Taxation Determination

TD 2004/81

Income tax: consolidation: capital gains: does the deregistration of a subsidiary member of a consolidated group cause a 'new event' to happen under paragraph 170-275(1)(a) of the Income Tax Assessment Act 1997 if, before the subsidiary joined that group, a transfer of shares in it was a 'deferral event' under section 170-255 and the group's head company is the 'originating company' for the deferral event?

• Please note that the PDF version is the authorised version of this ruling.

FOI status:

may be released

Preamble

1. Yes.

2. Subdivision 170-D of the Income Tax Assessment Act 1997 (ITAA 1997) disregards a capital loss or deduction that arises if a company (the 'originating company') that is a member of a 'linked group' disposes of a CGT asset to another member of that group. A disposal in these circumstances is referred to as a 'deferral event'. The disregarded loss or deduction (the 'deferred loss') may be recognised subsequently as a loss of the originating company if either the asset, or the originating company, leaves that linked group. These events are referred to as 'new events': section 170-275 of the ITAA 1997.

3. In particular, a new event happens if the CGT asset that gave rise to the deferral event ceases to exist: paragraph 170-275(1)(a) of the ITAA 1997. In the case where the CGT asset is a share in a company, a new event would happen if the company were deregistered pursuant to the Corporations Act 2001. This is because a deregistered company ceases to exist as do the shares in that company (see Taxation Determination TD 2000/7).

4. When the subsidiary member of the consolidated group is deregistered, the interaction between the loss deferral provisions in Subdivision 170-D of the ITAA 1997 and the single entity rule in section 701-1 of the ITAA 1997 must be considered. Under the single entity rule, the subsidiary members of a consolidated group are treated as parts of the head company (and not separate entities) for the group's income tax purposes.

5. However, the single entity rule does not apply to defeat a clearly intended outcome under provisions outside the consolidation rules (such as Part 3-5 of the ITAA 1997). In such cases, intra-group interests, or legal entities that are part of a single entity for consolidation purposes, require a level of recognition in applying provisions that have regard to such interests and entities. Paragraphs 8(c) and 26 to 28 of Taxation Ruling TR 2004/11 explain the Commissioner's view that reading the Act as a whole achieves this outcome (and without the need to resort to section 701-85 of the ITAA 1997).

6. In our view, the single entity rule does not prevent the recognition of shares held in the subsidiary member for the purpose of identifying if a new event happens under paragraph 170-275(1)(a) of the ITAA 1997. In applying this provision, the shares in the subsidiary member are recognised as CGT assets which cease to exist on deregistration. The deferred loss can therefore be recognised, consistent with the policy underlying Subdivision 170-D of the ITAA 1997 which provides for loss deferral, not loss denial.

7. Because the head company is the originating company for the deferral event, it will be taken to have made the loss. The head company will be the originating company if it acquired this status from a subsidiary that joined the consolidated group (see Example 1 and Taxation Determination TD 2004/80) or was the actual originating company for the deferral event (see Example 2).

8. In both cases, the head company will be taken to have made the loss just before the subsidiary member is deregistered: subsection 170-275(1) of the ITAA 1997. The loss amount will be equal to the loss deferred under section 170-270 of the ITAA 1997, subject to the operation of Subdivision 715-D of the ITAA 1997 if the deferred loss is in a loss denial pool at the time the new event happens.

Note 1: We would take the same view if shares in the subsidiary member ceased to exist other than as a result of deregistration, for example if they were cancelled. However, as in the case of deregistration, the shares in the subsidiary member would only be recognised where, and to the extent, the shares were the subject of a deferral event under section 170-255 of the ITAA 1997. That is, it is only for the purposes of allowing the capital loss or deduction under section 170-275 of the ITAA 1997 that the shares in the subsidiary are recognised.

Note 2: This Determination applies if the head company is the originating company. If the head company is not the originating company because the originating company for the deferral event did not become a member of the consolidated group (but remained a member of the linked group) there is no issue. That is, the entity entitled to recognise the deferred loss is not a member of the consolidated group and so the single entity rule is not relevant. The single entity rule does not usually affect the application of the income tax laws to an entity outside the group (see Example 3).

Example 1

9. ParentCo and its wholly-owned subsidiaries SubCo, B Co and C Co were members of a linked group within the meaning of section 170-260 of the ITAA 1997. ParentCo owned all the shares in SubCo and B Co. Also, SubCo owned all the shares in C Co. All of these entities are Australian resident companies.

10. In November 1999, SubCo disposed of all its shares in C Co to B Co. Because the entities were members of the same linked group, the capital loss that would otherwise have arisen as a result of this disposal was disregarded under subsection 170-270(1) of the ITAA 1997. SubCo is the originating company in respect of this deferral event. This is what the linked group looked like just after the deferral event:

11. ParentCo chose to form a consolidated group with effect from 1 July 2002. The group comprises all of the above companies. SubCo's full history in respect of the deferral event, including its status as the originating company, is inherited by ParentCo by operation of the entry history rule (see Taxation Determination TD 2004/80).

12. In May 2004, C Co was deregistered. The shares in C Co are recognised as CGT assets for the purpose of applying subsection 170-275(1) of the ITAA 1997 (ParentCo would be the 'other entity' that acquired C Co's shares under paragraph 170-255(1)(a) by operation of the single entity and entry history rules). On deregistration, the shares in C Co ceased to exist and a new event happens under paragraph 170-275(1)(a) of the ITAA 1997. ParentCo, as the originating company, will therefore be taken to have made a capital loss just before C Co is deregistered, for an amount equal to the original deferred capital loss on each share.

Example 2

13. ParentCo and its wholly-owned subsidiaries SubCo and B Co were members of a linked group within the meaning of section 170-260 of the ITAA 1997. ParentCo owned all the shares in SubCo and B Co. All of these entities are Australian resident companies.

14. In November 1999, ParentCo disposed of all its shares in SubCo to B Co. Because the entities were members of the same linked group, the capital loss that would otherwise have arisen as a result of this disposal was disregarded under subsection 170-270(1) of the ITAA 1997. ParentCo is the originating company in respect of this deferral event. This is what the linked group looked like just after the deferral event:

15. ParentCo chose to form a consolidated group with effect from 1 July 2002. The group comprises all of the above companies.

16. In May 2004, SubCo was deregistered and, as a result, a new event happens under paragraph 170-275(1)(a) of the ITAA 1997. ParentCo, as the actual originating company for the deferral event, will therefore be taken to have made a capital loss just before SubCo is deregistered, for an amount equal to the original deferred capital loss on each share.

Example 3

17. ParentCo owned all the shares in B Co. It also owned 90% of the shares in SubCo which had a wholly owned subsidiary, C Co. All of these entities are Australian resident companies.

18. In November 2000, SubCo disposed of all its shares in C Co to B Co. Because the entities were members of the same linked group, the capital loss that would otherwise have arisen as a result of this disposal was disregarded under subsection 170-270(1) of the ITAA 1997. SubCo is the originating company in respect of this deferral event. This is what the linked group looked like just after the deferral event:

19. ParentCo chose to form a consolidated group with effect from 1 July 2002. The consolidated group comprises only ParentCo, B Co and C Co. The originating company, SubCo, does not become a member of the consolidated group but remains a member of the linked group.

20. In May 2004, C Co was deregistered and a new event happens under paragraph 170-275(1)(a) of the ITAA 1997. In this example, the entity entitled to recognise the deferred loss (SubCo) is not a member of the consolidated group. Therefore, neither the single entity rule nor this Determination applies. But SubCo will be taken to have made a capital loss just before C Co is deregistered, for an amount equal to the original deferred capital loss on each share.

Date of effect

21. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
15 December 2004

Previously issued in draft form as TD 2004/D69.

References

ATO references:
NO 2004/13879

Related Rulings/Determinations:

TD 2000/7
TD 2004/80
TR 92/20
TR 2004/11

Subject References:
capital gains tax
capital losses
consolidation
deferral event
deferred capital losses and deductions
disregarded capital loss
linked group
new event
originating company
relevant CGT asset
single entity rule

Legislative References:
TAA 1953 Pt IVAAA
ITAA 1997 Pt 3-5
ITAA 1997 Subdiv 170-D
ITAA 1997 170-255
ITAA 1997 170-255(1)(a)
ITAA 1997 170-260
ITAA 1997 170-270
ITAA 1997 170-270(1)
ITAA 1997 170-275
ITAA 1997 170-275(1)
ITAA 1997 170-275(1)(a)
ITAA 1997 701-1
ITAA 1997 701-85
ITAA 1997 Subdiv 715-D
Corporations Act 2001