NEW BUSINESS TAX SYSTEM (CONSOLIDATION) BILL (NO. 1) 2002

2002

The Parliament of the
Commonwealth of Australia

HOUSE OF REPRESENTATIVES

Presented and read a first time

New Business Tax System (Consolidation) Bill (No. 1) 2002

No. , 2002

(Treasury)

A Bill for an Act about income tax to implement a New Business Tax System, and for related purposes

A Bill for an Act about income tax to implement a New Business Tax System, and for related purposes

1 Short title

This Act may be cited as the New Business Tax System (Consolidation) Act (No. 1) 2002.

2 Commencement

3 Schedule(s)

Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

4 Amendment of income tax assessments

Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment made before the commencement of this section for the purposes of giving effect to this Act.

Schedule 1—Main consolidation provisions

Part 3-90—Consolidated groups

Division 700—Guide and objects

Guide

700-1 What this Part is about

This Part allows certain groups of entities to be treated as single entities for income tax purposes.

Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members.

(a) set the cost for income tax purposes of assets that subsidiary members bring into the group; and

(b) determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and

(c) deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group.

700-5 Overview of this Part

(1) The single entity rule determines how the income tax liability of a consolidated group will be ascertained. The basic principle is contained in the Core Rules in Division 701.

(2) Essentially, a consolidated group consists of an Australian resident head company and all of its Australian resident wholly-owned subsidiaries (which may be companies, trusts or partnerships). Special rules apply to foreign-owned groups with no single Australian resident head company.

(3) An eligible wholly-owned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner.

(4) This Part also contains rules which set the cost for income tax purposes of assets of entities when they become subsidiary members of a consolidated group and of membership interests in those entities when they cease to be subsidiary members of the group.

(5) Certain tax attributes (such as losses and franking credits) of entities that become subsidiary members of a consolidated group are transferred under this Part to the head company of the group. These tax attributes remain with the group after an entity ceases to be a subsidiary member.

Objects

700-10 Objects of this Part

(a) to prevent double taxation of the same economic gain realised by a consolidated group; and

(b) to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and

(ii) improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly-owned groups.

Division 701—Core rules

701-20 Cost to head company of assets consisting of certain liabilities owed by entity that leaves group

701-25 Tax-neutral consequence for head company of ceasing to hold assets when entity leaves group

701-35 Tax-neutral consequence for entity of ceasing to hold assets when it joins group

701-45 Cost of assets consisting of liabilities owed to entity by members of the group

701-50 Cost of certain membership interests of which entity becomes holder on leaving group

701-70 Adjustments to taxable income where identities of parties to arrangement merge on joining group

701-75 Adjustments to taxable income where identities of parties to arrangement re-emerge on leaving group

Common rule

701-1 Single entity rule

(1) If an entity is a ^*subsidiary member of a ^*consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the ^*head company of the group, rather than separate entities, during that period.

(2) The purposes covered by this subsection (the head company core purposes) are:

(a) working out the amount of the ^*head company’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b) working out the amount of the head company’s loss (if any) of a particular ^*sort for any such income year.

Note: The single entity rule would affect the head company’s income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.

(3) The purposes covered by this subsection (the entity core purposes) are:

(a) working out the amount of the entity’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b) working out the amount of the entity’s loss (if any) of a particular ^*sort for any such income year.

Note: An assessment of the entity’s liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.

(d) overall foreign loss in respect of interest income (within the meaning of section 160AFD of the Income Tax Assessment Act 1936);

(e) overall foreign loss in respect of modified passive income (within the meaning of that section);

(f) overall foreign loss in respect of offshore banking income (within the meaning of that section);

(g) overall foreign loss in respect of other assessable foreign income (within the meaning of that section).

Head company rules

701-5 Entry history rule

For the head company core purposes in relation to the period after the entity becomes a ^*subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the ^*head company.

Note: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-10 and tax loss history is affected by Division 707).

701-10 Cost to head company of assets that entity brings into group

(1) This section has effect for the head company core purposes when the entity becomes a ^*subsidiary member of the group.

(2) This section applies in relation to each asset that becomes an asset of the ^*head company because subsection 701-1(1) (the single entity rule) applies.

(3) The object of this section (and Division 705 which relates to it) is to recognise the cost to the ^*head company of such assets as an amount reflecting the group’s cost of acquiring the entity.

(4) Each asset’s ^*tax cost is set at the time the entity becomes a ^*subsidiary member of the group at the asset’s ^*tax cost setting amount.

(b) the asset’s ^*tax cost is set by this section at more than one time (each of which is a setting time) for the same income year;

then, except where subsection (6) applies, only the amount at which the tax cost is set at the last of the setting times is to be taken into account.

is required to be worked out for one or more occasions when an entity (whether or not the same entity) ceases to be a ^*subsidiary member of the group in the income year, then the amount at which the asset’s ^*tax cost is set by this subsection at a particular setting time is only taken into account in working out the head company’s terminating value for a particular occasion if:

(7) If an asset is an excluded asset under subsection 705-35(2), its ^*tax cost is not set.

701-15 Cost to head company of membership interests in entity that leaves group

(1) If the entity ceases to be a ^*subsidiary member of the group, this section has effect for the head company core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year. However, this section does not have effect if the entity ceases to be a subsidiary member where Subdivision 705-C (about the group joining another consolidated group) has effect.

Note: This section could have effect, for example, if an entity ceases to be a subsidiary member of the group because:

(b) the head company ceases to satisfy the requirements to be a head company (thereby bringing the group to an end).

(2) The object of this section is to preserve the alignment of the ^*head company’s costs for ^*membership interests in each entity and its assets by recognising, when an entity ceases to be a ^*subsidiary member of the group, the cost of those interests as an amount equal to the cost of the entity’s assets at that time reduced by the amount of its liabilities.

Note: The head company’s costs for membership interests in entities was aligned with the costs of their assets when the entities became subsidiary members of the group.

(3) For each ^*membership interest that the ^*head company of the group holds in an entity that ceases to be a ^*subsidiary member, the interest’s ^*tax cost is set just before the entity ceases to be a subsidiary member at the interest’s ^*tax cost setting amount.

Note: The membership interests would include those that are actually held by subsidiary members of the group, but which are treated as those of the head company under the single entity rule.

701-20 Cost to head company of assets consisting of certain liabilities owed by entity that leaves group

(2) This section applies in relation to each asset, consisting of a liability owed by the entity, that becomes an asset of the ^*head company because subsection 701-1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a ^*subsidiary member. This is a liability that, ignoring that subsection, is owed to a ^*member of the group.

(3) The object of this section is to set a cost for the asset to enable income tax consequences for the ^*head company in respect of the asset to be determined.

(4) The asset’s ^*tax cost is set at the time the entity ceases to be a ^*subsidiary member of the group at the asset’s ^*tax cost setting amount.

701-25 Tax-neutral consequence for head company of ceasing to hold assets when entity leaves group

(b) the asset becomes an asset of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a ^*subsidiary member of the group; and

(3) The object of this section is to ensure that there is no income tax consequence for the ^*head company in respect of the asset.

Note: In the case of assets other than trading stock, the fact that the head company ceases to hold them when the single entity rules ceases to apply to them would not constitute a disposal or other event having tax consequences for the head company.

(4) The asset is taken to be ^*trading stock of the ^*head company at the end of the income year (but not at the start of the next income year), and its ^*value at that time is taken to be equal to:

(a) if the asset was trading stock of the head company at the start of the income year (including as a result of its ^*tax cost being set)—the asset’s value at that time; or

(b) if paragraph (a) does not apply and the asset is ^*livestock that was acquired by natural increase—the ^*cost of the asset; or

(c) in any other case—the amount of the outgoing incurred by the head company in connection with the acquisition of the asset;

increased by the amount of any outgoing forming part of the cost of the asset that was incurred by the head company during its current holding of the asset.

Entity rules

701-30 Where entity not subsidiary member for whole of income year

(1) The object of this section is to provide for a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them.

(a) the entity is a ^*subsidiary member of the group for some but not all of an income year; and

(b) there are one or more periods in the income year (each of which is a non-membership period) during which the entity is not a subsidiary member of any ^*consolidated group.

(3) For every non-membership period, work out the entity’s taxable income (if any) for the period, the income tax (if any) payable on that taxable income and the entity’s loss (if any) (a non-membership period loss) of each ^*sort for the period. Work them out:

(a) as if the start and end of the period were the start and end of the income year; and

(b) ignoring the operation of this section in relation to each other non-membership period (if any).

Note: Other provisions of this Part are to be applied in working out the taxable income or loss, for example, section 701-40 (Exit history rule).

(4) The entity’s income tax (if any) for the ^*financial year concerned is the total of every amount of income tax worked out for the entity under subsection (3).

(5) The entity’s taxable income for the income year is the total of every amount of taxable income worked out for the entity under subsection (3).

(6) The entity’s income tax worked out under subsection (4) is taken to be payable on the entity’s taxable income for the income year worked out under subsection (5), even if the amount of the tax differs from the amount that would be worked out by reference to that taxable income apart from subsection (5).

(7) The entity has a loss of a particular ^*sort for the income year if and only if it has a non-membership period loss of that sort for the non-membership period (if any) ending at the end of the income year. The amount of the loss for the income year is the amount of the non-membership period loss.

701-35 Tax-neutral consequence for entity of ceasing to hold assets when it joins group

(1) When the entity becomes a ^*subsidiary member of the group, this section has effect for the entity core purposes.

(2) This section applies in relation to an asset if the asset is ^*trading stock of the entity just before it becomes a ^*subsidiary member of the group.

(3) The object of this section is to ensure that there is no income tax consequence for the entity in respect of the asset.

Note: In the case of assets other than trading stock, the fact that the entity ceases to hold them when the single entity rule begins to apply to them would not constitute a disposal or other event having tax consequences for the entity.

(4) The ^*value of the ^*trading stock at the end of the income year that ends when the entity becomes a ^*subsidiary member is taken to be equal to:

(a) if the asset was trading stock of the entity at the start of the income year—the asset’s value at that time; or

(b) if paragraph (a) does not apply and the asset is ^*livestock that was acquired by natural increase—the ^*cost of the asset; or

increased by the amount of any outgoing forming part of the cost of the asset that was incurred by the entity during its current holding of the asset.

701-40 Exit history rule

(1) If the entity ceases to be a ^*subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to any thing covered by subsection (2) (an eligible asset etc.) after it becomes that of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity.

(b) any liability or other thing that, in accordance with ^*accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability;

that becomes that of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a ^*subsidiary member of the group.

(3) Everything that happened in relation to any eligible asset etc. while it was that of the ^*head company, including because of any application of section 701-5 (the entry history rule), is taken to have happened in relation to it as if it had been an eligible asset etc. of the entity.

Note 1: If the eligible asset etc. was brought into the group when an entity became a subsidiary member, section 701-5 (the entry history rule) would have had the effect that things happening to the eligible asset etc. while it was that of the entity would be taken to have happened as if it was that of the head company. Such things will in turn be taken by this subsection to have happened in relation to the eligible asset etc. as if it were that of the entity that takes the asset out of the group.

Note 2: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-45).

701-45 Cost of assets consisting of liabilities owed to entity by members of the group

(1) If the entity ceases to be a ^*subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to the income year in which the entity ceases to be a subsidiary member or any later income year.

(a) it becomes an asset of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a ^*subsidiary member of the group; and

(b) the asset consists of a liability owed to the entity by a ^*member of the group.

(3) The object of this section is to set the cost of the asset to enable income tax consequences for the ^*head company in respect of the asset to be determined.

Note: In the case of other assets, the fact that the entity inherits their history under section 701-40 when the entity ceases to be a subsidiary member of the group means that the assets would be treated as having the same cost as they would for the head company at that time. However, assets consisting of liabilities do not have such a history because they are only recognised when the entity ceases to be a subsidiary member and the single entity rule ceases to apply.

(4) The asset’s ^*tax cost is set at the time the entity ceases to be a ^*subsidiary member of the group at the asset’s ^*tax cost setting amount.

Note: If section 701-30 (Where entity not subsidiary member for whole of income year) applies, the time the entity ceases to be a subsidiary member will be treated as the start of an income year.

701-50 Cost of certain membership interests of which entity becomes holder on leaving group

(a) the entity and one or more other entities cease to be ^*subsidiary members of the group at the same time because of an event happening in relation to one of them; and

(b) when the entity ceases to be a subsidiary member, it holds an asset consisting of a ^*membership interest in any of the other entities;

(2) The cost of any ^*membership interest that one of the entities holds in another is to be treated in the same way as membership interests held by the ^*head company. In both cases the object is to preserve the alignment of costs for membership interests and assets (that was established when each entity became a ^*subsidiary member) by recognising the cost of those interests, when it ceases to be a subsidiary member, as an amount equal to the cost of the entity’s assets at that time reduced by the amount of its liabilities.

(3) The asset’s ^*tax cost is set just before the entity ceases to be a ^*subsidiary member of the group at the asset’s ^*tax cost setting amount.

Supporting provisions

701-55 Setting the tax cost of an asset

(1) This section states the meaning of the expression an asset’s tax cost is set at a particular time at the asset’s ^*tax cost setting amount.

(2) If any of Subdivisions 40-A to 40-D, sections 40-425 to 40-445 and Subdivision 328-D is to apply in relation to the asset, the expression means that the provisions apply as if:

(a) the asset were ^*acquired at the particular time for a payment equal to its ^*tax cost setting amount; and

(b) at that time the same method of working out the decline in value were chosen for the asset as applied to it just before that time; and

(c) where just before that time the prime cost method applied for working out the asset’s decline in value and the asset’s tax cost setting amount does not exceed the joining entity’s ^*terminating value for the asset—at that time an ^*effective life were chosen for the asset equal to the remainder of the effective life of the asset just before that time; and

(d) where just before that time the prime cost method applied for working out the asset’s decline in value and the asset’s ^*tax cost setting amount exceeds the joining entity’s terminating value for the asset—the ^*head company were required to choose at that time an effective life for the asset in accordance with section 40-95 (other than subsections (2) and (5)) and any choice of an effective life determined by the Commissioner were limited to one in force at that time; and

(e) where neither paragraph (c) nor (d) applies—at that time an effective life were chosen for the asset equal to the asset’s effective life just before that time.

(3) If Division 70 is to apply in relation to the asset, the expression means that the Division applies as if the asset were ^*trading stock at the start of the income year in which the particular time occurs and its ^*value at that time were equal to its ^*tax cost setting amount.

(4) If Division 16E of Part III of the Income Tax Assessment Act 1936 is to apply in relation to the asset, the expression means that the Division applies as if the asset were acquired at the particular time for a payment equal to the asset’s ^*tax cost setting amount.

(5) If Part 3.1 or 3.3 is to apply in relation to the asset, the expression means that the Part applies as if the asset’s ^*cost base or ^*reduced cost base were increased or reduced so that the cost base or reduced cost base at the particular time equals the asset’s ^*tax cost setting amount.

(6) If any provision of this Act that is not mentioned above, the expression means that the provision applies as if the asset’s cost at that time were equal to its ^*tax cost setting amount.

701-60 Tax cost setting amount

Tax cost setting amount
Item	If the asset’s tax cost is set by:	The asset’s tax cost setting amount is:
1	section 701-10 (Cost to head company of assets that entity brings into group)	the amount worked out in accordance with Division 705
2	section 701-15 (Cost to head company of membership interests in entity that leaves group)	the amount worked out in accordance with section 711-15 or 711-55
3	section 701-20 (Cost to head company of assets consisting of certain liabilities owed by entity that leaves group) or section 701-45 (Cost of assets consisting of liabilities owed to entity by members of the group)	the ^*market value of the asset
4	section 701-50 (Cost of certain membership interests of which entity becomes holder on leaving group)	the amount worked out in accordance with section 711-55

701-65 Net income and losses for trusts and partnerships

Net income of partnerships and trusts

(1) If:

(a) another provision of this Division applies for the purpose of:

(i) working out the amount of the entity’s liability (if any) for income tax calculated by reference to an income year; or

(ii) working out the amount of the entity’s taxable income for an income year; and

(b) the entity is a trust or partnership;

the provision instead applies in a corresponding way for the purpose of working out the amount of the entity’s net income, as defined in the Income Tax Assessment Act 1936, (if any) for the income year.

Note: Subsection 701-30(3) requires non-membership periods mentioned in that subsection to be treated as the start and end of an income year. This section would therefore also apply to those periods.

Partnership losses

(2) If:

(a) another provision of this Division applies for the purpose of working out the amount of the entity’s loss (if any) of a particular ^*sort for an income year; and

(b) the entity is a partnership;

the provision instead applies in a corresponding way for the purpose of working out the amount of an entity’s partnership loss, as defined in section 90 of the Income Tax Assessment Act 1936, (if any) for the income year.

Note: The provision applies normally to a trust, as it can have a loss of any sort worked out in the same way as a loss of the same sort for an entity of another kind.

Exceptions

701-70 Adjustments to taxable income where identities of parties to arrangement merge on joining group

Section applies to certain arrangements

(1) This section applies for the head company core purposes and the entity core purposes if, just before the time (the joining time) when the entity becomes a ^*subsidiary member of the group, an ^*arrangement is in force under which:

(a) expenditure is to be, or has been, incurred in return for the doing of some thing; and

(b) the persons incurring the expenditure and deriving the corresponding amount (each of which is a combining entity) are the entity and either:

(i) another entity that became a subsidiary member at the same time; or

(ii) the ^*head company.

Note 1: If expenditure incurred under an arrangement consists of a payment of loan interest or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the loan principal, or other amount of a similar kind, under the arrangement.

Note 2: If expenditure incurred under an arrangement consists of a payment of rent, a lease payment or a payment of a similar kind, the expenditure would be incurred in return for the making available or continued making available of the thing rented or leased, or other thing of a similar kind, under the arrangement.

Note 3: If expenditure incurred under an arrangement consists of a payment of an insurance premium or a payment of a similar kind, the expenditure would be incurred in return for the provision or continued provision of insurance against the risk concerned, or of a thing of a similar kind, under the arrangement.

Object

(2) The object of this section is to align the income tax position of the combining entities at the joining time, because after that time they lose their separate tax identities under the single entity rule in subsection 701-1(1) and this would preserve any imbalance.

Adjustment for disproportionate deductibility

(3) If the total of a combining entity’s deductions that are allowable for:

(a) the following income year (the joining income year):

(i) if the combining entity is the ^*head company—the income year in which the joining time occurs;

(ii) in any other case—the income year that ends at the joining time; and

(b) all earlier income years;

is not equal to the amount worked out under subsection (4), then:

(d) if it is more—the entity’s assessable income for the joining income year includes the difference.

Pre-joining time proportion of total arrangement deductions

(4) The amount is worked out using the formula:

where:

pre-joining time services proportion means the proportion of all things to be done under the arrangement in return for the incurring of the expenditure represented by those things that were done before the joining time.

total arrangement deductions means the total of the deductions that, ignoring this Part (other than subsection (7) of this section), would be allowable for expenditure incurred by the combining entity under the arrangement for all income years.

Adjustment for disproportionate assessability

(5) If the total of the amounts included in a combining entity’s assessable income in respect of amounts derived under the arrangement for the joining income year and all earlier income years is not equal to the amount worked out under subsection (6):

(a) if the total is less—the entity’s assessable income for the joining income year includes the difference; and

(b) if it is more—the entity is entitled to deduct the difference for the joining income year.

Pre-joining time proportion of total arrangement assessable income

(6) The amount is worked out using the formula:

where:

pre-joining time services proportion has the same meaning as in subsection (4).

total arrangement assessable income means the total of the amounts that, ignoring this Part (other than subsection (7) of this section), would be included in the combining entity’s assessable income for amounts derived by it under the arrangement for all income years.

Modified application of section if combining entities previously members of same group

(7) If the combining entities were ^*members of the same ^*consolidated group (whether or not the group to which this section applies) on one or more previous occasions, this section applies in relation to the entities as if:

(a) the only things to be done under the arrangement in return for the incurring of the expenditure were those things to be done after the entities ceased to be members of the same group on the previous occasion or the last of the previous occasions; and

(b) the only deductions allowable to an entity for expenditure incurred by it under the arrangement, and the only amounts included in an entity’s assessable income in respect of amounts derived under the arrangement, were:

(i) if the entity was the ^*head company of the consolidated group of which the combining entities were members on the previous occasion or last of the previous occasions—those for the income year, in which the previous occasion or the last of the previous occasions occurred, that are attributable to the period after that occasion and those for all later income years; and

(ii) in any other case—those for the income year that started when the entity ceased to be a ^*subsidiary member of the group on the previous occasion or the last of the previous occasions and those for all later income years.

701-75 Adjustments to taxable income where identities of parties to arrangement re-emerge on leaving group

Section applies to certain arrangements

(1) This section applies for the head company core purposes and the entity core purposes if the entity ceases to be a ^*subsidiary member of the group and, just before the time (the leaving time) when it does so, an ^*arrangement is in force under which:

(a) expenditure is to be, or has been, incurred in return for the doing of some thing; and

(b) the persons incurring the expenditure and deriving the corresponding amount (each of which is a separating entity) are the entity and either:

(i) another entity that ceases to be a subsidiary member at the same time; or

(ii) the ^*head company.

Note: The notes to subsection 701-70(1) on the application of that subsection to expenditure under certain kinds of arrangements are equally applicable for the purposes of this subsection.

Object

(2) The object of this section is to align the income tax position of the separating entities at the leaving time, because from that time they have separate tax identities as a result of the single entity rule in subsection 701-1(1) ceasing to apply, and this may create an imbalance.

Adjustment for disproportionate deductibility

(3) If the total of the deductions that are or will be allowable for expenditure incurred by the separating entity under the arrangement for:

(a) the following income year (the leaving income year):

(i) if the separating entity is the ^*head company—the income year in which the leaving time occurs;

(ii) in any other case—the income year that starts at the leaving time; and

(b) all later income years;

is not equal to the amount worked out under subsection (4), the deductions are adjusted so that they do equal the amount.

Post-leaving time proportion of total arrangement deductions

(4) The amount is worked out using the formula:

where:

post-leaving time services proportion means the proportion of all things to be done under the arrangement in return for the incurring of the expenditure represented by those things that are to be done after the leaving time.

total arrangement deductions means the total of the deductions that, ignoring this Part, would be allowable for expenditure incurred by the separating entity under the arrangement for all income years.

Adjustment for disproportionate assessability

(5) If the total of the amounts that are or will be included in its assessable income in respect of amounts derived under the arrangement for the leaving income year and all later income years is not equal to the amount worked out under subsection (6), the amounts that are or will be included in its assessable income are adjusted so that they do equal the amount worked out under subsection (6).

Post-leaving time proportion of total arrangement assessable income

(6) The amount is worked out using the formula:

where:

post-leaving time services proportion has the same meaning as in subsection (4).

total arrangement assessable income means the total of the amounts that, ignoring this Part, would be included in the separating entity’s assessable income for amounts derived by it under the arrangement for all income years.

701-80 Accelerated depreciation

(1) This section has effect for the head company core purposes when the entity becomes a ^*subsidiary member of the group.

Object

(2) The object of this section is to preserve any entitlement to accelerated depreciation for assets that become those of the ^*head company because subsection 701-1(1) (the single entity rule) applies when the entity becomes a ^*subsidiary member of the group. This is only to apply where the asset’s ^*tax cost setting amount is not more than the entity’s ^*terminating value for the asset.

Section applies to certain depreciating assets

(3) This section applies if:

(a) the entity ^*acquired a ^*depreciating asset at or before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and held the asset continuously until the entity became a ^*subsidiary member of the group; and

(b) the ^*tax cost setting amount that applies in relation to the asset for the purposes of section 701-10 when it becomes an asset of the ^*head company because subsection 701-1(1) (the single entity rule) applies is not more than the entity’s ^*terminating value for the asset.

Preservation of accelerated depreciation

(4) While the asset is held by the ^*head company under subsection 701-1(1) (the single entity rule), the decline in its value under Division 40 is worked out by replacing the component in the formula in subsection 40-70(1) or 40-75(1) that includes the asset’s ^*effective life with the rate that would apply under subsection 42-160(1) or 42-165(1) of this Act if it had not been amended by the New Business Tax System (Capital Allowances) Act 2001.

701-85 Other exceptions etc. to the rules

The operation of each provision of this Division is subject to any provision of this Act that so requires, either expressly or impliedly.

Note: An example of such a provision is Division 707 (about the transfer of certain losses to the head company of a consolidated group). That Division modifies the effect that the inheritance of history rule in section 701-5 would otherwise have.

[The next Division is Division 703.]

Division 703—Consolidated groups and their members

Guide to Division 703

703-1 What this Division is about

A consolidated group and a consolidatable group each consists of a head company and all the companies, trusts and partnerships that:

(a) are resident in Australia; and

(b) are wholly-owned subsidiaries of the head company (either directly or through other companies, trusts and partnerships).

A consolidatable group becomes consolidated at a time chosen by the company that was the head company at the time.

Table of sections

Basic concepts

703-5 What is a consolidated group?

703-10 What is a consolidatable group?

703-15 Members of a consolidated group or consolidatable group

703-20 Certain entities that cannot be members of a consolidated group or consolidatable group

703-25 Australian residence requirements for trusts

703-30 When is one entity a wholly-owned subsidiary of another?

703-35 Treating entities as wholly-owned subsidiaries by disregarding employee shares

703-40 Treating entities held through non-fixed trusts as wholly-owned subsidiaries

703-45 Entities interposed between the head company and a subsidiary member of a consolidated group

Choice to consolidate a consolidatable group

703-50 Choice to consolidate a consolidatable group

Consolidated group created when MEC group ceases to exist

703-55 Creating consolidated groups from certain MEC groups

Notice of events affecting consolidated group

703-60 Notice of events affecting consolidated group

[This is the end of the Guide.]

Basic concepts

703-5 **What is a consolidated group?**

(1) A consolidated group comes into existence:

(a) on the day specified in a choice by a company under section 703-50 as the day on and after which a ^*consolidatable group is taken to be consolidated; or

(b) as described in section 703-55 (about creating a consolidated group from a ^*MEC group).

Note: The day specified in a choice under section 703-50 as the day on and after which a consolidatable group is taken to be consolidated may be a day before the choice is made.

(2) The consolidated group continues to exist until the ^*head company of the group:

(a) ceases to be a head company; or

(b) becomes a member of a ^*MEC group.

The consolidated group ceases to exist when one of those events happens to the head company.

(3) At any time while it is in existence, the consolidated group consists of the ^*head company and all of the ^*subsidiary members (if any) of the group at the time.

Note: A consolidated group continues to exist despite one or more entities ceasing to be subsidiary members of the group or becoming subsidiaries of the group, as long as the events described in subsection (2) do not happen to the head company. Thus a consolidated group may come to consist of a head company alone at various times.

703-10 **What is a consolidatable group?**

(1) A consolidatable group consists of:

(a) a single ^*head company; and

(b) all the ^*subsidiary members of the group.

(2) To avoid doubt, a consolidatable group cannot consist of a ^*head company alone.

703-15 Members of a consolidated group or consolidatable group

(1) An entity is a member of a ^*consolidated group or ^*consolidatable group while the entity is:

(a) the ^*head company of the group; or

(b) a ^*subsidiary member of the group.

(2) At a particular time in an income year, an entity is:

(a) a head company if all the requirements in item 1 of the table are met in relation to the entity; or

(b) a subsidiary member of a ^*consolidated group or ^*consolidatable group if all the requirements in item 2 of the table are met in relation to the entity:

Head companies and subsidiary members of groups
Column 1 Entity’s role in relation to group	Column 2 Income tax treatment requirements	Column 3 Australian residence requirements	Column 4 Ownership requirements
1 Head company	The entity must be a company (but not one covered by section 703-20) that has all or some of its taxable income (if any) taxed at a rate that is or equals the ^*general company tax rate	The entity must be an Australian resident (but not a ^*prescribed dual resident)	The entity must not be a ^wholly-owned subsidiary of another entity that meets the requirements in columns 2 and 3 of this item or, if it is, it must not* be a subsidiary member of a ^consolidatable group or ^consolidated group
2 Subsidiary member	The requirements are that: (a) the entity must be a company, trust or partnership (but not one covered by section 703-20); and (b) if the entity is a company—all or some of its taxable income (if any) must be taxable apart from this Part at a rate that is or equals the ^general company tax rate; and (c) the entity must not* be a non-profit company (as defined in the Income Tax Rates Act 1986)	The entity must: (a) be an Australian resident (but not a ^*prescribed dual resident), if it is a company; or (b) comply with section 703-25, if it is a trust; or (c) be a partnership	The entity must be a ^*wholly-owned subsidiary of the head company of the group and, if there are interposed between them any entities, the requirement in subsection 703-45(1) must be met

703-20 **Certain entities that cannot be members of a consolidated group or consolidatable group**

(1) The object of this section is to specify certain entities that cannot be ^*members of a ^*consolidated group because of the way their income is treated for income tax purposes.

(2) An entity of a kind specified in an item of the table cannot be a ^*member of a ^*consolidated group or a ^*consolidatable group at a time in an income year if the conditions specified in the item exist:

Certain entities that cannot be members of a consolidated or consolidatable group
Item	An entity of this kind:	Cannot be a member of a consolidated group or consolidatable group if:
1	An entity of any kind	At the time, the total ^ordinary income and ^statutory income of the entity is exempt from income tax under Division 50
2	A company	The company is a recognised medium credit union (as defined in section 6H of the Income Tax Assessment Act 1936) for the income year
3	A company	The company: (a) is an approved credit union for the income year for the purposes of section 23G of the Income Tax Assessment Act 1936; and (b) is not a recognised medium credit union (as defined in section 6H of that Act) or a recognised large credit union (as defined in that section) for the income year
4	A company	Assuming the company applied at the time an amount of its assessable income as described in paragraph 120(1)(c) of the Income Tax Assessment Act 1936, the company could deduct that amount because of that paragraph
5	A company	The company is a ^*PDF at the end of the income year
6	A company	The company is a ^*film licensed investment company at the time
7	A trust	The trust is: (a) a ^complying superannuation entity for the income year; or (b) a non-complying ADF or non-complying superannuation fund (as those terms are defined in section 267 of the Income Tax Assessment Act 1936*) for the income year

703-25 Australian residence requirements for trusts

A trust described in an item of the table must meet the requirements specified in the item to be able to be a ^*subsidiary member of a ^*consolidated group or a ^*consolidatable group at a time in an income year:

Australian residence requirements for trusts
Item	A trust of this kind:	Can be a member of a consolidated group or consolidatable group only if these requirements are met:
1	A trust (except a unit trust)	The trust must be a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936
2	A unit trust (except a ^corporate unit trust or a ^public trading trust for the income year)	The trust must be: (a) a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936; and (b) a ^*resident trust for CGT purposes for the income year
3	A ^corporate unit trust or a ^public trading trust for the income year	The trust must be a resident unit trust (as defined in whichever one of sections 102H and 102Q of the Income Tax Assessment Act 1936 is relevant) for the income year

703-30 **When is one entity a wholly-owned subsidiary of another?**

(1) One entity (the subsidiary entity) is a wholly-owned subsidiary of another entity (the holding entity) if all the ^*membership interests in the subsidiary entity are beneficially owned by:

(a) the holding entity; or

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

(2) An entity (other than the subsidiary entity) is a wholly-owned subsidiary of the holding entity if, and only if:

(a) it is a wholly-owned subsidiary of the holding entity; or

(b) it is a wholly-owned subsidiary of a wholly-owned subsidiary of the holding entity;

because of any other application or applications of this section.

Note: This Part also operates in some cases as if an entity were a wholly-owned subsidiary of another entity, even though the entity is not covered by the definition in this section because of:

(a) ownership of shares under certain arrangements for employee shareholding (see section 703-35); or

(b) interposed trusts that are not fixed trusts (see section 703-40).

703-35 Treating entities as wholly-owned subsidiaries by disregarding employee shares

(1) The object of this section is to ensure that an entity is not prevented from being a ^*subsidiary member of a ^*consolidated group or ^*consolidatable group just because there are minor holdings of ^*shares in a company issued under ^*arrangements for employee shareholdings. (It does not matter whether the company is the entity or is interposed between the entity and a ^*member of the group.)

Note: A company that is prevented from being a subsidiary member of a consolidated group may be a head company (so there could be 2 consolidated or consolidatable groups, instead of the one that this section ensures exists).

(2) This Part (except Division 719) operates as if a company that meets the requirement of subsection (3) at a particular time were a ^*wholly-owned subsidiary of an entity (the holding entity) at the time.

(3) The company must be one that would be a ^*wholly-owned subsidiary of the holding entity at the time if the ^*shares in the company that are to be disregarded under subsection (4) did not exist.

(4) Disregard each of the ^*shares described in subsection (5) if the total number of those shares is not more than 1% of the number of ordinary shares in the company.

(5) A ^*share in the company that is beneficially owned by an entity may be disregarded under subsection (4) if:

(a) the entity acquired (as defined in section 139G of the Income Tax Assessment Act 1936) the share either:

(i) in the circumstances described in subsection 139C(1) or (2) of that Act; or

(ii) by exercising a right the entity acquired (as so defined) in those circumstances; and

(b) all the shares in the company available for acquisition in those circumstances are ordinary shares and all the rights available for acquisition in those circumstances are rights to acquire ordinary shares; and

(c) if the entity acquired the share in those circumstances—at the time of the acquisition, at least 75% of the permanent employees (as defined in section 139GB of that Act) of the employer (as defined in section 139GA of that Act) were or had earlier been entitled to acquire in those circumstances:

(i) shares in the company or rights to acquire shares in the company; or

(ii) shares in a holding company (as defined in section 139GC of that Act) of the company or rights to acquire such shares; and

(d) the conditions in subsections 139CD(6) and (7) of that Act are met in relation to the acquisition of the share by the entity; and

(e) the company is not covered by section 139DF of that Act.

Note: Section 139CD of the Income Tax Assessment Act 1936 sets out certain preconditions for shares and rights acquired under employee share schemes to be qualifying shares and qualifying rights. Section 139C of that Act explains when a share or right is acquired under an employee share scheme. Section 139DF prevents shares and rights relating to certain companies from being qualifying shares and rights.

(6) The ^*share may be disregarded under subsection (4) even though the condition in paragraph (5)(c) is not met, if:

(a) the conditions in paragraphs (5)(a), (b), (d) and (e) are met; and

(b) the Commissioner has made a determination under subsection 139CD(8) of the Income Tax Assessment Act 1936 in relation to the share.

703-40 Treating entities held through non-fixed trusts as wholly-owned subsidiaries

(1) This section operates to ensure that an entity (the test entity) is not prevented from being a ^*subsidiary member of a ^*consolidated group or ^*consolidatable group just because there is a trust that is not a ^*fixed trust interposed between the test entity and the ^*head company of the group.

(2) This Part (except Division 719) operates as if the test entity were a ^*wholly-owned subsidiary of the ^*head company if the test entity would have been a wholly-owned subsidiary of the head company had the interposed trust been a ^*fixed trust and all its objects been beneficiaries.

703-45 Entities interposed between the head company and a subsidiary member of a consolidated group

(1) For an entity (the test entity) to be a ^*subsidiary member of a ^*consolidated group or ^*consolidatable group if there are one or more other entities interposed between the test entity and the ^*head company of the group, one of the sets of circumstances described in subsection (2), (3) or (4) must exist.

Subsidiary members or nominees interposed

(2) One set of circumstances is that each of the interposed entities either:

(a) is a ^*subsidiary member of the group; or

(b) holds ^*membership interests in:

(i) the test entity; or

(ii) a subsidiary member of the group interposed between the ^*head company of the group and the test entity;

only as a nominee of one or more entities each of which is a ^*member of the group.

Non-resident interposed—test entity is a company

(3) Another set of circumstances is that:

(a) the test entity is a company; and

(b) at least one of the interposed entities is:

(i) a company (a non-resident company) that is a foreign resident; or

(ii) a trust (a non-resident trust) that does not meet the requirements in any item of the table in section 703-25; and

(i) a ^*subsidiary member of the group; or

(ii) a non-resident company; or

(iii) a non-resident trust; or

(iv) an entity that holds ^*membership interests in an entity interposed between it and the test entity, or in the test entity, only as a nominee of one or more entities each of which is a ^*member of the group, a non-resident company or a non-resident trust; or

(v) a partnership, each of the partners in which is a non-resident company or a non-resident trust; and

(d) the test entity would be a subsidiary member of the group if each interposed entity that is a non-resident company or non-resident trust were a subsidiary member of the group.

Non-resident interposed—test entity is a trust or partnership

(4) Another set of circumstances is that:

(a) the test entity is a trust or partnership; and

(b) one or more of the interposed entities are companies that are ^*subsidiary members of the group because the circumstances in subsection (3) exist; and

(c) the test entity would be a subsidiary member of the group if the ^*head company beneficially owned all the ^*membership interests beneficially owned by each company described in paragraph (b).

Choice to consolidate a consolidatable group

703-50 Choice to consolidate a consolidatable group

(1) A company may make a choice in the ^*approved form given to the Commissioner within the period described in subsection (3) that a ^*consolidatable group is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the ^*head company of the group on the day specified.

Choice is irrevocable

(2) The choice cannot be revoked, and the specification of the day cannot be amended, after the choice is made under subsection (1).

Period for giving choice to Commissioner

(3) The period for giving the choice to the Commissioner:

(a) starts at the start of the day specified in the choice; and

(b) ends at the end of:

(i) the day on which the company gives the Commissioner its ^*income tax return for the first income year ending after the day specified in the choice; or

(ii) the last day in the period within which the company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return.

Choice has no effect after consolidated group ceases to exist

(4) The choice does not have effect after the ^*consolidated group that came into existence because of the choice ceases to exist. To avoid doubt, this subsection does not prevent the choice from:

(a) being made by the company at a time when it is not a head company; or

(b) having effect in relation to a time before the consolidated group ceased to exist, even if that time is before the choice is made.

Choice does not have effect if it contains wrong information

(5) The choice does not have effect (and is taken not to have had effect) if the Commissioner is satisfied that the choice contains information that is incorrect in a material particular.

Commissioner may give effect to choice despite wrong information

(6) Subsection (5) does not prevent the choice from having effect (and being taken to have had effect) if the Commissioner gives the company written notice that the choice has effect despite the incorrect information.

Note: Subsection (6) does not let the Commissioner make the choice effective if it did not have effect because it was not made in accordance with subsection (1). This could have happened if:

(a) the choice was not in the approved form (for example because it did not include information the Commissioner required (whether in the form or otherwise)); or

(b) the choice was not given to the Commissioner within the period described in subsection (3); or

Choice does not have effect if company is a member of a MEC group

(7) The choice does not have effect (and is taken not to have had effect) if, on the day specified, the company was a member of a ^*MEC group.

Consolidated group created when MEC group ceases to exist

703-55 Creating consolidated groups from certain MEC groups

(1) A ^*consolidated group comes into existence at the time a ^*MEC group ceases to exist if:

(a) the MEC group included only one ^*eligible tier-1 company just before the time; and

(b) the MEC group ceases to exist only because the company ceases to be an eligible tier-1 company; and

(2) To avoid doubt, the ^*consolidated group consists at the time of:

(a) the company (as the ^*head company of the consolidated group); and

(b) every entity (if any) that was a ^*subsidiary member of the ^*MEC group just before that time (as a subsidiary member of the consolidated group).

Notice of events affecting consolidated group

703-60 Notice of events affecting consolidated group

(1) Within 28 days of an event described in an item of the table, the entity described in column 3 of the item must give the Commissioner notice in the ^*approved form of the event.

Notice of events
Column 1 Item	Column 2 If this event happens:	Column 3 Notice must be given by:
1	An entity becomes a ^member of a ^consolidated group	The ^*head company of the consolidated group
2	An entity ceases to be a ^subsidiary member of a ^consolidated group	The ^head company of the group, or the person who was its public officer just before it ceased to exist if the former subsidiary member ceases to be a ^member of the group because the head company ceases to exist
3	A ^*consolidated group ceases to exist	The company that was the ^*head company of the group, or the person who was its public officer just before it ceased to exist if it ceases to be the head company of the group because it ceases to exist

(2) Despite subsection (1), if:

(a) an event described in subsection (1) happens in relation to a ^*consolidated group that comes into existence on the day specified in a choice under section 703-50; and

(b) the event happens more than 28 days before the choice is made;

the company that makes the choice must give the Commissioner notice in the ^*approved form of the event at the same time as the choice is made.

(3) Despite subsection (1), if:

(a) an event described in subsection (1) happens in relation to a ^*consolidated group that comes into existence at a time under subsection 703-55(1) because a ^*MEC group ceased to exist at that time; and

(b) the ^*MEC group came into existence under paragraph 719-5(1)(a) because a notice of choice under section 719-50 is given after that time; and

the ^*head company of the consolidated group must give the Commissioner notice in the ^*approved form of the event at the same time as the notice of choice is given.

[The next Division is Division 705.]

Division 705—Tax cost setting amount for assets where entities become subsidiary members of consolidated groups

Guide to Division 705

705-1 What this Division is about

When an entity becomes a subsidiary member of a consolidated group, the tax cost of its assets is set at a tax cost setting amount that is worked out in accordance with this Division.

Table of Subdivisions

705-A Basic case: a single entity joining an existing consolidated group

Subdivision 705-A—Basic case: a single entity joining an existing consolidated group
Guide to Subdivision 705-A

705-5 What this Subdivision is about

When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity.

Table of sections

Application and object

705-10 Application and object of this Subdivision

705-15 Cases where this Subdivision does not have effect

Tax cost setting amount for assets that joining entity brings into joined group

705-20 Tax cost setting amount worked out under this Subdivision

705-25 Tax cost setting amount for retained cost base assets

705-30 What is the joining entity’s terminating value for an asset?

705-35 Tax cost setting amount for reset cost base assets

705-40 Reduction in tax cost setting amount for revenue assets

705-45 Reduction in tax cost setting amount for accelerated depreciation assets

705-50 Reduction in tax cost setting amount for over-depreciated assets

705-55 Order of application of sections 705-40, 705-45 and 705-50

How to work out the allocable cost amount

705-60 What is the joined group’s allocable cost amount for the joining entity?

705-65 Cost of membership interests in the joining entity—step 1 in working out allocable cost amount

705-70 Liabilities of the joining entity—step 2 in working out allocable cost amount

705-75 Liabilities of the joining entity—reductions for purposes of step 2 in working out allocable cost amount

705-80 Liabilities of the joining entity—reductions/increases for purposes of step 2 in working out allocable cost amount

705-85 Liabilities of the joining entity—increases for purposes of step 2 in working out allocable cost amount

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

705-95 Pre-joining time distributions out of certain profits—step 4 in working out allocable cost amount

705-100 Losses accruing to joined group before joining time—step 5 in working out allocable cost amount

705-105 Continuity of holding membership interests—steps 3 to 5 in working out allocable cost amount

705-110 If joining entity transfers a loss to the head company—step 6 in working out allocable cost amount

705-115 If head company becomes entitled to certain deductions—step 7 in working out allocable cost amount

Preservation of application of Subdivision 165-CC (about unrealised losses)

705-120 Preservation of application of Subdivision 165-CC (about unrealised losses)

How to work out a pre-CGT factor for assets of joining entity

705-125 Pre-CGT factor for assets of joining entity

[This is the end of the Guide.]

Application and object

705-10 Application and object of this Subdivision

Application

(1) This Subdivision has effect, subject to section 705-15, for the head company core purposes set out in subsection 701-1(2) if an entity (the joining entity) becomes a ^*subsidiary member of a ^*consolidated group (the joined group) at a particular time (the joining time).

Object

(2) The object of this Subdivision is to recognise the ^*head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity. That amount consists of the cost of the group’s ^*membership interests in the joining entity, increased by the joining entity’s liabilities and adjusted to take account of the joining entity’s retained profits, distributions of profits, deductions and losses.

(3) The reason for recognising the ^*head company’s cost in this way is to align the costs of assets with the costs of ^*membership interests, and to allow for the preservation of this alignment until the entity ceases to be a ^*subsidiary member, in order to:

(a) prevent double taxation of gains and duplication of losses; and

(b) remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically.

Note: Under Division 711, the alignment is preserved by recognising the head company’s cost of membership interests in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.

705-15 Cases where this Subdivision does not have effect

This Subdivision does not have effect if any of the following exceptions applies:

(a) the first exception is where the joining entity becomes a ^*member of the joined group because it is a member of that group at the time it comes into existence as a ^*consolidated group;

Note: See Subdivision 705-B for rules about the treatment of assets if entities become members in circumstances covered by this exception.

(b) the second exception is where all of the members of another consolidated group become members of the joined group as a result of the ^*acquisition of ^*membership interests in the ^*head company of the joining group;

Note: See Subdivision 705-C for rules about the treatment of assets if entities become members in circumstances covered by this exception.

(i) the joining entity and one or more other entities become members of the joined group as a result of an event that happens in relation to one of them; and

(ii) the case is not covered by the second exception;

Note: See Subdivision 705-D for rules about the treatment of assets if entities become members in circumstances covered by this exception.

(d) the fourth exception is where the joining entity becomes a member of the joined group where circumstances described in subsection 703-45(3) or (4) exist.

Note: See Subdivision 705-E for rules about the treatment of assets if entities become members in circumstances covered by this exception.

Tax cost setting amount for assets that joining entity brings into joined group

705-20 Tax cost setting amount worked out under this Subdivision

If this Subdivision has effect, for the purposes of item 1 in the table in section 701-60 (Tax cost setting amount) the ^*tax cost setting amount for an asset whose ^*tax cost is set at the time the joining entity becomes a ^*subsidiary member of the joined group is worked out under this Subdivision.

705-25 Tax cost setting amount for retained cost base assets

(1) This section states what the ^*tax cost setting amount is for a ^*retained cost base asset.

Australian currency

(2) If the ^*retained cost base asset is covered by paragraph (a) or (b) of the definition of that expression and is not covered by another subsection of this section, its ^*tax cost setting amount is equal to the amount of the Australian currency concerned.

Qualifying securities

(3) If the ^*retained cost base asset is a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936), the ^*tax cost setting amount for the qualifying security is instead equal to the joining entity’s ^*terminating value for the asset.

Entitlements to pre-paid services etc.

(4) If the ^*retained cost base asset is covered by paragraph (c) of the definition of that expression, its ^*tax cost setting amount is equal to the amount of the deductions to which the ^*head company is entitled under section 701-5 (the entry history rule) in respect of the expenditure that gave rise to the entitlement.

Note: If the total amount to be treated as tax cost setting amounts for retained cost base assets exceeds the joined group’s allocable cost amount for the joining entity, the head company makes a capital gain equal to the excess.

Retained cost base asset

(5) A retained cost base asset is:

(a) Australian currency, other than ^*trading stock or ^*collectables of the joining entity; or

(b) a right to receive a specified amount of such Australian currency, other than a right that is a marketable security within the meaning of section 70B of the Income Tax Assessment Act 1936; or

Example: A debt or a bank deposit.

(i) expenditure has been incurred in return for the doing of the thing; and

(ii) the thing is required or permitted to be done, or to cease being done, after the expenditure is incurred.

705-30 **What is the joining entity’s terminating value for an asset?**

Trading stock

(1) If an asset of the joining entity is ^*trading stock, the joining entity’s terminating value for the asset is:

(a) if the asset was on hand at the start of the income year in which the joining time occurs (including because of the operation of Division 701)—its ^*value at that time; or

(b) if paragraph (a) does not apply and the asset is ^*livestock that was acquired by natural increase—the ^*cost of the asset; or

(c) in any other case—the amount of the outgoing incurred by the joining entity in connection with the acquisition of the asset;

increased by the amount of any outgoing forming part of the cost of the asset that is incurred by the joining entity during its current holding of the asset.

Qualifying securities

(2) If an asset of the joining entity is a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936) that is not ^*trading stock, the joining entity’s terminating value for the asset is equal to the amount of consideration that the joining entity would need to receive, if it were to dispose of the asset just before the joining time, without an amount being assessable income of, or deductible to, the joining entity under section 159GS of the Income Tax Assessment Act 1936.

Depreciating assets

(3) If an asset of the joining entity is a ^*depreciating asset, the joining entity’s terminating value for the asset is equal to the asset’s ^*adjustable value just before the joining time.

Other CGT assets

(4) If an asset of the joining entity is a ^*CGT asset that is not covered by any of the above subsections, the joining entity’s terminating value for the asset is equal to the asset’s ^*cost base just before the joining time.

Other assets

(5) The joining entity’s terminating value for any other asset that it holds is the amount that would be the asset’s ^*cost base just before the joining time if it were an asset covered by subsection (4).

705-35 Tax cost setting amount for reset cost base assets

(1) For each asset of the joining entity (a reset cost base asset) that is not a ^*retained cost base asset or an asset (an excluded asset) covered by subsection (2), the asset’s ^*tax cost setting amount is worked out by:

(a) first working out the joined group’s ^*allocable cost amount for the joining entity in accordance with section 705-60; and

(b) then reducing that amount by the total of the ^*tax cost setting amounts in accordance with section 705-25 for each retained cost base asset (but not below zero); and

(c) finally, allocating the result to each of the joining entity’s reset cost base assets (other than excluded assets) in proportion to their ^*market values.

Note 1: For an asset consisting of an entitlement to receive an amount that will be included in assessable income, the market value of the asset would take into account the tax payable on the amount.

Note 2: If there are no reset cost base assets, the result is instead treated as a capital loss of the head company.

Excluded assets

(2) An asset is covered by this subsection if, under any of the steps in the table in section 705-60, the joined group’s ^*allocable cost amount for the joining entity is reduced by an amount in respect of the asset.

Note: An example is an entitlement to a deduction, for which there is a reduction under step 2 in the table.

Goodwill resulting from ownership and control of the joining entity

(3) If, just after the joining time, the ^*head company has, because of its ownership and control of the joining entity, a goodwill asset associated with assets or businesses of the joined group:

(a) for the head company core purposes, the asset’s ^*tax cost is set at the joining time at its ^*tax cost setting amount; and

(b) for the purpose of doing so:

(i) the asset is taken to be an asset of the joining entity that becomes an asset of the head company because subsection 701-1(1) (the single entity rule) applies; and

(ii) it is taken to have a ^*market value just before the joining time of an amount equal to its market value just after the joining time.

705-40 Reduction in tax cost setting amount for revenue assets

Limit on tax cost setting amount

(1) The ^*tax cost setting amount for a reset cost base asset to which subsection (2) applies (a revenue asset) must not exceed the greater of:

(a) the asset’s ^*market value; and

(b) the joining entity’s ^*terminating value for the asset.

Subsection applies to revenue assets

(2) This subsection applies to a reset cost base asset if, assuming the ^*head company were to ^*dispose of it after the joining time, any gain or loss on the disposal would be taken into account in determining the taxable income or ^*tax loss of the head company, but any ^*capital gain or ^*capital loss on the disposal would be disregarded.

Note: For example, trading stock and depreciating assets.

Allocation of excess

(3) If there is an excess under subsection (1), it is allocated among the other reset cost base assets (whether or not revenue assets) other than excluded assets, so as to increase their ^*tax cost setting amounts, in accordance with the following principles:

(a) the allocation is to be in proportion to the ^*market values of the assets;

(b) the amount allocated to a revenue asset must not cause its tax cost setting amount to breach the limit imposed by subsection (1);

(c) any of the excess that cannot be so allocated is to be reallocated, to the maximum extent possible, among the remaining reset cost base assets (other than excluded assets) by applying this subsection a further one or more times.

Note: If any of the excess cannot be allocated, it is instead treated as a capital loss of the head company.

705-45 Reduction in tax cost setting amount for accelerated depreciation assets

If:

(a) the joining entity ^*acquired a ^*depreciating asset at or before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and held it continuously until the joining time; and

(b) the asset’s ^*tax cost setting amount would be greater than the joining entity’s ^*terminating value for the asset; and

the asset’s tax cost setting amount is reduced so that it equals the terminating value.

Note 1: A consequence of the choice is that accelerated depreciation will apply to the asset: see section 701-80.

Note 2: Unlike the position with a reduction in tax cost setting amount under section 705-40, the amount of the reduction is not re-allocated among other assets.

705-50 Reduction in tax cost setting amount for over-depreciated assets

Object

(1) The object of this section is to limit deferral of tax on profits that were not subject to tax because of ^*over-depreciation of assets and were distributed to recipients untaxed because of their entitlement to the intercorporate dividend rebate.

Reduction by amount of tax deferral resulting from over-depreciation

(2) If:

(a) the ^*tax cost setting amount for an asset that is ^*over-depreciated at the joining time would be more than the joining entity’s ^*terminating value for the asset; and

(b) before the joining time, the joining entity paid one or more unfranked or partly franked dividends to recipients entitled to a rebate of income tax under section 46 or 46A of the Income Tax Assessment Act 1936 on the dividends; and

the tax cost setting amount for the asset is reduced by the lesser of the tax deferral amount and the ^*over-depreciation, but not so that it becomes less than the joining entity’s terminating value for the asset.

Tax deferral amount

(3) For the purposes of paragraph (2)(c), there is a tax deferral amount in relation to the dividends if:

(a) to some extent (whose amount is the qualifying profits amount) the dividends, so far as they were not franked dividends, were paid out of profits satisfying the following requirements:

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

(ii) the decline in value represented the ^*over-depreciation of the asset;

(iii) 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; and

(b) to some extent the qualifying profits amount of the dividends was not distributed by the recipients of the dividends before the joining time directly, or indirectly through one or more interposed entities, to a taxpayer who was not entitled to a rebate of income tax under section 46 or 46A of the Income Tax Assessment Act 1936 on them.

The tax deferral amount is equal to the qualifying profits amount, to the extent that it was not distributed as mentioned in paragraph (b).

Where asset transferred with roll-over relief

(4) If:

(a) an asset was transferred to the joining entity by another entity; and

(b) a roll-over under Subdivision 126-B applied to the transfer; and

(c) the other entity paid one or more dividends that, if paid by the joining entity, would have satisfied the requirements of paragraphs (2)(b) and (c) in relation to the asset;

the joining entity is taken for the purposes of subsection (2) to have paid the dividends.

Assets that, under transitional provisions, effectively were not subject to subsection (1) when previously brought into a group

(5) If:

(a) before the joining time, the joining entity ceased to be a ^*subsidiary member of a ^*consolidated group (the original group), whether or not the current group; and

(b) an asset was continuously held by the joining entity from when it ceased to be a member of the original group until the joining time; and

(c) when the entity ceased to be a subsidiary member of the original group, the ^*head company of that group made a choice under the Income Tax (Transitional Provisions) Act 1997 to increase by an amount (the transitional increase amount) the head company’s ^*terminating value for the asset that was to be used in applying step 1 of the table in section 711-20 of this Act; and

(d) the asset is ^*over-depreciated at the joining time;

the ^*tax cost setting amount for the asset, in respect of the joining entity becoming a subsidiary member of the current group, is reduced by the lesser of the transitional increase amount and the ^*over-depreciation.

When an asset is over-depreciated

(6) An asset is over-depreciated at a particular time if, at that time:

(a) the asset is a ^*depreciating asset; and

(b) the asset’s ^*market value exceeds its ^*adjustable value; and

The over-depreciation of the asset then is the lesser of the 2 excesses (or either of them if they are the same).

Note: Unlike the position with a reduction in tax cost setting amount under section 705-40, the amount of a reduction under this section is not re-allocated among other assets.

705-55 Order of application of sections 705-40, 705-45 and 705-50

If more than one of sections 705-40, 705-45 and 705-50 apply:

(a) the ^*head company may choose the order in which the sections are to apply; and

(b) if it does not, the order is as follows:

(i) first, section 705-40;

(ii) second, section 705-45;

(iii) third, section 705-50.

How to work out the allocable cost amount

705-60 **What is the joined group’s allocable cost amount for the joining entity?**

Work out the joined group’s allocable cost amount for the joining entity in this way:

Working out the joined group’s allocable cost amount for the joining entity
Step	What the step requires	Purpose of the step
1	Start with the step 1 amount worked out under section 705-65, which is about the cost of ^membership interests in the joining entity held by ^members of the joined group	To ensure that the allocable cost amount includes the cost of ^*acquiring the membership interests
2	Add to the result of step 1 the step 2 amount worked out under section 705-70, which is about the value of the joining entity’s liabilities	To ensure that the joining entity’s liabilities at the joining time, which are part of the joined group’s cost of acquiring the joining entity, are reflected in the allocable cost amount
3	Add to the result of step 2 the step 3 amount worked out under section 705-90, which is about undistributed, frankable profits accruing to the joined group before the joining time	To increase the allocable cost amount to reflect the undistributed, taxed profits and so prevent double taxation
4	Subtract from the result of step 3 the step 4 amount worked out under section 705-95, which is about pre-joining time distributions out of certain profits	To prevent the allocable cost amount reflecting return of part of the amount paid to ^acquire the ^membership interests in the joining entity
5	Subtract from the result of step 4 the step 5 amount worked out under section 705-100, which is about certain losses accruing to the joined group before the joining time	To prevent: (a) a double benefit arising from the losses; and (b) losses that cannot be transferred to the ^*head company, or are cancelled by the head company, under Subdivision 707-A being reinstated in an unrealised form or reducing unrealised gains.
6	Subtract from the result of step 5 the step 6 amount worked out under section 705-110, which is about losses that the joining entity transferred to the ^*head company under Subdivision 707-A	To stop the joined group getting benefits both through higher ^*tax cost setting amounts for the joining entity’s assets and through losses transferred to the head company
7	Subtract from the result of step 6 the step 7 amount worked out under section 705-115, which is about certain deductions to which the ^*head company is entitled	To stop the joined group getting benefits both through the ^*tax cost of the joining entity’s assets being set and through certain tax deductions of the joining entity being inherited by the head company
8	If the remaining amount is positive, it is the joined group’s allocable cost amount. Otherwise the joined group’s allocable cost amount is nil.

705-65 Cost of membership interests in the joining entity—step 1 in working out allocable cost amount

(1) For the purposes of step 1 in the table in section 705-60, the step 1 amount is the sum of the following amounts for each ^*membership interest that ^*members of the joined group hold in the joining entity at the joining time:

Working out the step 1 amount
Item	If the market value of the membership interest is...	The amount is...
1	equal to or greater than its ^*cost base	its cost base
2	less than its ^*cost base but greater than its

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