rule) of theIncome Tax Assessment Act 1997, hold an asset.

Reduction of asset's tax cost setting amount for over-depreciation

(3) When the transitional group came into existence:

(a) the asset must have become that of the head company of the transitional group because subsection 701-1(1) of that Act applied in relation to a transitional entity; and

(b) section 705-50 of that Act must have reduced by an amount (the reduction amount ) the tax cost setting amount for the asset.

Asset held continuously within group

(4) The asset must, disregarding subsection 701-1(1) of that Act, have been held at all times by the head company or a subsidiary member of the transitional group from when the transitional group came into existence until the entity ceases to be a subsidiary member of the transitional group.

Head company's advice to leaving entity

(5) Before the entity ceases to be a subsidiary member of the transitional group, the head company must have advised the entity of the amount that the head company proposes to choose under subsection (6) of this section in relation to the asset.

Note: This information would need to be known by the entity if it later becomes a subsidiary member of another consolidated group and still holds the asset. This is because subsection 705-50(5) of theIncome Tax Assessment Act 1997 requires a reduction in the tax cost setting amount for the asset on joining that other group and the amount chosen by the head company under this section is relevant to working out that reduction.

Head company's choice

(6) If this section applies, the head company may, in relation to the entity's ceasing to be a subsidiary member, choose that the terminating value for the asset, that is to be used in applying step 1 of the table in section 711-20 of theIncome Tax Assessment Act 1997, is increased by so much of the reduction amount as the head company chooses.

701-45 When entity leaves transitional group, head company may choose, for purposes of transitional group's allocable cost amount, to use formation time market values, instead of terminating values, for certain pre-CGT assets

(1) This section applies if:

(a) an entity ceases to be a subsidiary member of the transitional group; and

(b) just before the transitional group came into existence, the entity that became the head company held a pre-CGT asset; and

(c) that holding of the asset did not occur as a result of a CGT event:

(i) for which there was a roll-over under Subdivision 126-B of theIncome Tax Assessment Act 1997; and

(ii) that occurred after 11.45 am by legal time in the Australian Capital Territory on 21 September 1999; and

(d) just before the entity ceases to be a subsidiary member of the group, the asset is still a pre-CGT asset and is held by the head company only because the entity is taken by subsection 701-1(1) (the single entity rule) of theIncome Tax Assessment Act 1997to be a part of the head company.

(2) If this section applies, the head company may, in relation to the entity's ceasing to be a subsidiary member, choose that the terminating value for the asset, that is to be used in applying step 1 of the table in section 711-20 of theIncome Tax Assessment Act 1997, is equal to its market value just before the transitional group came into existence.

Division 702 - Modified application of this Act to assets that an entity brings into a consolidated group

Table of sections

702-1 Modified application of section 40-77 of this Act to assets that an entity brings into a consolidated group

702-5 Modified application of subsection 40-285(6) of this Act after entity brings assets into consolidated group

702-1 Modified application of section 40-77 of this Act to assets that an entity brings into a consolidated group

(1) This section applies if:

(a) an entity becomes a subsidiary member of a consolidated group; and

(b) just before it does so, section 40-77 of this Act applies to an asset that it holds.

(2) For so long as the asset continues to be:

(a) an asset of the head company because subsection 701-1(1) (the single entity rule) of theIncome Tax Assessment Act 1997 applies; or

(b) an asset of another entity, where it became such an asset as a result of that subsection ceasing to apply on the entity ceasing to be a subsidiary member of the group;

then, despite certain provisions of that Act applying, in accordance with subsection 701-55(2) of that Act, as if the asset were acquired for a payment equal to its tax cost setting amount:

(c) subsection 40-77(1) continues to apply to the asset; and

Note: This means that Division 40 of theIncome Tax Assessment Act 1997 continues not to apply to an asset that is a mining, quarrying or prospecting right.

(d) subsection 40-77(2) continues to apply to the asset, but applies as if the reference in that subsection to the cost of the asset were a reference to the cost worked out on the basis that the asset were acquired for a payment equal to its tax cost setting amount; and

(e) subsection 40-77(3) continues to apply to the asset, but applies as if the reference in that subsection to the amount included in assessable income under subsection 40-285(1) of that Act were a reference to the amount so worked out on the basis that the asset were acquired for a payment equal to its tax cost setting amount.

702-5 Modified application of subsection 40-285(6) of this Act after entity brings assets into consolidated group

If:

(a) an entity becomes a subsidiary member of a consolidated group; and

(b) because subsection 701-1(1) (the single entity rule) of theIncome Tax Assessment Act 1997 applies, an asset of the entity becomes an asset of the head company of the group; and

(c) a balancing adjustment event happens in relation to the asset while it is an asset of the head company;

subsection 40-285(6) of this Act (about reducing the amount included in assessable income for a balancing adjustment event) applies as if the cost of the asset were equal to the tax cost setting amount applicable in relation to the asset for the purposes of having its tax cost set by section 701-10 (cost to head company of assets that entity brings into group) of theIncome Tax Assessment Act 1997.

Note: The tax cost setting amount applicable in relation to the asset for that purpose is worked out in accordance with Division 705 of theIncome Tax Assessment Act 1997.