Income Tax Assessment Act 1997 Act No. 38 of 1997 as amended This compilation was prepared on 29 May 2009 taking into account amendments up to Act No. 35 of 2009 Volume 7 includes: Table of Contents Sections 700-1 to 727-910 The text of any of those amendments not in force on that date is appended in the Notes section The operation of amendments that have been incorporated may be affected by application provisions that are set out in the Notes section Chapter 3-Specialist liability rules Contents Chapter 3-Specialist liability rules i Part 3-90-Consolidated groups 1 Division 700-Guide and objects 1 Guide 1 700-1 What this Part is about 1 700-5 Overview of this Part 2 Objects 3 700-10 Objects of this Part 3 Division 701-Core rules 4 Common rule 5 701-1 Single entity rule 5 Head company rules 6 701-5 Entry history rule 6 701-10 Cost to head company of assets of joining entity 7 701-15 Cost to head company of membership interests in entity that leaves group 8 701-20 Cost to head company of assets consisting of certain liabilities owed by entity that leaves group 9 701-25 Tax-neutral consequence for head company of ceasing to hold assets when entity leaves group 10 Entity rules 11 701-30 Where entity not subsidiary member for whole of income year 11 701-35 Tax-neutral consequence for entity of ceasing to hold assets when it joins group 14 701-40 Exit history rule 15 701-45 Cost of assets consisting of liabilities owed to entity by members of the group 16 701-50 Cost of certain membership interests of which entity becomes holder on leaving group 17 Supporting provisions 18 701-55 Setting the tax cost of an asset 18 701-58 Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule 20 701-60 Tax cost setting amount 21 701-61 Assets in relation to Division 230 financial arrangement-head company's assessable income or deduction 21 701-65 Net income and losses for trusts and partnerships 22 Exceptions 23 701-70 Adjustments to taxable income where identities of parties to arrangement merge on joining group 23 701-75 Adjustments to taxable income where identities of parties to arrangement re-emerge on leaving group 26 701-80 Accelerated depreciation 29 701-85 Other exceptions etc. to the rules 30 Division 703-Consolidated groups and their members 31 Guide to Division 703 31 703-1 What this Division is about 31 Basic concepts 32 703-5 What is a consolidated group? 32 703-10 What is a consolidatable group? 33 703-15 Members of a consolidated group or consolidatable group 33 703-20 Certain entities that cannot be members of a consolidated group or consolidatable group 35 703-25 Australian residence requirements for trusts 37 703-30 When is one entity a wholly-owned subsidiary of another? 37 703-33 Transfer time for sale of shares in company 38 703-35 Treating entities as wholly-owned subsidiaries by disregarding employee shares 39 703-37 Disregarding certain preference shares following an ADI restructure 41 703-40 Treating entities held through non-fixed trusts as wholly-owned subsidiaries 43 703-45 Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group 43 Choice to consolidate a consolidatable group 44 703-50 Choice to consolidate a consolidatable group 44 Consolidated group created when MEC group ceases to exist 45 703-55 Creating consolidated groups from certain MEC groups 45 Notice of events affecting consolidated group 46 703-60 Notice of events affecting consolidated group 46 Effects of choice to continue group after shelf company becomes new head company 47 703-65 Application 47 703-70 Consolidated group continues in existence with interposed company as head company and original company as a subsidiary member 48 703-75 Interposed company treated as substituted for original company at all times before the completion time 48 703-80 Effects on the original company's tax position 50 Division 705-Tax cost setting amount for assets where entities become subsidiary members of consolidated groups 51 Guide to Division 705 51 705-1 What this Division is about 51 Subdivision 705-A-Basic case: a single entity joining an existing consolidated group 51 Guide to Subdivision 705-A 51 705-5 What this Subdivision is about 51 Application and object 53 705-10 Application and object of this Subdivision 53 705-15 Cases where this Subdivision does not have effect 54 Tax cost setting amount for assets that joining entity brings into joined group 55 705-20 Tax cost setting amount worked out under this Subdivision 55 705-25 Tax cost setting amount for retained cost base assets 55 705-30 What is the joining entity's terminating value for an asset? 56 705-35 Tax cost setting amount for reset cost base assets 58 705-40 Tax cost setting amount for reset cost base assets held on revenue account 59 705-45 Reduction in tax cost setting amount for accelerated depreciation assets 60 705-47 Reduction in tax cost setting amount for some privatised assets 61 705-50 Reduction in tax cost setting amount for over- depreciated assets 64 705-55 Order of application of sections 705-40, 705-45, 705- 47 and 705-50 67 705-56 Modification for tax cost setting in relation to finance leases 67 705-57 Adjustment to tax cost setting amount where loss of pre-CGT status of membership interests in joining entity 69 705-58 Assets and liabilities not set off against each other 72 705-59 Exception: treatment of linked assets and liabilities 72 How to work out the allocable cost amount 76 705-60 What is the joined group's allocable cost amount for the joining entity? 76 705-65 Cost of membership interests in the joining entity- step 1 in working out allocable cost amount 78 705-70 Liabilities of the joining entity-step 2 in working out allocable cost amount 82 705-75 Liabilities of the joining entity-reductions for purposes of step 2 in working out allocable cost amount 83 705-80 Liabilities of the joining entity- reductions/increases for purposes of step 2 in working out allocable cost amount 85 705-85 Liabilities of the joining entity-increases for purposes of step 2 in working out allocable cost amount 86 705-90 Undistributed, taxed profits accruing to joined group before joining time-step 3 in working out allocable cost amount 87 705-93 If pre-joining time roll-over from foreign resident company-step 3A in working out allocable cost amount 91 705-95 Pre-joining time distributions out of certain profits-step 4 in working out allocable cost amount 92 705-100 Losses accruing to joined group before joining time- step 5 in working out allocable cost amount 93 705-105 Continuity of holding membership interests-steps 3 to 5 in working out allocable cost amount 93 705-110 If joining entity transfers a loss to the head company-step 6 in working out allocable cost amount 94 705-115 If head company becomes entitled to certain deductions-step 7 in working out allocable cost amount 94 How to work out a pre-CGT factor for assets of joining entity 95 705-125 Pre-CGT factor for assets of joining entity 95 Subdivision 705-B-Case of group formation 97 Guide to Subdivision 705-B 97 705-130 What this Subdivision is about 97 Application and object 98 705-135 Application and object of this Subdivision 98 Modified application of Subdivision 705-A 98 705-140 Subdivision 705-A has effect with modifications 98 705-145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members 99 705-147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members 100 705-150 Adjustment to result of step 3A in working out allocable cost amount where pre-formation time roll-over from head company to member of wholly-owned group 103 705-155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests 106 705-160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members 109 705-163 Modified application of section 705-57 111 705-165 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members 114 Subdivision 705-C-Case where a consolidated group is acquired by another 115 Guide to Subdivision 705-C 115 705-170 What this Subdivision is about 115 Application and object 116 705-175 Application and object of this Subdivision 116 Modified application of Division 701 in relation to acquired group etc. 116 705-180 Modifications of Division 701 116 Modified application of Subdivision 705-A in relation to acquiring group 118 705-185 Subdivision 705-A has effect with modifications 118 Modifications of Subdivision 705-A for the purposes of this Subdivision 119 705-190 Modified application of section 705-50 119 705-195 Modified application of subsection 705-65(6) 119 705-200 Modified application of section 705-85 120 705-205 Modified application of section 705-125 121 Subdivision 705-D-Where multiple entities are linked by membership interests 122 Guide to Subdivision 705-D 122 705-210 What this Subdivision is about 122 Application and object 123 705-215 Application and object of this Subdivision 123 Modified application of Subdivision 705-A 123 705-220 Subdivision 705-A has effect with modifications 123 705-225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities 124 705-227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities 125 705-230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests 128 705-235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities 129 705-240 Modified application of section 705-57 131 705-245 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members 133 Subdivision 705-E-Adjustments for errors etc. 134 Guide to Subdivision 705-E 134 705-300 What this Subdivision is about 134 Operative provisions 134 705-305 Object of this Subdivision 134 705-310 Operation of Part IVA of the Income Tax Assessment Act 1936 134 705-315 Errors that attract special adjustment action 134 705-320 Tax cost setting amounts taken to be correct 136 Division 707-Losses for head companies when entities become members etc. 137 Subdivision 707-A-Transfer of previously unutilised losses to head company 137 Guide to Subdivision 707-A 137 707-100 What this Subdivision is about 137 707-105 Who can utilise the loss? 138 Objects 138 707-110 Objects of this Subdivision 138 Application 139 707-115 What losses this Subdivision applies to 139 Transfer of loss from joining entity to head company 140 707-120 Transfer of loss from joining entity to head company 140 707-125 Modified same business test for companies' post-1999 losses 141 707-130 Modified pattern of distributions test 143 707-135 Transferring loss transferred to joining entity because same business test was passed 144 Effect of transfer of loss 144 707-140 Effect of transfer of loss 144 Cancelling the transfer of the loss 145 707-145 Cancelling the transfer of the loss 145 What happens if the loss is not transferred? 145 707-150 Loss cannot be utilised for income year ending after the joining time 145 Subdivision 707-B-Can a transferred loss be utilised? 146 Guide to Subdivision 707-B 146 707-200 What this Subdivision is about 146 Operative provisions 146 707-205 Modified period for test for maintaining same ownership 146 707-210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier 147 Subdivision 707-C-Amount of transferred losses that can be utilised 149 Guide to Subdivision 707-C 149 707-300 What this Subdivision is about 149 Object 150 707-305 Object of this Subdivision 150 How much of a transferred loss can be utilised? 151 707-310 How much of a transferred loss can be utilised? 151 707-315 What is a bundle of losses? 154 707-320 What is the available fraction for a bundle of losses? 155 707-325 Modified market value of an entity becoming a member of a consolidated group 157 707-330 Losses transferred from former head company 160 707-335 Limit on utilising transferred losses if circumstances change during income year 160 707-340 Utilising transferred losses while exempt income remains 161 707-345 Other provisions are subject to this Subdivision 163 Subdivision 707-D-Special rules about losses 163 707-400 Head company's business before and after consolidation not compared 163 707-410 Exit history rule does not treat entity as having made a loss 163 Division 709-Other rules applying when entities become subsidiary members etc. 165 Subdivision 709-A-Franking accounts 165 Guide to Subdivision 709-A 165 709-50 What this Subdivision is about 165 Object 166 709-55 Object of this Subdivision 166 Treatment of franking accounts at joining time 167 709-60 Nil balance franking account for joining entity 167 Treatment of subsidiary member's franking account 167 709-65 Subsidiary member's franking account does not operate 167 Treatment of head company's franking account 168 709-70 Credits arising in head company's franking account 168 709-75 Debits arising in head company's franking account 168 Franking distributions by subsidiary member 169 709-80 Subsidiary member's distributions on employee shares and certain preference shares taken to be distributions by the head company 169 709-85 Non-share distributions by subsidiary members taken to be distributions by head company 169 709-90 Subsidiary member's distributions to foreign resident taken to be distributions by head company 170 Payment of group liability by former subsidiary member 170 709-95 Payment of group liability by former subsidiary member 170 709-100 Refund of income tax to former subsidiary member 171 Subdivision 709-B-Imputation issues 172 Guide to Subdivision 709-B 172 709-150 What this Subdivision is about 172 Operative provisions 172 709-155 Testing consolidated groups 172 709-160 Subsidiary member is exempting entity 173 709-165 Subsidiary member is former exempting entity 174 709-170 Head company and subsidiary are exempting entities 175 709-175 Head company is former exempting entity 175 Subdivision 709-C-Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group 178 Guide to Subdivision 709-C 178 709-180 What this Subdivision is about 178 709-185 Joining entity's excess franking deficit tax offsets transferred to head company 178 709-190 Exit history rule not to treat leaving entity as having a franking deficit tax offset excess 179 Subdivision 709-D-Deducting bad debts 180 Guide to Subdivision 709-D 180 709-200 What this Subdivision is about 180 Application and object 180 709-205 Application of this Subdivision 180 709-210 Object of this Subdivision 182 Limit on deduction of bad debt 182 709-215 Limit on deduction of bad debt 182 Extension of Subdivision to debt/equity swap loss 186 709-220 Limit on deduction of swap loss 186 Division 711-Tax cost setting amount for membership interests where entities cease to be subsidiary members of consolidated groups 188 Guide to Division 711 188 711-1 What this Division is about 188 Application and object of this Division 189 711-5 Application and object of this Division 189 Tax cost setting amount for membership interests etc. 189 711-10 Tax cost setting amount worked out under this Division 189 711-15 Tax cost setting amount where no multiple exit 190 711-20 What is the old group's allocable cost amount for the leaving entity? 191 711-25 Terminating values of assets that the leaving entity takes with it-step 1 in working out allocable cost amount 192 711-30 What is the head company's terminating value for an asset? 194 711-35 If head company becomes entitled to certain deductions-step 2 in working out allocable cost amount 194 711-40 Liabilities owed to the leaving entity by members of the old group-step 3 in working out allocable cost amount 195 711-45 Liabilities etc. owed by the leaving entity-step 4 in working out allocable cost amount 196 711-55 Tax cost setting amount for membership interests where multiple exit 199 711-65 Membership interests treated as having been acquired before 20 September 1985-simple case 201 711-70 Membership interests treated as having been acquired before 20 September 1985-multiple exit case 203 Division 713-Rules for particular kinds of entities 205 Subdivision 713-A-Trusts 205 Working out a joined group's allocable cost amount for a joining trust 206 713-20 Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests 206 713-25 Undistributed, realised profits that accrue to joined group before joining time and could be distributed tax free-step 3 in working out allocable cost amount 209 Determining destination of distribution by non-fixed trust 210 713-50 Factors to consider 210 Subdivision 713-C-Some unit trusts treated like head companies of consolidated groups 211 Guide to Subdivision 713-C 211 713-120 What this Subdivision is about 211 Object of this Subdivision 211 713-125 Object of this Subdivision 211 Choice to form a consolidated group 212 713-130 Choosing to form a consolidated group 212 Effects of choice 213 713-135 Effects of choice 213 713-140 Modifications of the applied law 214 Subdivision 713-E-Partnerships 216 Guide to Subdivision 713-E 216 713-200 What this Subdivision is about 216 Objects 217 713-205 Objects of this Subdivision 217 Partnership cost setting interests etc. 219 713-210 Partnership cost setting interests 219 713-215 Terminating value for partnership cost setting interest 219 Setting tax cost of partnership cost setting interests 220 713-220 Set tax cost of partnership cost setting interests if partner joins consolidated group 220 713-225 Tax cost setting amount for partnership cost setting interest 221 713-230 Reduction in allocable cost amount if partnership asset is over-depreciated 223 Special rules where partnership joins consolidated group 224 713-235 Partnership joins group-set tax cost of partnership assets 224 713-240 Partnership joins group-tax cost setting amount for partnership asset 224 713-245 Partnership joins group-pre-CGT factor for partnership asset 226 Special rules where partnership leaves consolidated group 227 713-250 Partnership leaves group-standard provisions modified 227 713-255 Partnership leaves group-tax cost setting amount for partnership cost setting interests 227 713-260 Partnership leaves group-tax cost setting amount for assets consisting of being owed certain liabilities 228 713-265 Partnership leaves group-adjustments to leaving partner's allocable cost amount 229 713-270 Partnership leaves group-certain partnership cost setting interests treated as having been acquired before 20 September 1985 230 Subdivision 713-L-Life insurance companies 231 Guide to Subdivision 713-L 231 713-500 What this Subdivision is about 231 General modifications for life insurance companies 233 713-505 Head company treated as a life insurance company 233 713-510 Certain subsidiaries of life insurance companies cannot be members of consolidated group 233 Life insurance companies' liabilities on joining consolidated group 234 713-511 Treatment of certain liabilities for income year when life insurance company joins consolidated group 234 Tax cost setting rules for life insurance companies joining consolidated group 235 713-515 Certain assets taken to be retained cost base assets where life insurance company joins group 235 713-520 Valuing certain liabilities where life insurance company joins group 236 713-525 Obligation to value certain assets and liabilities at joining time 237 Losses of life insurance companies joining consolidated group 238 713-530 Treatment of certain losses of life insurance company 238 Losses of life insurance companies' subsidiaries joining consolidated group 238 713-535 Losses of entities whose membership interests are complying superannuation/FHSA assets of life insurance company 238 713-540 Losses of entities whose membership interests are segregated exempt assets of life insurance company 239 Imputation rules for life insurance companies joining consolidated group 240 713-545 Treatment of franking surplus in franking account of life insurance subsidiary joining group 240 713-550 Treatment of head company's franking account after joining 242 Annuity payable by life insurance company to another member of a consolidated group 242 713-553 Special rules relating to segregated exempt assets 242 713-555 Transfer from segregated exempt assets because policyholder and life insurance company are in group 244 713-560 If valuation of segregated exempt assets is delayed 246 Liabilities for life insurance companies leaving consolidated group 248 713-565 Treatment of certain liabilities for income year when life insurance company leaves consolidated group 248 Losses for life insurance companies leaving consolidated group 249 713-570 Certain losses transferred to leaving company 249 Tax cost setting rules for life insurance companies leaving consolidated group 250 713-575 Terminating value of certain assets where life insurance company leaves group 250 713-580 Valuing certain liabilities where life insurance company leaves group 250 713-585 Obligation to value certain assets and liabilities at leaving time 251 Subdivision 713-M-General insurance companies 252 Guide to Subdivision 713-M 252 713-700 What this Subdivision is about 252 Tax cost setting rules for general insurance companies joining consolidated group 252 713-705 Certain assets taken to be retained cost base assets where general insurance company joins group 252 Liabilities and reserves of general insurance companies joining and leaving consolidated groups 253 713-710 Treatment of liabilities and reserves for income year when general insurance company joins or leaves group 253 713-715 If general insurance company joins consolidated group 254 713-720 If general insurance company leaves consolidated group 254 Division 715-Interactions between this Part and other areas of the income tax law 256 Subdivision 715-A-Treatment of unrealised losses existing when ownership or control of a company changes before or during consolidation 256 Object 258 715-15 Object of this Subdivision 258 Effect on Subdivision 165-CC of a company becoming a member of a consolidated group 259 715-25 Subdivision 165-CC stops applying to earlier changeover time 259 715-30 Meaning of 165-CC tagged asset 260 715-35 Meaning of final RUNL 260 165-CC tagged assets that affect tax cost setting amounts 260 715-50 Step 1 amount is reduced if membership interest in subsidiary member is 165-CC tagged asset and same business test is failed 260 715-55 Step 2 amount is affected if liability of subsidiary member is 165-CC tagged asset of another group member and same business test is failed 262 165-CC tagged assets that form loss denial pools of head company when consolidated group is formed 263 715-60 Assets that the head company already owns 263 715-70 Assets of subsidiary member that become those of head company 264 How Subdivision 165-CC applies to consolidated groups 266 715-75 Extension of single entity rule and entry history rule 266 Effect on Subdivision 165-CC of entity leaving consolidated group 266 715-80 Application of sections 715-85 to 715-110 266 715-85 First changeover time for leaving company at or after leaving time 267 715-90 How same business test applies if leaving time is changeover time for leaving company 267 715-95 If ownership and control of leaving entity have not changed since head company's last changeover time 268 715-100 First choice: adjustable values of leaving assets reduced to nil 269 715-105 Second choice: head company's final RUNL applied in reducing adjustable values of leaving assets that are loss assets 269 715-110 Third choice: loss denial pool of leaving entity created 270 Effect of assets in loss denial pool of head company becoming assets of leaving entity 270 715-120 What happens 270 715-125 First choice: adjustable values of leaving assets reduced to nil 271 715-130 Second choice: pool's loss denial balance applied in reducing adjustable values of leaving assets that are loss assets 271 715-135 Third choice: loss denial pool of leaving entity created 272 Effect of first and second choices on various kinds of assets 273 715-145 Effect of choice on adjustable value of leaving asset 273 General provisions about loss denial pools 274 715-155 When asset leaves pool 274 715-160 How loss denial balance is applied to losses realised on assets in pool 275 715-165 When pool ceases to exist 275 Choices under this Subdivision 276 715-175 When choice must be made 276 715-180 Head company to notify leaving entity of choice 276 715-185 Leaving entity may choose to cancel loss denial pool by reducing adjustable values of assets in the pool 276 Subdivision 715-B-How Subdivision 165-CD applies to consolidated groups and leaving entities 277 How Subdivision 165-CD applies to consolidated groups 277 715-215 Extension of single entity rule and entry history rule 277 715-225 Working out adjusted unrealised loss using individual asset method 278 715-230 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715-H 279 How Subdivision 165-CD applies to leaving entity that is a company 279 715-240 Application of sections 715-245 to 715-260 279 715-245 If ownership or control of leaving entity has altered since head company's last alteration time or formation of group 280 715-250 If head company has had an alteration time but ownership and control of leaving entity have not altered since 281 715-255 Consequences if leaving entity is a loss company at the leaving time 282 715-260 If neither of sections 715-245 and 715-250 applies 283 How Subdivision 165-CD applies to leaving entity that is a trust 284 715-270 Subdivision 165-CD applies 284 Subdivision 715-C-Common rules for the purposes of Subdivisions 715-A and 715-B 285 715-290 Additional assumptions to be made when using reference time 285 Subdivision 715-D-Treatment of company's deferred losses under Subdivision 170-D on joining a consolidated group 286 Key terminology 286 715-310 What is a 170-D deferred loss, and when it revives 286 Deferred loss on 165-CC tagged asset 287 715-355 Head company's own deferred losses at formation time 287 715-360 Deferred losses brought in by subsidiary member 288 715-365 How loss denial balance is applied when 170-D deferred loss revives 289 Subdivision 715-F-Interactions with Division 230 (financial arrangements) 290 715-375 Cost setting-amount of liability that is Division 230 financial arrangement 290 715-380 Exit history rule not to affect certain matters related to Division 230 financial arrangements 291 715-385 Exit history rule and elective methods applying to Division 230 financial arrangements 292 Subdivision 715-G-How value shifting rules apply to a consolidated group 292 715-410 Extension of single entity rule and entry history rule 292 715-450 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715-H 293 Subdivision 715-H-Cancelling loss on realisation event for direct or indirect interest in a subsidiary member of a consolidated group 294 715-610 Cancellation of loss 294 715-615 Exception for interests in entity leaving consolidated group 295 715-620 Exception if loss attributable to certain matters 296 Subdivision 715-J-Entry history rule and choices 296 Head company's choice overriding entry history rule 297 715-660 Head company's choice overriding entry history rule 297 Choices head company can make ignoring entry history rule to override inconsistencies 300 715-665 Head company's choice to override inconsistency 300 Choices with ongoing effect 304 715-670 Ongoing effect of choices made by entities before joining group 304 715-675 Head company adopting choice with ongoing effect 304 Subdivision 715-K-Exit history rule and choices 305 Choices leaving entity can make ignoring exit history rule 305 715-700 Choices leaving entity can make ignoring exit history rule 305 Choices leaving entity can make ignoring exit history rule to overcome inconsistencies 307 715-705 Choices leaving entity can make ignoring exit history rule to overcome inconsistencies 307 Subdivision 715-U-Effect on conduit foreign income 310 715-875 Extension of single entity rule and entry history rule 310 715-880 No CFI for leaving entity 311 Subdivision 715-V-Entity ceasing to be exempt from income tax on becoming subsidiary member of consolidated group 311 715-900 Transition time taken to be just before joining time 311 Subdivision 715-W-Effect on arrangements where CGT roll-overs are obtained 312 715-910 Effect on restructures-original entity becomes a subsidiary member 312 715-915 Effect on restructures-original entity is a head company 313 715-920 Effect on restructures-original entity is a head company that becomes a subsidiary member of another group 313 715-925 Effect on restructures-original entity ceases being a subsidiary member 314 Division 716-Miscellaneous special rules 316 Subdivision 716-A-Assessable income and deductions spread over several membership or non-membership periods 316 Guide to Subdivision 716-A 316 716-1 What this Division is about 316 Operative provisions 317 716-15 Assessable income spread over 2 or more income years 317 716-25 Deductions spread over 2 or more income years 319 716-70 Capital expenditure that is fully deductible in one income year 321 Assessable income and deductions arising from share of net income of a partnership or trust, or from share of partnership loss 323 716-75 Application 323 716-80 Head company's assessable income and deductions 324 716-85 Entity's assessable income and deductions for a non- membership period 325 716-90 Entity's share of assessable income or deductions of partnership or trust 326 716-95 Special rule if not all partnership or trust's assessable income or deductions taken into account in working out amount 327 716-100 Spreading period 327 Subdivision 716-E-Tax cost setting for exploration and prospecting assets 328 716-300 Prime cost method of working out decline in value 328 Subdivision 716-G-Low-value and software development pools 329 Assets in joining entity's low-value pool 329 716-330 Head company's deductions for decline in value of assets in joining entity's low-value pool 329 Entity leaving group with asset allocated to head company's low-value pool 332 716-335 Entity leaving group with asset allocated to head company's low-value pool 332 Depreciating assets arising from expenditure in joining entity's software development pool 334 716-340 Depreciating assets arising from expenditure in joining entity's software development pool 334 Software development pools if entity leaves consolidated group 337 716-345 Head company taken not to have incurred expenditure 337 Subdivision 716-Z-Other 338 716-800 Allocating amounts to periods if head company and subsidiary member have different income years 338 716-850 Grossing up threshold amounts for periods of less than 365 days 338 716-855 Working out the cost base or reduced cost base of a pre-CGT asset after certain roll-overs 339 Division 717-International tax rules 341 Subdivision 717-A-Foreign income tax offsets 341 717-1 What this Subdivision is about 341 Object 341 717-5 Object of this Subdivision 341 Foreign income tax on amounts in head company's assessable income 342 717-10 Head company taken to be liable for subsidiary member's foreign income tax 342 Subdivision 717-D-Transfer of certain surpluses under CFC, FIF and FLP provisions: entry rules 342 Guide to Subdivision 717-D 342 717-200 What this Subdivision is about 342 Object 343 717-205 Object of this Subdivision 343 Transfers 343 717-210 Attribution surpluses 343 717-220 FIF attribution surpluses 344 717-227 Deferred attribution credits 345 717-230 Calculating FIF income where a company joins the group 345 Subdivision 717-E-Transfer of certain surpluses under CFC, FIF and FLP provisions: exit rules 346 Guide to Subdivision 717-E 346 717-235 What this Subdivision is about 346 Object 347 717-240 Object of this Subdivision 347 Transfers 347 717-245 Attribution surpluses 347 717-255 FIF attribution surpluses 348 717-262 Deferred attribution credits 349 717-265 Calculating FIF income where a company leaves the group 350 Subdivision 717-O-Offshore banking units 351 Guide to Subdivision 717-O 351 717-700 What this Subdivision is about 351 717-705 Object of this Subdivision 352 717-710 Head company treated as OBU 352 Division 719-MEC groups 353 Subdivision 719-A-Modified application of Part 3-90 to MEC groups 353 719-2 Modified application of Part 3-90 to MEC groups 353 Subdivision 719-B-MEC groups and their members 353 719-4 What this Subdivision is about 353 Basic concepts 355 719-5 What is a MEC group? 355 719-10 What is a potential MEC group? 358 719-15 What is an eligible tier-1 company? 361 719-20 What is a top company and a tier-1 company? 362 719-25 Head company and subsidiary members of a MEC group 364 719-30 Treating entities as wholly-owned subsidiaries by disregarding employee shares 364 719-35 Treating entities held through non-fixed trusts as wholly-owned subsidiaries 366 719-40 Special conversion event-potential MEC group 366 719-45 Application of sections 703-20 and 703-25 367 Choice to consolidate a potential MEC group 368 719-50 Eligible tier-1 companies may choose to consolidate a potential MEC group 368 719-55 When choice starts to have effect 370 Provisional head company 371 719-60 Appointment of provisional head company 371 719-65 Qualifications for the provisional head company of a MEC group 372 719-70 Income year of new provisional head company to be the same as that of former provisional head company 373 Head company 374 719-75 Head company 374 Notice of events affecting group 375 719-80 Notice of events affecting MEC group 375 Effects of change of head company 376 719-85 Application 376 719-90 New head company treated as substituted for old head company at all times before the transition time 377 719-95 No consequences of old head company becoming, and new head company ceasing to be, subsidiary member of the group 378 Subdivision 719-C-MEC group cost setting rules: joining cases 379 Guide to Subdivision 719-C 379 719-150 What this Subdivision is about 379 Application and object 379 719-155 Object of this Subdivision 379 Modified application of tax cost setting rules for joining 380 719-160 Tax cost setting rules for joining have effect with modifications 380 719-165 Trading stock value not set for assets of eligible tier-1 companies 381 719-170 Modified effect of subsections 705-175(1) and 705- 185(1) 381 Subdivision 719-F-Losses 382 Guide to Subdivision 719-F 382 719-250 What this Subdivision is about 382 Maintaining the same ownership to be able to utilise loss 383 719-255 Special rules 383 719-260 Special test for utilising a loss because a company maintains the same owners 384 719-265 What is the test company? 385 719-270 Assumptions about the test company having made the loss for an income year 389 719-275 Assumptions about nothing happening to affect direct and indirect ownership of the test company 391 719-280 Assumptions about the test company failing to meet the conditions in section 165-12 393 Same business test and change of head company 394 719-285 Same business test and change of head company 394 Bundles of losses and their available fractions 395 719-300 Application 395 719-305 Subdivision 707-C affects utilisation of losses made by ongoing head company while it was head company 396 719-310 Adjustment of available fractions for bundles of losses previously transferred to ongoing head company 397 719-315 Further adjustment of available fractions for all bundles 397 719-320 Limit on utilising losses other than the prior group losses 398 719-325 Cancellation of all losses in a bundle 399 Subdivision 719-H-Imputation issues 400 719-425 Guide to Subdivision 719-H 400 Operative provisions 400 719-430 Transfer of franking account balance on cessation event 400 719-435 Distributions by subsidiary members of MEC group taken to be distributions by head company 401 Subdivision 719-I-Bad debts 401 Guide to Subdivision 719-I 401 719-450 What this Subdivision is about 401 Maintaining the same ownership to be able to deduct bad debt 402 719-455 Special test for deducting a bad debt because a company maintains the same owners 402 719-460 Assumptions about nothing happening to affect direct and indirect ownership of the test company 404 719-465 Assumptions about the test company failing to meet the conditions in section 165-123 404 Subdivision 719-J-MEC group cost setting rules: leaving cases 406 Guide to Subdivision 719-J 406 719-500 What this Subdivision is about 406 719-505 Application and object of this Subdivision 406 719-510 Modified operation of paragraphs 711-15(1)(b) and (c) 406 Subdivision 719-K-MEC group cost setting rules: pooling cases 407 Guide to Subdivision 719-K 407 719-550 What this Subdivision is about 407 719-555 Application and object of this Subdivision 407 719-560 Pooled interests 408 719-565 Setting cost of reset interests 408 719-570 Cost setting amount 409 Subdivision 719-T-Interactions between this Part and other areas of the income tax law: special rules for MEC groups 410 How Subdivision 165-CC applies to MEC groups 411 719-700 Changeover times under section 165-115C or 165-115D 411 719-705 Additional changeover times for head company of MEC group 412 How Subdivision 165-CD applies to MEC groups 413 719-720 Alteration times under section 165-115L or 165-115M 413 719-725 Additional alteration times for head company of MEC group 413 719-730 Some alteration times only affect interests in top company 414 719-735 Some alteration times affect only pooled interests 415 How indirect value shifting rules apply to a MEC group 416 719-755 Effect on MEC group cost setting rules if head company is losing entity or gaining entity for indirect value shift 416 Cancelling loss on realisation event for direct or indirect interest in a subsidiary member of a MEC group 416 719-775 Cancellation of loss 416 719-780 Exception for pooled interests in eligible tier-1 companies 418 719-785 Exception for interests in top company 418 719-790 Exception for interests in entity leaving MEC group 418 719-795 Exception if loss attributable to certain matters 419 Division 721-Liability for payment of tax where head company fails to pay on time 420 Guide to Division 721 420 721-1 What this Division is about 420 Object 421 721-5 Object of this Division 421 When this Division operates 421 721-10 When this Division operates 421 Joint and several liability of contributing member 424 721-15 Head company and contributing members jointly and severally liable to pay group liability 424 721-17 Notice of joint and several liability for general interest charge 426 721-20 Limit on liability where group first comes into existence 426 Tax sharing agreements 427 721-25 When a group liability is covered by a tax sharing agreement 427 721-30 TSA contributing members liable for contribution amounts 428 721-32 Notice of general interest charge liability under TSA 429 721-35 When a TSA contributing member has left the group clear of the group liability 430 721-40 TSA liability and group liability are linked 430 Part 3-95-Value shifting 432 Division 723-Direct value shifting by creating right over non- depreciating asset 432 Subdivision 723-A-Reduction in loss from realising non-depreciating asset 432 723-1 Object 432 723-10 Reduction in loss from realising non-depreciating asset over which right has been created 433 723-15 Reduction in loss from realising non-depreciating asset at the same time as right is created over it 435 723-20 Exceptions 436 723-25 Realisation event that is only a partial realisation 437 723-35 Multiple rights created to take advantage of the $50,000 threshold 437 723-40 Application to CGT asset that is also trading stock or revenue asset 438 723-50 Effects if right created over underlying asset is also trading stock or a revenue asset 438 Subdivision 723-B-Reducing reduced cost base of interests in entity that acquires non-depreciating asset under roll-over 439 723-105 Reduced cost base of interest reduced when interest realised at a loss 439 723-110 Direct and indirect roll-over replacement for underlying asset 440 Division 725-Direct value shifting affecting interests in companies and trusts 442 Guide to Division 725 442 725-1 What this Division is about 442 Subdivision 725-A-Scope of the direct value shifting rules 443 725-45 Main object 443 725-50 When a direct value shift has consequences under this Division 444 725-55 Controlling entity test 444 725-65 Cause of the value shift 444 725-70 Consequences for down interest only if there is a material decrease in its market value 445 725-80 Who is an affected owner of a down interest? 446 725-85 Who is an affected owner of an up interest? 446 725-90 Direct value shift that will be reversed 447 725-95 Direct value shift resulting from reversal 447 Subdivision 725-B-What is a direct value shift 448 725-145 When there is a direct value shift 448 725-150 Issue of equity or loan interests at a discount 449 725-155 Meaning of down interests, decrease time, up interests and increase time 450 725-160 What is the nature of a direct value shift? 451 725-165 If market value decrease or increase is only partly attributable to the scheme 451 Subdivision 725-C-Consequences of a direct value shift 451 General 452 725-205 Consequences depend on character of down interests and up interests 452 725-210 Consequences for down interests depend on pre-shift gains and losses 452 Special cases 453 725-220 Neutral direct value shifts 453 725-225 Issue of bonus shares or units 453 725-230 Off-market buy-backs 455 Subdivision 725-D-Consequences for down interest or up interest as CGT asset 455 725-240 CGT consequences; meaning of adjustable value 456 725-245 Table of taxing events generating a gain for interests as CGT assets 457 725-250 Table of consequences for adjustable values of interests as CGT assets 458 725-255 Multiple CGT consequences for the same down interest or up interest 460 Subdivision 725-E-Consequences for down interest or up interest as trading stock or a revenue asset 461 725-310 Consequences for down interest or up interest as trading stock 461 725-315 Adjustable value of trading stock 463 725-320 Consequences for down interest or up interest as a revenue asset 463 725-325 Adjustable value of revenue asset 464 725-335 How to work out those consequences 465 725-340 Multiple trading stock or revenue asset consequences for the same down interest or up interest 468 Subdivision 725-F-Value adjustments and taxed gains 468 725-365 Decreases in adjustable values of down interests (with pre-shift gains), and taxing events generating a gain 468 725-370 Uplifts in adjustable values of up interests under certain table items 470 725-375 Uplifts in adjustable values of up interests under other table items 472 725-380 Decreases in adjustable value of down interests (with pre-shift losses) 474 Division 727-Indirect value shifting affecting interests in companies and trusts, and arising from non-arm's length dealings 476 Guide to Division 727 476 727-1 What this Division is about 476 727-5 What is an indirect value shift? 477 727-10 How does this Division deal with indirect value shifts? 479 727-15 When does an indirect value shift have consequences under this Division? 479 727-25 Effect of this Division on realisations at a loss that occur before the nature or extent of an indirect value shift can be fully determined 480 Subdivision 727-A-Scope of the indirect value shifting rules 480 727-95 Main object 480 727-100 When an indirect value shift has consequences under this Division 481 727-105 Ultimate controller test 482 727-110 Common-ownership nexus test (if both losing and gaining entities are closely held) 482 727-125 No consequences if losing entity is a superannuation entity 483 Subdivision 727-B-What is an indirect value shift 483 727-150 How to determine whether a scheme results in an indirect value shift 483 727-155 Providing economic benefits 485 727-160 When an economic benefit is provided in connection with a scheme 486 727-165 Preventing double-counting of economic benefits 486 Subdivision 727-C-Exclusions 487 Guide to Subdivision 727-C 487 727-200 What this Subdivision is about 487 General 488 727-215 Amount does not exceed $50,000 488 727-220 Disposal of asset at cost, or at undervalue if full value is not reflected in adjustable values of equity or loan interests in the losing entity 488 Indirect value shifts involving services 489 727-230 Services provided by losing entity to gaining entity for at least their direct cost 489 727-235 Services provided by gaining entity to losing entity for no more than a commercially realistic price 490 727-240 What services certain provisions apply to 491 727-245 How to work out certain amounts for the purposes of sections 727-230 and 727-235 492 Anti-overlap provisions 493 727-250 Distribution by an entity to a member or beneficiary 493 Miscellaneous 494 727-260 Shift down a wholly-owned chain of entities 494 Subdivision 727-D-Working out the market value of economic benefits 495 727-300 What the rules in this Subdivision are for 495 727-315 Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000 495 Subdivision 727-E-Key concepts 496 Ultimate controller 497 727-350 Ultimate controller 497 727-355 Control (for value shifting purposes) of a company 497 727-360 Control (for value shifting purposes) of a fixed trust 498 727-365 Control (for value shifting purposes) of a non-fixed trust 499 727-370 Preventing double counting for percentage stake tests 500 727-375 Tests in this Subdivision are exhaustive 500 Common-ownership nexus and ultimate stake of a particular percentage 500 727-400 When 2 entities have a common-ownership nexus within a period 500 727-405 Ultimate stake of a particular percentage in a company 502 727-410 Ultimate stake of a particular percentage in a fixed trust 503 727-415 Rules for tracing 504 Subdivision 727-F-Consequences of an indirect value shift 505 Guide to Subdivision 727-F 505 727-450 What this Subdivision is about 505 Operative provisions 506 727-455 Consequences of the indirect value shift 506 Affected interests 506 727-460 Affected interests in the losing entity 506 727-465 Affected interests in the gaining entity 507 727-470 Exceptions 507 727-520 Equity or loan interest and related terms 508 727-525 Indirect equity or loan interest 509 Affected owners 509 727-530 Who are the affected owners 509 Choices about method to be used 511 727-550 Choosing the adjustable value method 511 727-555 Giving other affected owners information about the choice 513 Subdivision 727-G-The realisation time method 514 727-600 What this Subdivision is about 514 Operative provisions 515 727-610 Consequences of indirect value shift 515 727-615 Reduction of loss on realisation event for affected interest in losing entity 516 727-620 Reduction of gain on realisation event for affected interest in gaining entity 517 727-625 Total gain reductions not to exceed total loss reductions 517 727-630 How cap in section 727-625 applies if affected interest is also trading stock or a revenue asset 518 727-635 Splitting an equity or loan interest 520 727-640 Merging equity or loan interests 520 727-645 Effect of CGT roll-over 521 Further exclusion for certain 95% services indirect value shifts if realisation time method must be used 522 727-700 When 95% services indirect value shift is excluded 522 95% services indirect value shifts that are not excluded 523 727-705 Another provision of the income tax law affects amount related to services by at least $100,000 523 727-710 Ongoing or recent service arrangement reduces value of losing entity by at least $100,000 524 727-715 Service arrangements reduce value of losing entity that is a group service provider by at least $500,000 525 727-720 Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000 527 727-725 Meaning of predominantly-services indirect value shift 528 Subdivision 727-H-The adjustable value method 528 Guide to Subdivision 727-H 528 727-750 What this Subdivision is about 528 727-755 Consequences of indirect value shift 529 Reductions of adjustable value 530 727-770 Reduction under the adjustable value method 530 727-775 Has there been a disaggregated attributable decrease? 531 727-780 Working out the reduction on a loss-focussed basis 532 Uplifts of adjustable value 533 727-800 Uplift under the attributable increase method 533 727-805 Has there been a disaggregated attributable increase? 535 727-810 Scaling-down formula 536 Consequences of the method for various kinds of assets 537 727-830 CGT assets 537 727-835 Trading stock 538 727-840 Revenue assets 539 Subdivision 727-K-Reduction of loss on equity or loan interests realised before the IVS time 540 727-850 Consequences of scheme under this Subdivision 541 727-855 Presumed indirect value shift 542 727-860 Conditions about the prospective gaining entity 543 727-865 How other provisions of this Division apply to support this Subdivision 545 727-870 Effect of CGT roll-over 547 727-875 Application to CGT asset that is also trading stock or revenue asset 547 Subdivision 727-L-Indirect value shift resulting from a direct value shift 547 727-905 How this Subdivision affects the rest of this Division 548 727-910 Treatment of value shifted under the direct value shift 549 Part 3-90-Consolidated groups Division 700-Guide and objects Table of sections Guide 700-1 What this Part is about 700-5 Overview of this Part Objects 700-10 Objects of this Part 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. This is supported by rules that: (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 The objects of this Part are: (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 (c) to provide a systematic solution to the prevention of such double taxation and double tax benefits that will: (i) reduce the cost of complying with this Act; and (ii) improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly-owned groups. Division 701-Core rules Table of sections Common rule 701-1 Single entity rule Head company rules 701-5 Entry history rule 701-10 Cost to head company of assets of joining entity 701-15 Cost to head company of membership interests in entity that leaves group 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 Entity rules 701-30 Where entity not subsidiary member for whole of income year 701-35 Tax-neutral consequence for entity of ceasing to hold assets when it joins group 701-40 Exit history rule 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 Supporting provisions 701-55 Setting the tax cost of an asset 701-58 Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule 701-60 Tax cost setting amount 701-61 Assets in relation to Division 230 financial arrangement- head company's assessable income or deduction 701-65 Net income and losses for trusts and partnerships Exceptions 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 701-80 Accelerated depreciation 701-85 Other exceptions etc. to the rules 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. Head company core purposes (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. Entity core purposes (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. What is a sort of loss? (4) Each of these paragraphs identifies a sort of loss: (a) *tax loss; (b) *film loss; (c) *net capital loss. This subsection lists all the sorts of loss. 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 1: 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). Note 2: Section 73BAC of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions. Note 3: Section 165-212E overrides this rule for the purposes of the same business test. 701-10 Cost to head company of assets of joining entity (1) This section has effect for the head company core purposes when the entity becomes a *subsidiary member of the group. Assets to which section applies (2) This section applies in relation to each asset that would be an asset of the entity at the time it becomes a *subsidiary member of the group, assuming that subsection 701-1(1) (the single entity rule) did not apply. Note: See subsection 705-35(3) for the treatment of a goodwill asset resulting from the head company's ownership and control of the joining entity. Object (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. Setting tax cost of assets (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. Multiple setting of tax cost for same trading stock (5) However, if: (a) the asset is *trading stock; and (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. (6) If: (a) the *head company's *terminating value for the asset; or (b) the *value of the asset at the start of the income year; 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 section at a particular setting time is only taken into account in working out the head company's terminating value for a particular occasion if: (c) the setting time occurs before the occasion; and (d) there is no intervening setting time or occasion. Excluded assets (7) If an asset is an excluded asset under subsection 705-35(2), its *tax cost is not set. Note: Excluded assets are assets such as entitlements to tax deductions. 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. Note: This section could have effect, for example, if an entity ceases to be a subsidiary member of the group because: (a) it ceases to satisfy the requirements to be a subsidiary member; or (b) the head company ceases to satisfy the requirements to be a head company (thereby bringing the group to an end). Object (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. Setting tax cost of membership interests (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 1: 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. Note 2: If the entity is a partnership, Subdivision 713-E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership. 701-20 Cost to head company of assets consisting of certain liabilities owed by 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. Assets to which section applies (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. Object (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. Setting tax cost of assets (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 the entity is a partnership, Subdivision 713-E sets the tax cost of assets consisting of a partner's share of a liability owed by the partnership to a member of the group. 701-25 Tax-neutral consequence for head company of ceasing to hold assets when entity 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. Assets to which section applies (2) This section applies in relation to an asset if: (a) the asset is *trading stock of the *head company; and (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 (c) the asset is not again an asset of the head company at or before the end of the income year. Object (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. Setting value of trading stock at tax-neutral amount (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. Note: As a consequence of fixing the trading stock's value at the end of the income year under this subsection, no election would be available under section 70-45 to value the trading stock at that time. Entity rules 701-30 Where entity not subsidiary member for whole of income year Object (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. When section has effect (2) This section has effect for the entity core purposes if: (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. Tax position of each non-membership period to be worked out (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); and (c) so that each relevant item is either: (i) allocated to only one of the non-membership periods or to a period that is all or part of the rest of the income year; or (ii) apportioned among such periods (for example, by Subdivision 716- A (see note to this subsection)). 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); and . Subdivision 716-A (about assessable income and deductions spread over several membership or non- membership periods); and . section 716-850 (about grossing up threshold amounts for periods of less than 365 days). Subdivision 716 also affects the tax position of the head company of a group of which the entity has been a subsidiary member for some but not all of the income year. (3A) For the purposes of working out the entity's taxable income (if any) for the non-membership period, determine: (a) whether the entity can *utilise a loss of any *sort transferred to the entity in the period; and (b) if the period started at the start of the income year-whether the entity can utilise a loss of any sort: (i) made by the entity, without a transfer, for an earlier income year; or (ii) transferred to the entity in an earlier income year; as if the time just after the end of the period were the end of the income year and the entity carried on at that time the same business that it carried on just before that time. Paragraph (3)(a) has effect subject to this subsection. Note: This means that things that happen in relation to the entity at the time it becomes a subsidiary member of the group are taken into account in determining whether the entity can utilise such a loss to affect its taxable income for the non-membership period. Income tax for the financial year (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). Taxable income for the income year (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). Loss for the income year (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. Utilisation and transfer of non-membership period loss (8) However, the provisions of this Act relating to transfer or *utilisation of a loss of any *sort have effect in relation to a non-membership period loss of that sort for any non-membership period as if the non-membership period loss were the entity's loss for an income year that: (a) started at the start of the period; and (b) ended at the end of the period. (9) Subsection (8) has effect not only for the entity core purposes, but also (despite subsection (2)) for other purposes. Excess franking deficit tax offset for the income year (10) For the purposes of applying section 205-70 in relation to an income year after the income year (the current income year) to which this section applies, the entity has an excess mentioned in paragraph 205-70(1)(c) (about excess franking deficit tax offsets) for the current income year only if it has such an excess for the non-membership period (if any) ending at the end of the current income year. The amount of the excess for the current income year is the amount of the excess for the non-membership period. 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. Assets to which section applies (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. Object (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. Setting value of trading stock at tax-neutral amount (4) The *value of the *trading stock at the end of the income year that ends, or, if section 701-30 applies, of the income year that is taken by subsection (3) of that section to end, 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 (c) in any other case-the amount of the outgoing incurred by the 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 was incurred by the entity during its current holding of the asset. Note: As a consequence of fixing the trading stock's value at the end of the income year under this subsection, no election would be available under section 70-45 to value the trading stock at that time. 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. Note: Section 73BAD of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions. Assets, liabilities and businesses covered (2) This subsection covers the following: (a) any asset; (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; (c) any business; (d) any registration under section 39J of the Industry Research and Development Act 1986 for particular research and development activities; 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. Head company history inherited (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. Assets to which section applies (2) This section applies in relation to an asset if: (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. Object (3) The object of this section is to set the cost of the asset to enable income tax consequences for the entity 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. Setting the asset's tax cost (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 1: 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. Note 2: If the entity is a partnership, Subdivision 713-E sets the tax cost of a partner's interest in an asset consisting of a liability that a member of the group owes to the partnership. 701-50 Cost of certain membership interests of which entity becomes holder on leaving group (1) If: (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; this section has effect for the entity core purposes. Object (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. Setting tax cost of membership interests (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. Note: If the asset consists of a membership interest in a partnership, Subdivision 713-E sets the tax cost of interests in partnership assets, rather than membership interests in the partnership. 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. Depreciating asset provisions (2) If any of Subdivisions 40-A to 40-D, sections 40-425 to 40-445 and Subdivision 328-D, and sections 73BA and 73BF of the Income Tax Assessment Act 1936, 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 subsections 40-95(1) and (3) 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. Trading stock provisions (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. Qualifying security provisions (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. Capital gain and loss provisions (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. Division 230 (financial arrangements) (5A) If Division 230 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: (a) unless paragraph (b) applies-the asset's *tax cost setting amount; or (b) if the asset's tax cost is set because an entity becomes a *subsidiary member of a *consolidated group, and Subdivision 230-C (fair value method), Subdivision 230-D (foreign exchange retranslation method) or Subdivision 230-F (reliance on financial reports method) is to apply in relation to the asset-the asset's *Division 230 starting value at the particular time. (5B) To avoid doubt, for the purposes of paragraph (5A)(b), determine the asset's *Division 230 starting value by reference to the relevant standards (as mentioned in section 230-230, 230-280 or 230-420) that apply in relation to the *head company's financial report for the income year in which the entity becomes a subsidiary member of the group. Other provisions (6) If any provision of this Act that is not mentioned above is to apply in relation to the asset, the expression means that the provision applies as if the asset's cost at that time were equal to its *tax cost setting amount. 701-58 Effect of setting the tax cost of an asset that the head company does not hold under the single entity rule (1) This section applies if: (a) the *tax cost of an asset was set at the time (the joining time) an entity became a *subsidiary member of a *consolidated group, at the asset's *tax cost setting amount; and (b) ignoring the operation of subsection 701-1(1) (the single entity rule), the entity held the asset at the joining time; and (c) taking into account the operation of subsection 701-1(1) (the single entity rule), the *head company of the group did not hold the asset at the joining time. Example: A debt owed by a member of the group to the joining entity at the joining time. (2) To avoid doubt, the asset's *tax cost setting amount mentioned in paragraph (1)(a) is not to be taken into account in applying the provisions mentioned in subsections 701-55(2), (3), (4), (5), (5A) and (6) in relation to the asset at and after the joining time. 701-60 Tax cost setting amount The asset's tax cost setting amount is worked out using this table. |Tax cost setting amount | |Item |If the asset's tax cost |The asset's tax cost | | |is set by: |setting amount is: | |1 |section 701-10 (Cost to |the amount worked out in| | |head company of assets |accordance with | | |of joining entity) |Division 705 | |2 |section 701-15 (Cost to |the amount worked out in| | |head company of |accordance with | | |membership interests in |section 711-15 or 711-55| | |entity that leaves | | | |group) | | |3 |section 701-20 (Cost to |the *market value of the| | |head company of assets |asset | | |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) | | |4 |section 701-50 (Cost of |the amount worked out in| | |certain membership |accordance with | | |interests of which |section 711-55 | | |entity becomes holder on| | | |leaving group) | | Note 1: The tax cost setting amount of certain interests in partnership assets is worked out under Subdivision 713-E. Note 2: The tax cost setting amount of certain assets of a life insurance company is worked out under Subdivision 713-L. 701-61 Assets in relation to Division 230 financial arrangement-head company's assessable income or deduction (1) This section applies if: (a) an entity (the joining entity) becomes a *subsidiary member of a *consolidated group; and (b) paragraph 701-55(5A)(b) applies in relation to one or more assets of the joining entity. (2) Work out if the total of the *Division 230 starting values for those assets exceeds or falls short of the total of their *tax cost setting amounts. (3) If there is an excess, an amount equal to 25% of that excess is included in the *head company's assessable income for: (a) the income year in which the particular time mentioned in subsection 701-55(5A) occurs; and (b) each of the 3 subsequent income years. (4) If there is a shortfall, the *head company is entitled to a deduction equal to 25% of that shortfall for: (a) the income year in which the particular time mentioned in subsection 701-55(5A) occurs; and (b) each of the 3 subsequent income years. 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 adjustment year): (i) if the combining entity is the *head company and the joining time occurs at the start of an income year-the income year before that income year; (ii) if the combining entity is the head company and subparagraph (i) does not apply-the income year in which the joining time occurs; (iii) in any other case-the income year that ends, or, if section 701- 30 applies, the income year that is taken by subsection (3) of that section to end, at the joining time; and (b) all earlier income years; is not equal to the amount worked out under subsection (4), then: (c) if the total is less-the entity is entitled to deduct the difference for the joining adjustment year; and (d) if it is more-the entity's assessable income for the joining adjustment year includes the difference. Pre-joining time proportion of total arrangement deductions (4) The amount is worked out using the formula: [pic] 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 adjustment 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 adjustment year includes the difference; and (b) if it is more-the entity is entitled to deduct the difference for the joining adjustment year. Pre-joining time proportion of total arrangement assessable income (6) The amount is worked out using the formula: [pic] 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, or, if section 701-30 applies, the income year that is taken by subsection (3) of that section to have 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 adjustment 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, or, if section 701-30 applies, the income year that is taken by subsection (3) of that section to start, 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: [pic] 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 adjustment 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: [pic] 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) a *depreciating asset to which Division 40 applies becomes that of the *head company because subsection 701-1(1) (the single entity rule) applies when the entity becomes a *subsidiary member of the group; and (b) just before the entity became a subsidiary member, subsection 40-10(3) or 40-12(3) of the Income Tax (Transitional Provisions) Act 1997 applied for the purpose of the entity working out the asset's decline in value under Division 40; and Note: The effect of those subsections was to preserve an entitlement to accelerated depreciation. (c) 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 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. 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? 703-33 Transfer time for sale of shares in company 703-35 Treating entities as wholly-owned subsidiaries by disregarding employee shares 703-37 Disregarding certain preference shares following an ADI restructure 703-40 Treating entities held through non-fixed trusts as wholly- owned subsidiaries 703-45 Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable 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 Effects of choice to continue group after shelf company becomes new head company 703-65 Application 703-70 Consolidated group continues in existence with interposed company as head company and original company as a subsidiary member 703-75 Interposed company treated as substituted for original company at all times before the completion time 703-80 Effects on the original company's tax position 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. Note: The group does not cease to exist in some cases where a shelf company is interposed between the head company and its former members: see subsection 124-380(5) and section 703- 70. (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 |Column 2 |Column 3 |Column 4 | |Entity's |Income tax |Australian |Ownership | |role in |treatment |residence |requirements | |relation |requirements |requirements | | |to group | | | | |1 Head |The entity |The entity |The entity | |company |must be a |must be an |must not be a | | |company (but |Australian |*wholly-owned | | |not one |resident (but |subsidiary of | | |covered by |not a |another entity| | |section 703-20|*prescribed |that meets the| | |) that has all|dual resident)|requirements | | |or some of its| |in columns 2 | | |taxable income| |and 3 of this | | |(if any) taxed| |item or, if it| | |at a rate that| |is, it must | | |is or equals | |not be a | | |the *corporate| |subsidiary | | |tax rate | |member of a | | | | |*consolidatabl| | | | |e group or | | | | |*consolidated | | | | |group | |2 |The |The entity |The entity | |Subsidiar|requirements |must: |must be a | |y member |are that: |(a) be an |*wholly-owned | | |(a) the entity|Australian |subsidiary of | | |must be a |resident (but |the head | | |company, trust|not a |company of the| | |or partnership|*prescribed |group and, if | | |(but not one |dual |there are | | |covered by |resident), if |interposed | | |section 703-20|it is a |between them | | |); and |company; or |any entities, | | |(b) if the |(b) comply |the set of | | |entity is a |with |requirements | | |company-all or|section 703-25|in | | |some of its |, if it is a |section 703-45| | |taxable income|trust; or |, | | |(if any) must |(c) be a |section 701C-1| | |be taxable |partnership |0 of the | | |apart from | |Income Tax | | |this Part at a| |(Transitional | | |rate that is | |Provisions) | | |or equals the | |Act 1997 or | | |*corporate tax| |section 701C-1| | |rate; and | |5 of that Act | | |(c) the entity| |must be met | | |must not be a | | | | |non-profit | | | | |company (as | | | | |defined in the| | | | |Income Tax | | | | |Rates Act | | | | |1986) | | | 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 |Cannot be a member of a | | |this kind: |consolidated group or | | | |consolidatable group if: | |1 |An entity of any|At the time, the total *ordinary| | |kind |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 | |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 approved | | | |deposit fund or a *non-complying| | | |superannuation fund for the | | | |income year | Note: A subsidiary of a life insurance company cannot be a member of a consolidated group or consolidatable group in certain circumstances: see section 713-510. 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|Can be a member of a consolidated | | |kind: |group or consolidatable group only| | | |if these requirements are met: | |1 |A trust (except|The trust must be a resident trust| | |a unit 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 |The trust must be: | | |(except a |(a) a resident trust estate for | | |*corporate unit|the income year for the purposes | | |trust or a |of Division 6 of Part III of the | | |*public trading|Income Tax Assessment Act 1936; | | |trust for the |and | | |income year) |(b) a *resident trust for CGT | | | |purposes for the income year | |3 |A *corporate |The trust must be a *resident unit| | |unit trust or a|trust for the income year | | |*public trading| | | |trust 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 (c) the holding entity and one or more wholly-owned subsidiaries of the holding entity. (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 (aa) ownership of certain preference shares following an ADI restructure (see section 703-37); or (b) interposed trusts that are not fixed trusts (see section 703-40). (3) For the purposes of this section, one entity is not prevented from being the beneficial owner of a *membership interest in another entity merely because the first entity is or becomes: (a) an externally-administered body corporate within the meaning of the Corporations Act 2001; or (b) an entity with a status under a *foreign law similar to the status of an externally-administered body corporate under the Corporations Act 2001. 703-33 Transfer time for sale of shares in company (1) This section applies if: (a) under a contract: (i) a person (the seller) stops being entitled to be registered as the holder of a *share in a company at a time (the transfer time); and (ii) another person (the buyer) becomes entitled to be registered as the holder of the share in the company at the transfer time; and (b) as a result of the contract, the seller stops being the beneficial owner of the share, and the buyer becomes the beneficial owner of the share; and (c) the seller and the buyer dealt with each other at *arm's length in relation to the contract; and (d) the seller and the buyer were not *associates of one another at any time during the period: (i) starting when the contract was entered into; and (ii) ending at the transfer time. (2) For the purposes of subsection 703-30(1): (a) the seller is taken to have stopped being the beneficial owner of the share at the transfer time; and (b) the buyer is taken to have become the beneficial owner of the share at the transfer time. 703-35 Treating entities as wholly-owned subsidiaries by disregarding employee shares (1) The object of this section is to ensure that an entity (the first entity) is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because there are minor holdings of *membership interests in an entity (the employee share scheme entity) issued under *arrangements for employee shareholdings. (It does not matter whether the employee share scheme entity is the first entity or is interposed between the first 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 an entity 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 entity must be one that would be a *wholly-owned subsidiary of the holding entity at the time if the *membership interests in the entity that are to be disregarded under subsection (4) did not exist. (4) Disregard: (a) 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; and (b) each of the *membership interests in an entity described in subsection (7) if the total number of those membership interests is not more than 1% of the number of membership interests of that kind in the entity. (5) A *share in a 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. (7) A *membership interest of a particular kind in an entity that is beneficially owned by another entity may be disregarded under subsection (4) if: (a) the membership interest forms part of a stapled security (within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936); and (b) the stapled security is treated as a *qualifying share because of Subdivision DB of that Division. Note: The kinds of membership interest that form part of a stapled security are an ordinary share and one or more other interests that are either shares or units in a unit trust: see section 139GCD of the Income Tax Assessment Act 1936. 703-37 Disregarding certain preference shares following an ADI restructure (1) The object of this section is to ensure that, following an *ADI restructure to which Part 4A of the Financial Sector (Business Transfer and Group Restructure) Act 1999 applies, a body corporate is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because the body (or another body corporate) has issued, or issues, certain preference *shares. (2) This Part (except Division 719) operates as if a body corporate that meets the requirement of subsection (3) at a particular time were a *wholly-owned subsidiary of another body corporate (the holding body) at the time. (3) The body corporate (the preference-share issuing body) must be one that would be a *wholly-owned subsidiary of the holding body at the time if the *shares in the preference share-issuing body that are to be disregarded under subsection (4) did not exist. (4) Disregard a *share in the preference-share issuing body if: (a) a restructure instrument under Part 4A of the Financial Sector (Business Transfer and Group Restructure) Act 1999 is in force in relation to a non-operating holding company within the meaning of that Act; and (b) because of the restructure to which the instrument relates, an *ADI becomes a subsidiary (within the meaning of that Act) of the non-operating holding company; and (c) the preference share-issuing body is: (i) the ADI; or (ii) part of an extended licensed entity (within the meaning of the *prudential standards) that includes the ADI; and (d) the shares are covered by subsection (5). (5) A *share is covered by this subsection if: (a) the share is a preference share; and (b) any *return on the share is fixed at the time of issue by reference to the amount subscribed; and (c) the share is not a *voting share; and (d) either: (i) the share is Tier 1 capital (within the meaning of the *prudential standards); or (ii) the share would be Tier 1 capital (within the meaning of the prudential standards) were it not for a limit, imposed by those standards, on the proportion of Tier 1 capital that can be made up of such shares. (6) Paragraph (5)(a) covers a preference share if it is issued: (a) by itself; or (b) in combination with one or more *schemes that are *related schemes in relation to a scheme under which a preference share is issued. (7) If subsection (5) has covered a *share, but would (apart from this subsection) stop covering the share from a particular time, then for a period of 180 days after that time the subsection is taken to continue to cover 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 Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group (1) This section describes, for the purposes of item 2, column 4 of the table in subsection 703-15(2), a set of requirements that must be met for an entity (the test entity) to be a *subsidiary member of a *consolidated group or a *consolidatable group at a particular time (the test time). (2) At the test time, each of the interposed entities must either: (a) be a *subsidiary member of the group; or (b) hold *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. 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 income year during which the day specified in the choice occurs; 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 (c) the company was not the head company of a consolidatable group on the day specified in the choice. 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 (c) the company is a *head company as defined in section 703-15 at the time. (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|Column 2 |Column 3 | | |If this event |Notice must be given by: | |Item |happens: | | |1 |An entity |The *head company of the | | |becomes a |consolidated group | | |*member of a | | | |*consolidated | | | |group | | |2 |An entity ceases|The *head company of the | | |to be a |group, or the person who was | | |*subsidiary |its public officer just | | |member of a |before it ceased to exist if | | |*consolidated |the former subsidiary member | | |group |ceases to be a *member of the| | | |group because the head | | | |company ceases to exist | |3 |A *consolidated |The company that was the | | |group ceases to |*head company of the group, | | |exist |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 *head company of the consolidated group 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 (c) the event happens more than 28 days before the notice of choice is given; 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. Effects of choice to continue group after shelf company becomes new head company 703-65 Application Sections 703-70 to 703-80 set out the effects if a company (the interposed company) chooses under subsection 124-380(5) that a *consolidated group is to continue in existence at and after the time referred to in that subsection as the completion time. Note: The choice is one of the conditions for a compulsory roll- over under Subdivision 124-G on an exchange of shares in the head company of a consolidated group for shares in the interposed company. 703-70 Consolidated group continues in existence with interposed company as head company and original company as a subsidiary member (1) The *consolidated group is taken not to have ceased to exist under subsection 703-5(2) because the company referred to in subsection 124-380(5) as the original company ceases to be the *head company of the group. (2) To avoid doubt, the interposed company is taken to have become the *head company of the *consolidated group at the completion time, and the original company is taken to have ceased to be the head company at that time. Note: A further result is that the original company is taken to have become a subsidiary member of the group at that time. Section 703-80 deals with the original company's tax position for the income year that includes the completion time. (3) A provision of this Part that applies on an entity becoming a *subsidiary member of a *consolidated group does not apply to an entity being taken to have become such a member as a result of this section, unless the provision is expressed to apply despite this subsection. Note: An example of the effect of this subsection is that there is no resetting under section 701-10 of the tax cost of assets of the original company that become assets of the interposed company because of subsection 701-1(1) (the single entity rule). (4) To avoid doubt, subsection (3) does not affect the application of subsection 701-1(1) (the single entity rule). 703-75 Interposed company treated as substituted for original company at all times before the completion time (1) Everything that happened in relation to the original company before the completion time: (a) is taken to have happened in relation to the interposed company instead of in relation to the original company; and (b) is taken to have happened in relation to the interposed company instead of what would (apart from this section) be taken to have happened in relation to the interposed company before that time; just as if, at all times before the completion time: (c) the interposed company had been the original company; and (d) the original company had been the interposed company. Note: This section treats the original company and the interposed company as having in effect exchanged identities throughout the period before the completion time, but without affecting any of the original company's other attributes. (2) To avoid doubt, subsection (1) also covers everything that, immediately before the completion time, was taken, because of: (a) section 701-1 (Single entity rule); or (b) section 701-5 (Entry history rule); or (c) one or more previous applications of this section; or (d) section 719-90 (about the effects of a change of head company of a MEC group); to have happened in relation to the original company. (3) Subsections (1) and (2) have effect: (a) for the head company core purposes in relation to an income year ending after the completion time; and (b) for the entity core purposes in relation to an income year ending after the completion time; and (c) for the purposes of determining the respective balances of the *franking accounts of the original company and the interposed company at and after the completion time. (4) Subsections (1) and (2) have effect subject to: (a) section 701-40 (Exit history rule); and (b) a provision of this Act to which section 701-40 is subject because of section 701-85 (about exceptions to the core rules in Division 701). Note: An example of provisions covered by paragraph (b) of this subsection is Subdivision 717-E (about transferring to a company leaving a consolidated group various surpluses under the CFC and FIF rules in Parts X and XI of the Income Tax Assessment Act 1936). 703-80 Effects on the original company's tax position In applying section 701-30 to the original company for the income year that includes the completion time, disregard a non- membership period that starts before the completion time. Note 1: Section 701-30 is about working out an entity's tax position for a period when it is not a subsidiary member of any consolidated group. Its application can also affect the entity's tax position in later income years. Note 2: Under section 703-75 the interposed company inherits the original company's tax position for the part of the income year that ends before the completion time, with the consequence that the original company's taxable income, income tax payable, and losses of any sort, for that part are each nil. Because of section 703-75 and this section, the only tax payable by the original company for the income year arises because of the application of section 701-30 to non-membership periods in the income year after the completion time. 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 705-B Case of group formation 705-C Case where a consolidated group is acquired by another 705-D Where multiple entities are linked by membership interests 705-E Adjustments for errors etc. 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 Tax cost setting amount for reset cost base assets held on revenue account 705-45 Reduction in tax cost setting amount for accelerated depreciation assets 705-47 Reduction in tax cost setting amount for some privatised assets 705-50 Reduction in tax cost setting amount for over-depreciated assets 705-55 Order of application of sections 705-40, 705-45, 705-47 and 705-50 705-56 Modification for tax cost setting in relation to finance leases 705-57 Adjustment to tax cost setting amount where loss of pre- CGT status of membership interests in joining entity 705-58 Assets and liabilities not set off against each other 705-59 Exception: treatment of linked assets and liabilities 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, taxed profits accruing to joined group before joining time-step 3 in working out allocable cost amount 705-93 If pre-joining time roll-over from foreign resident company-step 3A 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 How to work out a pre-CGT factor for assets of joining entity 705-125 Pre-CGT factor for assets of joining entity 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. (c) the third exception is where: (i) the joining entity and one or more other entities become members of the joined group at the same time 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. 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: see CGT event L3. Financial arrangements to which Subdivision 250-E applies (4A) The *tax cost setting amount is instead equal to the joining entity's *terminating value for the *retained cost base asset if the asset is a *financial arrangement to which Subdivision 250-E applies immediately before the joining time. 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. (c) a right to have something done under an *arrangement under which: (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. Note 1: There are some additional retained cost base assets for a joining entity that is a life insurance company: see Subdivision 713-L. The tax cost setting amount for those assets is worked out under that Subdivision. Note 2: The joining entity's right to receive lease payments under a finance lease is treated as a retained cost base asset in some circumstances (see paragraph 705-56(3)(b)). 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 to which Division 40 applies, the joining entity's terminating value for the asset is equal to the asset's *adjustable value just before the joining time. Financial arrangements to which Subdivision 250-E applies (3A) If an asset of the joining entity is a *financial arrangement to which Subdivision 250-E applies, 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 Subdivision 250-E. Division 230 financial arrangements (3B) If an asset of the joining entity is or is part of a *Division 230 financial arrangement, 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 Division 230. 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 1A: If a set of linked assets and liabilities includes one or more reset cost base assets, section 705-59 may affect how this section applies. In particular, that section may exclude the application of paragraph 705-35(1)(b) to retained cost base assets in the set; this in turn may affect the application of CGT event L3. Note 2: If there are no reset cost base assets, the result is instead treated as a capital loss of the head company: see CGT event L4. 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 Tax cost setting amount for reset cost base assets held on revenue account (1) The *tax cost setting amount for a reset cost base asset that is *trading stock, a *depreciating asset or 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. (2) If subsection (1) reduces the asset's *tax cost setting amount, the amount of the reduction is allocated among the other reset cost base assets (including other *trading stock, *depreciating assets and *revenue assets) other than excluded assets, so as to increase their tax cost setting amounts, in accordance with the principles set out in subsection (3). Note: If any of the amount of the reduction cannot be allocated, it is instead treated as a capital loss of the head company: see CGT event L8. (3) These are the principles: (a) the allocation is to be in proportion to the *market values of the assets; (b) the amount allocated to an item of *trading stock, to a *depreciating asset or to a *revenue asset must not cause its *tax cost setting amount to contravene subsection (1); (c) any of the amount that cannot be 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. 705-45 Reduction in tax cost setting amount for accelerated depreciation assets If: (a) an asset of the joining entity is a *depreciating asset to which Division 40 applies; and (aa) just before the entity became a subsidiary member, subsection 40-10(3) or 40-12(3) of the Income Tax (Transitional Provisions) Act 1997 applied for the purposes of the joining entity working out the asset's decline in value under Division 40; and Note: The effect of those subsections was to preserve an entitlement to accelerated depreciation. (b) the asset's *tax cost setting amount would be greater than the joining entity's *terminating value for the asset; and (c) the *head company chooses to apply this section to the asset; 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. 705-47 Reduction in tax cost setting amount for some privatised assets Object (1) The object of this section is to limit appropriately the amount the *head company of the joined group can deduct for a *depreciating asset it starts to *hold because the joining entity becomes a *subsidiary member of the group, by reference to the direct or indirect effect of the following provisions on the amount the joining entity could deduct for the asset: (a) former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for tax-exempt entities that become taxable); (b) former Subdivision 57-I, and Subdivision 57-J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and capital allowance deductions); (c) Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001). Reduction of tax cost setting amount (2) The *tax cost setting amount for a *depreciating asset is reduced to the joining entity's *terminating value for the asset if: (a) at a time before the joining entity became a *subsidiary member of the joined group, the asset was *held by an entity (whether the joining entity or another entity) that, at that time, was: (i) an *exempt Australian government agency; or (ii) another entity whose *ordinary income and *statutory income were exempt from income tax; and (b) any of the following provisions directly or indirectly affected the amount the joining entity could deduct for the asset: (i) former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for tax-exempt entities that become taxable); (ii) former Subdivision 57-I, and Subdivision 57-J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and *capital allowance deductions); (iii) Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001); and (c) apart from this section, the tax cost setting amount for the asset would exceed the joining entity's terminating value for the asset. Note 1: 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. Note 2: Former section 61A of, or former Subdivision 57-I or Subdivision 57-J in Schedule 2D to, the Income Tax Assessment Act 1936 or Division 58 of this Act may, for example, have indirectly affected the amount the joining entity could deduct for the asset because: (a) that section, Subdivision or Division affected the amount that could be deducted by an entity that held the asset before the joining entity and that effect extended to the joining entity because of a previous application of this subsection, roll-over relief or section 701-40 (the exit history rule); or (b) this subsection affected the amount the joining entity could deduct for the asset (either directly or because of section 701-40). Note 3: Subsection (2) has effect even if, just before the joining time, the joining entity was: (a) an exempt Australian government agency; or (b) another entity whose ordinary income and statutory income were exempt from income tax. This is because section 715-900 causes Division 58 to apply as if, just before the joining time, the joining entity's ordinary income or statutory income had become assessable income to some extent. Exception to reduction of tax cost setting amount (3) Subsection (2) does not apply if: (a) just before the joining time, the joining entity was neither an *exempt Australian government agency nor another entity whose *ordinary income and *statutory income were exempt from income tax; and (b) a condition in subsection (4) or (5) is met in relation to the period (the pre-joining taxable period) between the last time for which the condition in paragraph (2)(a) is met and the joining time. (4) One condition for subsection (2) not to apply is that an amount was included in an entity's assessable income, or an entity could deduct an amount, because of a *balancing adjustment event that occurred for the asset during the pre-joining taxable period. (5) Another condition for subsection (2) not to apply is that: (a) for at least some of the pre-joining taxable period, the asset was *held by the *head company of a *consolidated group (the earlier group) for the period (the earlier group period): (i) starting when (and because) an entity that had previously held the asset became a *subsidiary member of the earlier group or when the asset started to be held by that company because of an asset sale situation described in subsection 58-5(4) involving a *member of the earlier group as the purchaser mentioned in that subsection; and (ii) ending when (and because) an entity ceased to be a subsidiary member of the earlier group or when the earlier group ceased to exist; and (b) the company that was the head company of the earlier group just before the end of the earlier group period was not: (i) an *associate of the head company of the joined group just before the joining time; or (ii) the same company as the head company of the joined group; and (c) the earlier group period was at least 24 months. 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 (aa) subsection (5) does not apply to 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 former section 46 or 46A of the Income Tax Assessment Act 1936 on the dividends; and (c) there is a tax deferral amount in relation to the dividends under subsection (3); 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 or distributions included in the step 4 amount mentioned in step 4 in the table in section 705-60, 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 former 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). (3A) A way in which the extent to which dividends were paid out of profits that were not subject to income tax may be worked out is by: (a) assuming that dividends were paid out of profits of income years in order from the most recent to the earliest; and (b) assuming that, for any income year for which dividends were paid out of profits in accordance with paragraph (a), they were, to the extent they were not *franked distributions, paid out of profits of that income year that were not subject to income tax before they were paid out of such profits that were subject to income tax. 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 to which Division 40 applies; and (b) the asset's *market value exceeds its *adjustable value; and (c) the asset's *cost exceeds its adjustable value. 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, 705-47 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 705-47; (iv) fourth, section 705-50. 705-56 Modification for tax cost setting in relation to finance leases (1) This section applies if, just before the joining time: (a) the joining entity is the lessor or lessee under a lease of a *depreciating asset (the underlying asset) to which Division 40 applies; and (b) the joining entity classifies the lease, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, as a finance lease. Joining entity is lessor (2) If the joining entity is the lessor under the lease and *holds the underlying asset just before the joining time, subsection (5) applies, in relation to the joining entity, to the asset that is the joining entity's right to receive lease payments. Note: In this situation, the underlying asset will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 701-10). (3) If the joining entity is the lessor under the lease and does not *hold the underlying asset just before the joining time: (a) subsection (5) applies to the underlying asset in relation to the joining entity; and (b) for the purposes of this Division: (i) the joining entity's right to receive lease payments is taken to be a *retained cost base asset; and (ii) the *tax cost setting amount of that retained cost base asset is taken to be equal to its *market value just before the joining time. Note: In this situation, the asset that is the joining entity's right to receive lease payments will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 701-10). Joining entity is lessee (4) If the joining entity is the lessee under the lease and does not *hold the underlying asset just before the joining time: (a) subsection (5) applies to the underlying asset in relation to the joining entity; and (b) the liability that is the lessee's obligation to make lease payments is not taken into account under subsection 705-70(1). Note: If the joining entity is the lessee under the lease and holds the underlying asset just before the joining time: (a) the underlying asset will have its tax cost set at the joining time because it would be an asset of the joining entity at that time if the single entity rule did not apply (see section 701-10); and (b) the liability that is the lessee's obligation to make lease payments is taken into account under subsection 705- 70(1). Tax cost of certain assets set at nil (5) If this subsection applies to an asset, in relation to the joining entity: (a) the asset is not taken into account under paragraph 705- 35(1)(b) or (c); and (b) the asset's *tax cost setting amount is taken to be nil. 705-57 Adjustment to tax cost setting amount where loss of pre-CGT status of membership interests in joining entity Object (1) The object of this section is to ensure that provisions that cause *membership interests in the joining entity to stop being *pre-CGT assets, with a resultant increase in their *cost base and *reduced cost base, do not increase *tax cost setting amounts for *trading stock, *depreciating assets or *revenue assets of the joining entity, where those amounts are above the joining entity's *terminating values for the assets. When section applies (2) This section applies if: (a) a *membership interest that a *member of the joined group holds in the joining entity at the joining time had previously stopped being a *pre-CGT asset in the circumstances covered by any of subsections (3) to (5); and (b) the *cost base or *reduced cost base of the membership interest just after it stopped being a pre-CGT asset exceeded (the excess being the loss of pre-CGT status adjustment amount) its cost base or reduced cost base just before it stopped being a pre-CGT asset; and (c) an asset (a revenue etc. asset) that is *trading stock, a *depreciating asset or a *revenue asset becomes that of the *head company of the joined group because subsection 701-1(1) (the single entity rule) applies when the joining entity becomes a *subsidiary member of the group; and (d) the revenue etc. asset's *tax cost setting amount (after any application of section 705-40, 705-45, 705-47 or 705-50) exceeds the joining entity's *terminating value for the asset. Loss of pre-CGT status because Division 149 etc. applied while interest held by member (3) The first circumstance for the purpose of paragraph (2)(a) is where Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the *membership interest to stop being a *pre-CGT asset while the *member held the membership interest. Loss of pre-CGT status because Division 149 etc. applied before current holding by member (4) The second circumstance for the purpose of paragraph (2)(a) is where: (a) either: (i) the *member *acquired the *membership interest directly from another entity; or (ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions; and (b) Division 149 of this Act, former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of former Part IIIA of that Act applied to cause the membership interest to stop being a *pre-CGT asset while the other entity held the membership interest or while the member held the membership interest on the previous occasion; and (c) if subparagraph (a)(i) applies-at the time of the acquisition, the member *controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and (d) if subparagraph (a)(ii) applies-the same entity: (i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other party; or (ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or (iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition; or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions. Loss of pre-CGT status because of acquisition from another entity (5) The third circumstance for the purpose of paragraph (2)(a) is where: (a) either: (i) the *member acquired the *membership interest after 16 May 2002 directly from another entity; or (ii) the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions, all of which took place after 16 May 2002; and (b) the membership interest stopped being a *pre-CGT asset because of the acquisition from the other entity or from the member while the member held the membership interest on a previous occasion; and (c) if subparagraph (a)(i) applies-at the time of the acquisition, the member *controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and (d) if subparagraph (a)(ii) applies-the same entity: (i) was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other parties; or (ii) was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or (iii) was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition; or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions. Reduction in revenue etc. asset's tax cost setting amount (6) The revenue etc. asset's *tax cost setting amount (after any application of section 705-40, 705-45, 705-47 or 705-50) is instead the amount that would apply if, in working out the step 1 amount in the table in section 705-60, the *cost base and *reduced cost base of the *membership interest were reduced by the sum of the loss of pre-CGT status adjustment amounts for the membership interest and all other membership interests that have loss of pre-CGT status adjustment amounts. Limit on reduction (7) However, the reduction only takes place to the extent that it does not result in the asset's *tax cost setting amount being less than the joining entity's *terminating value for the asset. Note: The reduction under this section is converted into a capital loss available over a period of 5 income years starting with the income year in which the joining time occurs: see CGT event L1. 705-58 Assets and liabilities not set off against each other (1) This Part applies separately to each asset and liability even if *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, require them to be set off against each other. (2) This section has effect subject to section 705-59. 705-59 Exception: treatment of linked assets and liabilities (1) This section applies to each set of *linked assets and liabilities that the joining entity has immediately before the joining time. (2) One or more assets, and one or more liabilities, that an entity has constitute a set of linked assets and liabilities of the entity if, and only if, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board: (a) the total of the one or more assets is to be set off against the total of the one or more liabilities in preparing statements of the entity's financial position; and (b) the net amount after the set-off is to be recognised in those statements. (3) If the set consists only of one reset cost base asset for the purposes of section 705-35, and one or more liabilities: (a) first, work out the total (the available amount) that, apart from this section and the accounting requirement referred to in subsection (2) of this section, would be taken into account under subsection 705-70(1) (about step 2 in working out the allocable cost amount) for the one or more liabilities; and (b) next, work out the consequences under this table. |Treatment of linked assets and liabilities: single | |reset cost base asset case | |Item |If the |This is the result|This is the | | |asset's |for the asset: |result for the | | |*market | |one or more | | |value at the| |liabilities: | | |joining | | | | |time: | | | |1 |is less than|its *tax cost |only the | | |or equal to |setting amount is |difference (if | | |the |that market value |any) is taken | | |available |(and the asset is |into account | | |amount |not taken into |under subsection | | | |account under |705-70(1) for the| | | |paragraph |one or more | | | |705-35(1)(c)) |liabilities | |2 |is greater |its *tax cost |the one or more | | |than the |setting amount is:|liabilities are | | |available | |not taken into | | |amount |(a) the available |account under | | | |amount; plus |subsection | | | |(b) the amount |705-70(1) | | | |worked out for the| | | | |asset under | | | | |section 705-35 on | | | | |the basis that the| | | | |asset's *market | | | | |value is reduced | | | | |by the available | | | | |amount | | Note: Paragraph 705-35(1)(c) allocates the allocable cost amount (as reduced by the tax cost setting amounts of retained cost base assets) among the joining entity's reset cost base assets. (4) If the set consists only of one or more *retained cost base assets and one or more liabilities, this section does not affect their treatment. Note: This is because the tax cost setting amount for a retained cost base asset is worked out without regard to the allocable cost amount. (5) In any other case: (a) first, work out the available amount under paragraph (3)(a); and (b) next, work out the consequences under this table. |Treatment of linked assets and liabilities: all other | |cases | |Item |In this case:|This is the result|This is the | | | |for the one or |result for the | | | |more assets in the|one or more | | | |set: |liabilities in | | | | |the set: | |1 |there is no |the *tax cost |only the | | |*retained |setting amount of |difference (if | | |cost base |each of the assets|any) is taken | | |asset in the |is that asset's |into account | | |set, and the |market value at |under subsection| | |total of the |the joining time |705-70(1) | | |respective |(and none of them | | | |*market |is taken into | | | |values (at |account under | | | |the joining |paragraph | | | |time) of the |705-35(1)(c)) | | | |assets in the| | | | |set is less | | | | |than or equal| | | | |to the | | | | |available | | | | |amount | | | |2 |there is no |the *tax cost |none is taken | | |*retained |setting amount of |into account | | |cost base |each of the assets|under subsection| | |asset in the |is the sum of: |705-70(1) | | |set, and the |(a) a share of the| | | |total of the |available amount | | | |respective |that is | | | |*market |proportionate to | | | |values (at |that asset's | | | |the joining |market value at | | | |time) of the |the joining time; | | | |assets in the|and | | | |set is |(b) the amount | | | |greater than |worked out for the| | | |the available|asset under | | | |amount |section 705-35 on | | | | |the basis that the| | | | |asset's market | | | | |value at the | | | | |joining time is | | | | |reduced by the | | | | |share referred to | | | | |in paragraph (a) | | |3 |there are one|this section does |this section | | |or more |not affect the |does not affect | | |*retained |treatment of the |the treatment of| | |cost base |one or more assets|the one or more | | |assets in the|in the set |liabilities in | | |set, and the | |the set | | |total of | | | | |their | | | | |respective | | | | |*tax cost | | | | |setting | | | | |amounts is | | | | |greater than | | | | |or equal to | | | | |the available| | | | |amount | | | |4 |there are one|the one or more |the available | | |or more |retained cost base|amount is | | |*retained |assets are not |reduced by the | | |cost base |taken into account|retained cost | | |assets in the|under paragraph |base total | | |set, and the |705-35(1)(b); | | | |total (the |the *tax cost | | | |retained cost|setting amount of | | | |base total) |each remaining | | | |of their |asset in the set | | | |respective |is worked out by | | | |*tax cost |applying item 1 or| | | |setting |2, as appropriate,| | | |amounts is |of this table on | | | |less than the|the basis that: | | | |available |(a) the available | | | |amount |amount is reduced | | | | |by the retained | | | | |cost base total; | | | | |and | | | | |(b) the one or | | | | |more retained cost| | | | |base assets are | | | | |otherwise ignored | | Note 1: Paragraph 705-35(1)(b) reduces the allocable cost amount by the tax cost setting amounts of retained cost base assets. Item 4 of the table in this subsection excludes the application of paragraph 705-35(1)(b) to retained cost base assets in the set; this in turn may affect the application of CGT event L3. Note 2: Paragraph 705-35(1)(c) then allocates the reduced allocable cost amount among the joining entity's reset cost base assets. (6) In applying subsections (3), (4) and (5) of this section, disregard an asset covered by subsection 705-35(2) (assets that do not have a tax cost setting amount). (7) This section does not affect the application of sections 705- 40, 705-45, 705-47 and 705-50 (which adjust the tax cost setting amount for a reset cost base asset). 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 |To ensure that the | | |amount worked out under |allocable cost amount | | |section 705-65, which is |includes the cost of | | |about the cost of |*acquiring the | | |*membership interests in |membership interests | | |the joining entity held by| | | |*members of the joined | | | |group | | |2 |Add to the result of step |To ensure that the | | |1 the step 2 amount worked|joining entity's | | |out under section 705-70, |liabilities at the | | |which is about the value |joining time, which | | |of the joining entity's |are part of the joined| | |liabilities |group's cost of | | | |acquiring the joining | | | |entity, are reflected | | | |in the allocable cost | | | |amount | |3 |Add to the result of step |To increase the | | |2 the step 3 amount worked|allocable cost amount:| | |out under: | | | |(a) section 705-90, which |(a) to reflect the | | |is about undistributed, |undistributed, taxed | | |taxed profits accruing to |profits and so prevent| | |the joined group before |double taxation; or | | |the joining time; or |(b) if the joining | | |(b) if the joining entity |entity is a trust-to | | |is a trust (and not a |reflect the | | |*corporate tax |undistributed, | | |entity)-section 713-25, |realised profits that | | |which is about |could be distributed | | |undistributed, realised |tax free | | |profits accruing to the | | | |joined group before the | | | |joining time that could be| | | |distributed tax free | | |3A |For each step 3A amount |To adjust for certain | | |(if any) under |intra-group roll-overs| | |section 705-93 (which is |from foreign companies| | |about pre-joining time |before the joining | | |intra-group roll-overs |time | | |from foreign resident | | | |companies): | | | |(a) if the step 3A amount | | | |is an increase amount | | | |under that section-add to | | | |the result of step 3 (as | | | |affected by any previous | | | |application of this step) | | | |the step 3A amount; or | | | |(b) if the step 3A amount | | | |is a reduction amount | | | |under that | | | |section-subtract from the | | | |result of step 3 (as | | | |affected by any previous | | | |application of this step) | | | |the step 3A amount | | |4 |Subtract from the result |To prevent the | | |of step 3A the step 4 |allocable cost amount | | |amount worked out under |reflecting return of | | |section 705-95, which is |part of the amount | | |about pre-joining time |paid to *acquire the | | |distributions out of |*membership interests | | |certain profits |in the joining entity | |5 |Subtract from the result |To prevent: | | |of step 4 the step 5 |(a) a double benefit | | |amount worked out under |arising from the | | |section 705-100, which is |losses; and | | |about certain losses |(b) losses that cannot| | |accruing to the joined |be transferred to the | | |group before the joining |*head company, or are | | |time |cancelled by the head | | | |company, under | | | |Subdivision 707-A | | | |being reinstated in an| | | |unrealised form or | | | |reducing unrealised | | | |gains. | |6 |Subtract from the result |To stop the joined | | |of step 5 the step 6 |group getting benefits| | |amount worked out under |both through higher | | |section 705-110, which is |*tax cost setting | | |about losses that the |amounts for the | | |joining entity transferred|joining entity's | | |to the *head company under|assets and through | | |Subdivision 707-A |losses transferred to | | | |the head company | |7 |Subtract from the result |To stop the joined | | |of step 6 the step 7 |group getting benefits| | |amount worked out under |both through the *tax | | |section 705-115, which is |cost of the joining | | |about certain deductions |entity's assets being | | |to which the *head company|set and through | | |is entitled |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. | | Note: The head company may be taken to have made a capital gain, depending on the amount remaining after applying step 3A: see CGT event L2. 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: Note: If the joining entity is a trust, the step 1 amount may be increased by section 713-20 for settled capital that could be distributed tax free in respect of discretionary interests in the trust. |Working out the step 1 amount | |Item |If the market value|The amount is... | | |of the membership | | | |interest is... | | |1 |equal to or greater|its cost base | | |than its *cost base| | |2 |less than its *cost|its *market value | | |base but greater | | | |than its *reduced | | | |cost base | | |3 |less than or equal |its reduced cost | | |to its *reduced |base | | |cost base | | Note: Under section 716-855, if membership interests are pre-CGT assets that have been subject to certain roll-overs, the cost base and reduced cost base are worked out in the same way as if they were post-CGT assets. No indexation of cost base of pre-CGT membership interests (2) If the *membership interest is a *pre-CGT asset, in working out its *cost base for the purposes of subsection (1) no element is indexed. Adjustment if value shifting or loss transfer provision could apply (3) If, on the assumption that a *CGT event had happened just before the joining time in relation to the *membership interest, the *cost base or the *reduced cost base of the membership interest would have been changed by a provision of this Act, then the cost base or reduced cost base of the membership interest that is to be used in subsection (1) of this section is instead: (a) the cost base as it would have been so changed; or (b) the reduced cost base, as it would have been so changed, but ignoring the amount of any reduction resulting from the application of former subsection 160ZK(5) of the Income Tax Assessment Act 1936. Note: For example, a change in the cost base or reduced cost base may be required under provisions that apply where a loss transfer or value shift involving the joining entity has occurred. (3AA) If, on the assumption that: (a) the *members of the joined group had, just before the joining time, *disposed of their *membership interest in the joining entity; and (b) the consideration received by the members for the disposal were equal to the *market value of the membership interest at that time; they would have made a *capital loss that section 727-615 would have reduced (because of an indirect value shift), then the *reduced cost base of the membership interest that is to be used in subsection (1) of this section is reduced by the amount of that reduction. Reduction if section 165-115ZD could apply (3A) If, on the assumption that: (a) the *members of the joined group had, just before the joining time, *disposed of their *membership interest in the joining entity; and (b) the consideration received by the members for the disposal were equal to the *market value of the membership interest at that time; the *reduced cost base of the membership interest would have been reduced as a result of the operation of section 165-115ZD of this Act or the Income Tax (Transitional Provisions) Act 1997, then the reduced cost base of the membership interest that is to be used in subsection (1) of this section is reduced by the amount of that reduction. Certain provisions not to apply after joining time (4) Also, if a provision mentioned in subsection (3), (3AA) or (3A) would, because of events that happened before the joining time, apply to a *CGT event or a *realisation event that happens after the joining time in relation to the *members' *membership interests in the joining entity, the provision does not so apply. Reduction in cost base under subsection 110-55(7) to be added back (5) If, in working out the *reduced cost base of the *membership interest for the purposes of subsection (1), a reduction has taken place under subsection 110-55(7) (about certain distributions of pre-acquisition profits), the reduced cost base is increased by the amount of that reduction. Reduction in reduced cost base under subsection 165-115ZA(3) to be added back (5A) If: (a) in working out the *reduced cost base of the *membership interest for the purposes of subsection (1), a reduction has taken place under subsection 165-115ZA(3) (about alterations in ownership or control of loss companies); and (b) the reduction is to some extent attributable to so much of an amount that was taken into account both in working out the amount of the reduction and in working out: (i) the step 5 amount under section 705-100; or (ii) the step 6 amount under section 705-110; the reduced cost base is, to the extent mentioned in paragraph (b), increased by: (c) if subparagraph (b)(i) applies-the amount of that reduction; or (d) if subparagraph (b)(ii) applies-the amount of that reduction multiplied by the *corporate tax rate. (5B) For the purposes of working out the *cost base or *reduced cost base of a *membership interest under subsection (1), if: (a) either or both of the following things happen after the joining time: (i) money is paid, or becomes required to be paid, in respect of *acquiring the membership interest; (ii) property is given, or becomes required to be given, in respect of acquiring the membership interest; and (b) because the thing happened after the joining time, it was not taken into account in working out the first element of the cost base or reduced cost base of the membership interest; Note: This would be the case if the money was only to be paid etc. if a contingency happened after the joining time. the thing is nevertheless so taken into account, and taken always to have been so taken into account. Rights and options to acquire membership interests (6) For the purposes of this section, if at the joining time a *member of the joined group holds a right or option (including a contingent right or option), created or issued by the joining entity, to acquire a *membership interest in the joining entity, that right or option is treated as if it were a membership interest in the joining entity. 705-70 Liabilities of the joining entity-step 2 in working out allocable cost amount (1) For the purposes of step 2 in the table in section 705-60, the step 2 amount is worked out by adding up the amounts of each thing (an accounting liability) that, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability of the joining entity at the joining time that can or must be recognised in the entity's statement of financial position. Note: Certain liabilities of a life insurance company are worked out under Subdivision 713-L: see section 713-520. Where liability valued differently for joined group (1A) However, if, in accordance with those *accounting standards or statements, the amount of an accounting liability of the joining entity would be different when it became an accounting liability of the joined group, the different amount is treated as the amount of the liability. Note: Liabilities that the joining entity owes to members of the joined group would not be excluded under subsection (1) or (1A) even though the standards or statements require that they be eliminated in consolidated accounts of a parent entity and its subsidiaries. Exclusion where transfer of accounting liability (2) An amount is not to be added for an accounting liability that arises because of the joining entity's ownership of an asset if, on *disposal of the asset, the accounting liability will transfer to the new owner. Example: A liability to rehabilitate a mine site, where, under legislation or a licence, the liability will be transferred to the new owner on disposal of the mine. Note: Adjustments reducing or increasing the amount under this section are made by sections 705-75 to 705-85. 705-75 Liabilities of the joining entity-reductions for purposes of step 2 in working out allocable cost amount Reduction for future deduction (1) If some or all of an accounting liability will result in a deduction to the *head company, the amount to be added for the accounting liability under subsection 705-70(1) is reduced by the following amount: [pic] where: double-counting adjustment means the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction. Reduction for intra-group liabilities (2) If the amount of an accounting liability of the joining entity that is owed to a *member of the joined group is more than the amount applicable under the following table, the amount to be added for the accounting liability under subsection 705-70(1) instead equals the amount applicable under the table. |Amount applicable | |Item |If the market value|The amount | | |of the member's |applicable is... | | |asset constituted | | | |by the accounting | | | |liability is... | | |1 |equal to or greater|the asset's cost | | |than the asset's |base | | |*cost base | | |2 |less than the |the asset's *market | | |asset's *cost base |value | | |but greater than | | | |its *reduced cost | | | |base | | |3 |less than or equal |the asset's reduced | | |to the asset's |cost base | | |*reduced cost base | | Application of subsections 705-65(2), (3), (3AA) and (3A) (3) Subsections 705-65(2), (3), (3AA) and (3A) apply in relation to references in subsection (2) of this section to an asset's *cost base or *reduced cost base in a corresponding way to that in which they apply in relation to references in the table in subsection 705- 65(1) to a *membership interest's cost base or reduced cost base. Application of subsection 705-65(4) (4) Subsection 705-65(4) applies in relation to assets mentioned in subsection (2) of this section in a corresponding way to that in which it applies in relation to members' *membership interests. Reduction in reduced cost base under subsection 165-115ZA(3) to be added back (5) If: (a) in working out the *reduced cost base of a *member's asset for the purposes of subsection (2), a reduction has taken place under subsection 165-115ZA(3) (about alterations in ownership or control of loss companies); and (b) the reduction is to some extent attributable to so much of an amount that was taken into account both in working out the amount of the reduction and in working out: (i) the step 5 amount under section 705-100; or (ii) the step 6 amount under section 705-110; the reduced cost base is, to the extent mentioned in paragraph (b), increased by: (c) if subparagraph (b)(i) applies-the amount of that reduction; or (d) if subparagraph (b)(ii) applies-the amount of that reduction multiplied by the *corporate tax rate. 705-80 Liabilities of the joining entity-reductions/increases for purposes of step 2 in working out allocable cost amount Adjustment for unrealised gains and losses (1) If: (a) for income tax purposes, an accounting liability, or a change in the amount of an accounting liability, (other than one owed to a *member of the joined group) is taken into account at a later time than is the case in accordance with *accounting standards or statements of accounting concepts made by the Australian Accounting Standards Board; and Example: Accrued employee leave entitlements or foreign exchange gains and losses. (b) assuming that, for income tax purposes the accounting liability or change were taken into account at the same time as is the case in accordance with those standards or statements, the joined group's allocable cost amount would be different; Note: The difference would arise because subsection 705- 70(1) includes income tax liabilities and steps 3 and 5 of the table in section 705-60 are affected by the time at which changes in liabilities are taken into account for income tax purposes. then the amount to be added under subsection 705-70(1) for the accounting liability is: (c) if the difference is an increase-increased by the amount of the increase; and (d) if the difference is a decrease-decreased by the amount of the decrease. Use of reliable estimate (2) In working out for the purposes of subsection (1) an amount at a particular time or in respect of a particular period, use the most reliable basis for estimation that is available. Example: The amount of a change in liability for employee leave entitlements over a period. 705-85 Liabilities of the joining entity-increases for purposes of step 2 in working out allocable cost amount Increase in step 2 amount for employee share interests (1) If any *membership interest (an employee share interest) in the joining entity needed to be disregarded under section 703-35 in order for the joining entity to be a *wholly-owned subsidiary of the *head company at the joining time, the step 2 amount worked out under section 705-70 is increased by the sum of the *market values of those interests, reduced in each case by the reduction amount (if any) worked out under subsection (2) of this section. Reduction amount (2) There is a reduction amount if the *market value of the employee share interest at the time it was *acquired by the employee is more than the consideration paid or given for its acquisition. The reduction amount is worked out by multiplying the market value of the employee share interest at that time by the factor worked out using the formula: [pic] where: market value of all membership interests means the *market value of all *membership interests in the joining entity just before the employee share interest was *acquired. market value of head company's membership interests means the *market value, just before the employee share interest was *acquired, of any *membership interests that the *head company held, directly or indirectly in the joining entity, continuously from that time until the joining time. Increase to cover certain rights, options and certain equity interests (3) The step 2 amount worked out under section 705-70 is increased by: (a) the *market value of any right or option (including a contingent right or option), created or issued by the joining entity, to acquire a *membership interest in the joining entity, where that right or option is held at the joining time by a person other than a *member of the joined group; and (b) the market value of each thing that, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is equity in the joining entity at the joining time, where the thing is also a *debt interest. Increase to cover ADI restructure preference share interests (4) If any *share in the joining entity needed to be disregarded under section 703-37 in order for the joining entity to be a *wholly-owned subsidiary of the *head company at the joining time, the step 2 amount worked out under section 705-70 is increased by the sum of the *market values of those shares. 705-90 Undistributed, taxed profits accruing to joined group before joining time-step 3 in working out allocable cost amount (1) For the purposes of step 3 in the table in section 705-60, the step 3 amount is worked out in accordance with this section unless the joining entity is a trust that is not a *corporate tax entity at the joining time. Note: If the joining entity is such a trust, the step 3 amount is instead worked out in accordance with section 713-25. Undistributed profits (2) First work out the undistributed profits of the joining entity at the joining time. These are the amounts that, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, are retained profits of the joining entity that could be recognised in the joining entity's statement of financial position if that statement were prepared as at the joining time. (2A) However, if a loss that did not accrue to the joined group before the joining time (subsection (8) states what it means for a loss to accrue to the joined group before the joining time) would be taken into account in working out the undistributed profits, the loss is not so taken into account. Extent to which tax paid on undistributed profits (3) Then work out how much of the undistributed profits does not exceed the amount worked out using the following formula as at the joining time: [pic] Assumptions for purposes of subsection (3) (4) The assumptions are that the joining entity's franking account balance at the end of the income year that ends, or, if section 701- 30 applies, of the income year that is taken by subsection (3) of that section to end, at the joining time had been adjusted to take account of franking credits or franking debits that would arise if the following were paid just before the joining time: (a) the income tax, or refund of income tax, on the joining entity's taxable income for that income year; and (b) any income tax, or refund of income tax, that has not yet been paid (regardless of whether it has become payable or due for payment) on the joining entity's taxable income for any earlier income year, other than one excluded by subsection (5). Exclusion of certain income years where previous membership of a consolidated group (5) If the joining entity was previously a *subsidiary member of a *consolidated group, any income year earlier than the one that started, or, if section 701-30 applies, the one that is taken by subsection (3) of that section to have started, when the joining entity ceased to be a subsidiary member of that group is excluded for the purposes of paragraph (4)(b) of this section. Undistributed profits must have accrued to joined group (6) Next, work out the extent to which the undistributed profits that satisfy the requirements of subsection (3) accrued to the joined group before the joining time (subsection (7) states what it means for a profit to accrue to the joined group before the joining time). The result is the step 3 amount. Profit accruing to the joined group before the joining time (7) A profit accrued to the joined group before the joining time if, on the following assumptions: (a) that it was distributed to holders of *membership interests as it accrued; and (b) that entities interposed between the *head company and the joining entity successively distributed any of it immediately after receiving it; it would have been received by the entity that is the head company at the joining time, in respect of membership interests that it held continuously until that time either directly or indirectly through interposed entities. Note: If an entity interposed between the head company and the joining entity is a non-fixed trust, this subsection may involve determining how a power of appointment would have been exercised. Section 713-50 lists matters to have regard to in determining this. Loss accruing to the joined group before the joining time (8) A loss accrued to the joined group before the joining time if and to the extent that, assuming that as it arose it were instead a profit that was accruing, a distribution of that profit would have been a distribution made to the joined group out of profits that accrued to the joined group before the joining time. Use of reliable estimates (9) In working out: (a) for the purposes of subsection (4), the amount of income tax, or refund of income tax, on the joining entity's taxable income for a particular income year and the extent to which it has not yet been paid; or (b) for the purposes of subsection (7), the amount of a profit that accrued to the joined group during a particular period; or (c) for the purposes of subsection (8), the amount of a loss that accrued to the joined group during a particular period; use the most reliable basis for estimation that is available. (10) Without limiting paragraph (9)(b), a way in which, for the purposes of subsection (7), the amount of a profit that accrued to the joined group during a particular period may be worked out is by: (a) assuming that profits of income years were distributed in order from the most recent to the earliest; and (b) assuming that, for any income year for which distributions were paid out of profits in accordance with paragraph (a), they were, to the extent they were not *franked distributions, paid out of profits of that income year that were not subject to income tax before they were paid out of such profits that were subject to income tax. 705-93 If pre-joining time roll-over from foreign resident company-step 3A in working out allocable cost amount When there is a step 3A amount (1) For the purposes of step 3A in the table in section 705-60, there is a step 3A amount if: (a) before the joining time: (i) there was a roll-over under Subdivision 126-B (a Subdivision 126-B roll-over) in relation to a *CGT event that happened in relation to an asset (the roll-over asset); or (ii) former section 160ZZO of the Income Tax Assessment Act 1936 applied in relation to a disposal (a section 160ZZO roll- over) of an asset (also the roll-over asset); and (b) the originating company in relation to the Subdivision 126-B roll-over, or the transferor in relation to the section 160ZZO roll-over, was a foreign resident; and (c) the recipient company in relation to the Subdivision 126-B roll- over, or the transferee in relation to the section 160ZZO roll- over, was an Australian resident and was not the entity that became the *head company of the joined group; and (d) between the Subdivision 126-B roll-over, or the section 160ZZO roll-over, and the joining time, no other CGT event happened in relation to the roll-over asset for which there was not a Subdivision 126-B roll-over or a section 160ZZO roll-over; and (e) the roll-over asset is not a *pre-CGT asset at the joining time; and (f) the roll-over asset becomes that of the head company of the joined group because subsection 701-1(1) (the single entity rule) applies when the joining entity becomes a *subsidiary member of the group. What the step 3A amount is (2) The step 3A amount is: (a) if, as a result of the Subdivision 126-B roll-over mentioned in subparagraph (1)(a)(i), or the section 160ZZO roll-over mentioned in subparagraph (1)(a)(ii), a *capital loss of the originating company was disregarded or a capital loss of the transferor was not incurred-an increase amount equal to the capital loss; or (b) if, as a result of the Subdivision 126-B roll-over mentioned in subparagraph (1)(a)(i), or the section 160ZZO roll-over mentioned in subparagraph (1)(a)(ii), a *capital gain of the originating company was disregarded or a capital gain of the transferor did not accrue-a reduction amount equal to the capital gain. 705-95 Pre-joining time distributions out of certain profits-step 4 in working out allocable cost amount For the purposes of step 4 in the table in section 705-60, the step 4 amount is the sum of all distributions made by the joining entity before the joining time that: (a) the *head company receives directly, or would receive indirectly if entities interposed between the head company and the joining entity successively distributed any distribution they received immediately after receiving it; and (b) were made out of profits: (i) that did not accrue to the joined group before the joining time (see subsection 705-90(7)); or (ii) that accrued to the joined group before the joining time and recouped losses of any *sort that accrued to the joined group before that time (see subsection 705-90(8)). Note: As well as subsection 705-90(7), paragraph 705- 90(9)(b) and subsection 705-90(10) are relevant to working out whether or not profits accrued to the joined group before the joining time. 705-100 Losses accruing to joined group before joining time-step 5 in working out allocable cost amount (1) For the purposes of step 5 in the table in section 705-60, the step 5 amount is the sum of all losses of any *sort of the joining entity that: (a) had not been *utilised by the joining entity for the income year in which the joining time occurred or any earlier income year; and (b) accrued to the joined group before the joining time (see subsection 705-90(8)). (2) However, a loss is not to be taken into account under subsection (1) to the extent that it reduced the undistributed profits comprising the step 3 amount in the table in section 705- 60. 705-105 Continuity of holding membership interests-steps 3 to 5 in working out allocable cost amount If: (a) a *membership interest that a *member of the joined group held in the joining entity at the joining time was taken under this Act to have been *acquired by the member for its *market value at a particular time (the market value time); or (b) the *cost base and *reduced cost base of a membership interest that a member of the joined group held in the joining entity at the joining time were, before that time, changed on one or more occasions by this Act so that they equalled the market value of the membership interest at a particular time (the last of which times is also the market value time); then, for the purpose of sections 705-90, 705-95, 705-100 and 713- 25, the *head company is taken not to have held that membership interest, either directly or indirectly, before the market value time. 705-110 If joining entity transfers a loss to the head company-step 6 in working out allocable cost amount (1) For the purposes of step 6 in the table in section 705-60, the step 6 amount is worked out by multiplying the sum of the losses mentioned in subsection (2) by the *corporate tax rate. (2) The losses are the joining entity's losses of any *sort that: (a) were not *utilised by the joining entity for the income year in which the joining time occurred or any earlier income year; and (b) did not accrue to the joined group before the joining time (see subsection 705-90(8)); and (c) are transferred to the *head company under Subdivision 707-A; and (d) are not cancelled under section 707-145. 705-115 If head company becomes entitled to certain deductions-step 7 in working out allocable cost amount (1) For the purposes of step 7 in the table in section 705-60, the step 7 amount is worked out using the following formula: [pic] where: acquired deductions means all deductions covered by subsection (2) that are not owned deductions. owned deductions means the sum of all deductions for which the following requirements are satisfied: (a) the deduction is covered by subsection (2); (b) assuming the expenditure that gave rise to the deduction were instead a profit that accrued at the time the expenditure was incurred, a distribution of that profit would have been a distribution made to the joined group out of profits that accrued to the joined group before the joining time (see subsection 705-90(7)). (2) This subsection covers any deduction to which the *head company becomes entitled under section 701-5 as a result of the joining entity becoming a *subsidiary member of the joined group, other than a deduction for expenditure: (a) that is, forms part of or reduces, the cost of an asset of the joining entity that becomes an asset of the head company because subsection 701-1(1) (the single entity rule) applies; or (b) to which section 110-40 (about expenditure on assets acquired before 7.30 pm on 13 May 1997) applies; or (c) to the extent that the expenditure reduced the undistributed profits comprising the step 3 amount in the table in section 705-60. How to work out a pre-CGT factor for assets of joining entity 705-125 Pre-CGT factor for assets of joining entity Object (1) Because intra-group *membership interests in the joining entity are disregarded under subsection 701-1(1) (the single entity rule), the object of this section is to provide a mechanism to ensure that the benefit of the pre-CGT status of those interests is not lost. That mechanism involves working out a factor by which the pre-CGT status can be attached to the joining entity's assets and then recognised in membership interests held in an entity that owns the assets on ceasing to be a *subsidiary member of the joined group. Pre-CGT factor to be worked out for certain assets (2) A pre-CGT factor is worked out under this section for each asset of the joining entity at the joining time, other than one that, in accordance with *accounting standards, is a current asset. Note: A pre-CGT factor is not worked out for current assets because they would, in the ordinary course of operations of the joining entity, be consumed or disposed of within 12 months. How to work out pre-CGT factor (3) The pre-CGT factor is the amount (not exceeding 1) worked out by dividing: (a) the sum of: (i) for each *membership interest in the joining entity held by the *head company that is a *pre-CGT asset of the head company- the interest's *market value at the joining time; and (ii) for each membership interest in the joining entity held by a *subsidiary member that has a pre-CGT factor-the interest's market value at the joining time multiplied by its pre-CGT factor; by: (b) the sum of the market values, at the joining time, of all the joining entity's assets for which a pre-CGT factor is to be worked out. Note: The treatment of membership interests in an entity ceasing to be a member of the joined group as pre-CGT assets of members of the group could be manipulated to produce too many pre-CGT assets if the pre-CGT factor of an asset were not limited to 1 by the above subsection. Modification if joining entity is a trust (4) If the joining entity is a trust, a *membership interest in it is not taken into account under paragraph (3)(a) unless the membership interest is either a unit or an interest in the trust. Subdivision 705-B-Case of group formation Guide to Subdivision 705-B 705-130 What this Subdivision is about When a consolidated group comes into existence, the tax cost setting amount for the assets of each entity that becomes a subsidiary member is worked out by modifying the rules in Subdivision 705-A, so that the amount reflects the cost to the group of acquiring the entity. Table of sections Application and object 705-135 Application and object of this Subdivision Modified application of Subdivision 705-A 705-140 Subdivision 705-A has effect with modifications 705-145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members 705-147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members 705-150 Adjustment to result of step 3A in working out allocable cost amount where pre-formation time roll-over from head company to member of wholly-owned group 705-155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests 705-160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members 705-163 Modified application of section 705-57 705-165 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members Application and object 705-135 Application and object of this Subdivision Application (1) This Subdivision has effect for the head company core purposes set out in subsection 701-1(2) if one or more entities become *subsidiary members of a *consolidated group at the time (the formation time) it comes into existence as a consolidated group. Note: This is the first exception to Subdivision 705-A: see paragraph 705-15(a). Object (2) The object of this Subdivision is to modify the rules in Subdivision 705-A (which basically determine the tax cost setting amount for assets of an entity joining an existing *consolidated group) so that they have effect, and take account of different circumstances that apply, when a consolidated group comes into existence. Note: The main circumstance is where one of the entities has membership interests in another. In such a case, the order in which the rules in Subdivision 705-A are applied will affect the tax cost setting amounts for the assets of the entities. Modified application of Subdivision 705-A 705-140 Subdivision 705-A has effect with modifications (1) Subdivision 705-A has effect in relation to each entity becoming a *subsidiary member of the *consolidated group at the formation time in the same way as that Subdivision has effect in relation to an entity becoming a subsidiary member of a consolidated group in circumstances covered by that Subdivision. (2) However, that effect of Subdivision 705-A is subject to modifications set out in this Subdivision. 705-145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members Object (1) The object of this section is to ensure that where, on becoming *subsidiary members, entities hold assets consisting of *membership interests in other subsidiary members, the *head company's cost of becoming the holder of the assets of all of the entities that become subsidiary members correctly reflects the group's cost of acquiring the entities. Tax cost setting amounts to be worked out from top down (2) If, on becoming *subsidiary members, entities hold *membership interests in any other entities that become subsidiary members, the *tax cost setting amounts for the assets of entities holding membership interests must be worked out before the tax cost setting amounts for the assets of the entities in which the membership interests are held. Note: The tax cost setting amount in respect of assets of any subsidiary member in which the head company, but no other subsidiary member, holds membership interests can be worked out in any order in relation to the calculations for other subsidiary members. Tax cost setting amount for higher entity's membership interests to be used in working out lower entity's tax cost setting amount (3) The tax cost setting amount worked out for assets of an entity mentioned in subsection (2) consisting of *membership interests in another such entity is to be used as the amount for those interests under subsection 705-65(1) (step 1 of allocable cost amount) in working out the tax cost setting amount for assets of that other entity. Note 1: Subsection 705-65(1) adds together amounts worked out in accordance with section 705-65 representing the cost of the membership interests that each member of the group holds in the entity. If any of those membership interests is held by another subsidiary member, subsection (3) above will replace the amount otherwise applicable with the tax cost setting amount that will have been worked out for the interests in accordance with subsection (2) above. Note 2: The tax cost setting amount worked out for the membership interests has no relevance other than for the purpose mentioned in subsection (3). This is because, under the single entity principle, intra group membership interests are ignored while entities are members of the group. If an entity ceases to be a member, section 701-15 and Division 711 set the tax cost of membership interests in the entity at that time. Value shifting etc. provisions not to apply to later CGT events involving membership interests (4) However, despite subsection (3), subsection 705-65(4) (which prevents the later operation of value shifting etc. provisions) still applies to the *membership interests. Rights and options to acquire membership interests (5) For the purposes of this section, if, on becoming a *subsidiary member, an entity holds a right or option (including a contingent right or option), created or issued by another entity that becomes a subsidiary member at the same time, to acquire a *membership interest in that other entity, that right or option is treated as if it were a membership interest in that other entity. 705-147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members Object (1) The object of this section is to modify the effect that section 705-93 (step 3A of allocable cost amount) has in accordance with this Subdivision so that it takes account of *membership interests that entities that become *subsidiary members hold in other such entities. Apportionment of step 3A amount among first level interposed entities (2) If: (a) under section 705-93, in its application in accordance with this Subdivision, there is a step 3A amount for the purpose of working out the group's *allocable cost amount for an entity (the subject entity) that becomes a *subsidiary member of the group at the formation time; and (b) at that time one or more entities (the first level entities), that become subsidiary members of the group and in which the *head company holds *membership interests, are interposed between the head company and the subject entity; then the step 3A amount is apportioned among the first level entities and the subject entity on the following basis: (c) each first level entity has the following proportion of the step 3A amount: [pic] where: market value of all membership interests in subject entity means the *market value, at the formation time, of all *membership interests in the subject entity that are held by entities that become *members of the group at that time. market value of first level entity's direct and indirect membership interests in subject entity means so much of the *market value of all membership interests in the subject entity (as defined above) as is attributable to *membership interests that the first level entity holds directly, or indirectly through other interposed entities that become *subsidiary members of the group at the formation time; and (d) the subject entity has the remainder of the step 3A amount. Step 3A amount for assets consisting of membership interests held by subsidiary members in other subsidiary members (3) If: (a) before the formation time: (i) there was a roll-over under Subdivision 126-B (a Subdivision 126-B roll-over) in relation to a *CGT event that happened in relation to an asset (the roll-over asset); or (ii) former section 160ZZO of the Income Tax Assessment Act 1936 applied in relation to a disposal (a section 160ZZO roll- over) of an asset (also the roll-over asset); and (b) the originating company in relation to the Subdivision 126-B roll-over, or the transferor in relation to the section 160ZZO roll-over, was a foreign resident; and (c) the recipient company in relation to the Subdivision 126-B roll- over, or the transferee in relation to the section 160ZZO roll- over, was an Australian resident and was not the entity that became the *head company of the group; and (d) between the Subdivision 126-B roll-over, or the section 160ZZO roll-over, and the formation time, no other CGT event happened in relation to the roll-over asset for which there was not a Subdivision 126-B roll-over or a section 160ZZO roll-over; and (e) the roll-over asset is a *membership interest in an entity that becomes a *subsidiary member at the formation time, other than one that is held at that time by the entity that becomes the head company of the group; then, subject to subsection (5), there is under section 705-93 a step 3A amount for the purpose of working out the group's *allocable cost amount for the entity (the subject entity) that holds the roll-over asset at the formation time. What the step 3A amount is (4) The step 3A amount is: (a) if, as a result of the Subdivision 126-B roll-over mentioned in subparagraph (3)(a)(i), or the section 160ZZO roll-over mentioned in subparagraph (3)(a)(ii), a *capital loss of the originating company was disregarded or a capital loss of the transferor was not incurred-an increase amount equal to the capital loss; or (b) if, as a result of the Subdivision 126-B roll-over mentioned in subparagraph (3)(a)(i), or the section 160ZZO roll-over mentioned in subparagraph (3)(a)(ii), a *capital gain of the originating company was disregarded or a capital gain of the transferor did not accrue-a reduction amount equal to the capital gain. Apportionment of step 3A amount among first level interposed entities (5) If at the formation time one or more entities, that become *subsidiary members of the group and in which the *head company holds *membership interests, are interposed between the head company and the subject entity, then the step 3A amount is apportioned among those entities and the subject entity in the same way as a step 3A amount is apportioned under subsection (2). 705-150 Adjustment to result of step 3A in working out allocable cost amount where pre-formation time roll-over from head company to member of wholly-owned group Object (1) The object of this section is to ensure that, in working out the group's *allocable cost amount for certain entities that become *subsidiary members of the group at the formation time, an adjustment is made to take account of roll-overs under Subdivision 126-B or former section 160ZZO of the Income Tax Assessment Act 1936 before the formation time. When section applies (2) This section applies if: (a) before the formation time, there was a roll-over under Subdivision 126-B or former section 160ZZO of the Income Tax Assessment Act 1936 in relation to a *CGT event (the head company roll-over event) that happened in relation to an asset (the head company roll-over asset), where: (i) an entity (the head company roll-over recipient) that becomes a *subsidiary member of the group was the recipient company in relation to the roll-over; and (ii) the originating company in relation to that roll-over was the entity that becomes the *head company of the group; and (b) between the roll-over and the formation time, no other CGT event happened in relation to the head company roll-over asset: (i) for which there was another roll-over satisfying the requirements of paragraph (a); or (ii) for which there was not a roll-over under Subdivision 126-B or former section 160ZZO of the Income Tax Assessment Act 1936; and (c) the head company roll-over asset is not a *pre-CGT asset at the formation time; and (d) the sum of the *cost bases of all of the *head company's *CGT assets just before the head company roll-over event exceeded or was less than the sum of the cost bases of all of the head company's CGT assets just after the head company roll-over event (the excess or shortfall being the head company roll-over adjustment amount). Adjustment to result of step 3A in allocable cost amount for head company roll-over recipient (3) For the purpose of working out the group's *allocable cost amount for the head company roll-over recipient, the result of step 3A in the table in section 705-60 is increased (if the head company roll-over adjustment is an excess), or reduced (if the head company roll-over adjustment amount is a shortfall), by the amount worked out as follows: [pic] where: market value of all membership interests in head company roll-over recipient means the *market value, at the formation time, of all *membership interests in the head company roll-over recipient that are held by entities that become *members of the group at that time. Adjustment to result of step 3A in allocable cost amount for interposed entity (4) Also, if this section applies, for the purpose of working out the group's *allocable cost amount for any entity (the target entity) that: (a) becomes a *subsidiary member of the group at the formation time; and (b) is interposed at that time between the *head company and the head company roll-over recipient; and (c) is the first or only such interposed entity; the result of step 3A in the table in section 705-60 is increased (if the head company roll-over adjustment is an excess), or reduced (if the head company roll-over adjustment amount is a shortfall), by the amount worked out as follows: [pic] where: market value of all membership interests in head company roll-over recipient has the same meaning as in subsection (3). market value of head company's indirect membership interests in head company roll-over recipient means so much of the *market value, at the formation time, of the *head company's *membership interests in the target entity as is attributable to membership interests that the entity holds directly, or indirectly through other interposed entities that become *subsidiary members of the group at the formation time, in the head company roll-over recipient. Note: If, after applying this section, the amount remaining as a result of step 3A in the table in section 705-60 is negative, the head company makes a capital gain equal to that amount: see CGT event L2. 705-155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests Object (1) The object of this section is to ensure that, in working out the group's *allocable cost amount for entities that become *subsidiary members of the group at the formation time, the reduction under step 4 in the table in section 705-60 (about pre- formation time distributions out of certain profits) is made only for profits that have been effectively distributed to the *head company in respect of its direct *membership interests in the entities. This ensures consistency with the ordering rule in section 705-145. When section applies (2) This section applies to a distribution (the subject distribution) to the extent that the following conditions are satisfied: (a) the distribution is made by an entity (the subject entity) that becomes a *subsidiary member of the group at the formation time; (b) in working out the group's *allocable cost amount for the subject entity there would, apart from this section, be a reduction under step 4 in the table in section 705-60 for the distribution. Step 4 reduction only if subject distribution is made to head company etc. (3) There is no reduction as mentioned in paragraph (2)(b) for the subject distribution unless: (a) the subject distribution is made to the *head company of the group; or (b) the reduction is in accordance with subsection (5). Step 4 reduction for effective distribution to head company (4) If: (a) at the formation time, the *head company of the group has a direct *membership interest in the subject entity; and (b) the head company acquired the membership interest directly from another entity, or indirectly as a result of one or more acquisitions from other entities, where: (i) former section 160ZZ0 of the Income Tax Assessment Act 1936 applied to each acquisition; or (ii) there was a roll-over under Subdivision 126-B for each acquisition; or a combination of these happened; and (c) while it held the membership interest, the entity, or one of the entities, mentioned in paragraph (b) (the recipient of the further distribution) received a distribution (the further distribution) of some of the subject distribution from the subject entity; the consequences in subsections (5) and (6) apply. Reduction for further distribution that remains with recipient (5) If: (a) the following happen: (i) by the formation time, any of the further distribution (the eligible reduction amount) had not again been distributed by the recipient of the further distribution; (ii) the recipient of the further distribution does not become a *subsidiary member of the group at the formation time; or (b) the following happen: (i) by the formation time, any of the further distribution (the eligible reduction amount) had been distributed by the recipient of the further distribution to another entity directly, or indirectly though successive distributions by interposed entities; (ii) that other entity does not become a subsidiary member of the group at the formation time; or (c) both of the above paragraphs apply; then, in working out the group's *allocable cost amount for the subject entity, the reduction under step 4 in the table in section 705-60 for the subject distribution only takes place to the extent that it equals the sum of all eligible reduction amounts. Step 1 reduced cost base adjustment to reverse effect of reduction for further distribution (6) Also, if former subsection 160ZK(5) of the Income Tax Assessment Act 1936 or subsection 110-55(7) of this Act applied to the further distribution, then for the purposes of step 1 in the table in section 705-60 in working out the group's *allocable cost amount for the subject entity: (a) the reference in subsection 705-65(3) to a reduction resulting from the application of former subsection 160ZK(5) of the Income Tax Assessment Act 1936; and (b) the reference in subsection 705-65(5) to a reduction that has taken place under subsection 110-55(7); include a reference to the reduction in the *reduced cost base of the membership interest in the subject entity resulting from the application of former subsection 160ZK(5) of the Income Tax Assessment Act 1936, or subsection 110-55(7) of this Act, to the further distribution. 705-160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members Object (1) The object of this section is to prevent a distortion under section 705-35 in the allocation of *allocable cost amount to an entity that becomes a *subsidiary member of the group where that entity has direct or indirect *membership interests in another entity that has certain profits or tax losses when it becomes a subsidiary member. Adjustment to allocation of allocable cost amount where direct interest in entity with profits/losses (2) If: (a) an entity becomes a *subsidiary member of the group at the formation time; and (b) the entity has *membership interests in a second entity that becomes a subsidiary member of the group at that time; and (c) in working out the group's *allocable cost amount for the second entity: (i) an amount is required to be added (the second entity's profit/loss adjustment amount) under step 3 in the table in section 705-60 (about profits accruing before becoming a subsidiary member of the group); or (ii) an amount is required to be subtracted (also the second entity's profit/loss adjustment amount) under step 5 in the table in section 705-60 (about losses accruing before becoming a subsidiary member of the group); then, for the purposes of working out under section 705-35 the *tax cost setting amount for the assets of the first entity, the *market value of the first entity's membership interests in the second entity is reduced (in a subparagraph (c)(i) case) or increased (in a subparagraph (c)(ii) case) by the first entity's interest in the second entity's profit/loss adjustment amount (see subsection (3)). First entity's interest in second entity's profit/loss adjustment amount (3) The first entity's interest in the second entity's profit/loss adjustment amount is worked out using the formula: [pic] Adjustment to allocation of allocable cost amount for indirect interest in entity with profits/losses (4) If: (a) an entity becomes a *subsidiary member of the group at the formation time; and (b) the entity has *membership interests in a second entity that becomes a subsidiary member of the group at that time; and (c) the second entity has, directly or indirectly through one or more interposed entities that become subsidiary members of the group at the formation time, membership interests in a third entity that becomes a subsidiary member of the group at that time; and (d) in working out the group's *allocable cost amount for the third entity: (i) an amount is required to be added (the third entity's profit/loss adjustment amount) under step 3 in the table in section 705-60 (about profits accruing before becoming a subsidiary member of the group); or (ii) an amount is required to be subtracted (also the third entity's profit/loss adjustment amount) under step 5 in the table in section 705-60 (about losses accruing before becoming a subsidiary member of the group); then, for the purposes of working out under section 705-35 the *tax cost setting amount for the assets of the first entity, the *market value of the first entity's membership interests in the second entity is reduced (in a subparagraph (d)(i) case) or increased (in a subparagraph (d)(ii) case) by the first entity's interest in the third entity's profit/loss adjustment amount (see subsection (5)). First entity's interest in third entity's profit/loss adjustment amount (5) The first entity's interest in the third entity's profit/loss adjustment amount is worked out using the formula: [pic] where: market value of first entity's membership interests in third entity held through second entity means the *market value of all *membership interests in the third entity that the first entity holds indirectly through the second entity (including through that entity and one or more other entities that become *subsidiary members of the group and are interposed between the second entity and the third entity). 705-163 Modified application of section 705-57 Object (1) The object of this section is to ensure that, in working out *tax cost setting amounts for *trading stock, *depreciating assets or *revenue assets of entities that become *subsidiary members of the group at the formation time, section 705-57 (about loss of pre- CGT status of certain *membership interests) only applies if the *membership interests held directly by the *head company of the group are affected. Modified application of section 705-57-basic modification (2) For the purposes of applying section 705-57 in accordance with this Subdivision, a reference in that section to a *membership interest that a *member of the joined group holds in the joining entity at the joining time is taken to be a reference to a *membership interest that the *head company of the *consolidated group holds directly in an entity becoming a *subsidiary member at the formation time. Modified application of section 705-57-additional modifications where section 705-145 applies (3) Also, if an entity (the first entity) that becomes a *subsidiary member holds a *membership interest (the subject membership interest) in another entity (the second entity) that becomes a subsidiary member, section 705-57 (as modified in accordance with subsection (2)) is to be applied in relation to the subject membership interest as follows. (4) First work out whether there would be a reduction under that section in the *tax cost setting amount for the subject membership interest that is used as mentioned in subsection 705-145(3) (the subsection 705-145(3) tax cost setting amount) if: (a) the subject membership interest, if it is not a revenue etc. asset of the first entity, were taken to be such an asset; and (b) paragraphs 705-57(2)(c) and (d) and subsection 705-57(7) did not apply to the subject membership interest. (5) Next, if there would be such a reduction (whose amount is the notional section 705-57 reduction amount): (a) apply section 705-57 to reduce the *tax cost setting amount for any revenue etc. asset of the second entity; and (b) if the second entity holds a *membership interest in another entity that becomes a *subsidiary member-apply section 705-57 in relation to that interest in accordance with subsection (3) of this section; and for those purposes: (c) the subject membership interest is taken to be a membership interest that the *head company of the group holds directly in the second entity at the formation time; and (d) the requirements of paragraphs 705-57(2)(a) and (b) are taken to be satisfied in relation to the subject membership interest; and (e) the subject membership interest is taken to have a *cost base and *reduced cost base equal to the subsection 705-145(3) tax cost setting amount; and (f) the subject membership interest is taken to have a loss of pre- CGT status adjustment amount equal to the notional section 705- 57 reduction amount. Note: If the head company actually held any membership interests in the second entity, or if other entities becoming subsidiary members held membership interests in the second entity to which this subsection also applied, those membership interests would also be taken into account in working out the reduction under paragraph (a) and in applying paragraph (b). Section 705-57 not to apply where membership interests effectively acquired on normal market basis (6) If: (a) apart from this subsection, subsection 705-57(6) would apply in accordance with this Subdivision to the revenue etc. assets of an entity (the subject entity) that becomes a *subsidiary member of the group at the formation time; and (b) at the formation time, the *head company of the group holds all of the *membership interests in the subject entity; and (c) subsection 705-57(6) would apply because a circumstance covered by subsection 705-57(4) (about loss of pre-CGT status because Division 149 etc. applied) existed; and (d) the application of Division 149 of this Act, or the provision of the Income Tax Assessment Act 1936, as mentioned in paragraph 705-57(4)(b) of this Act happened because the entity that became the *head company of the group (the potential head entity) *acquired all of the *membership interests in the other entity mentioned in that paragraph directly or indirectly from another entity (the vendor); and (e) at the time of the acquisition, the potential head entity did not control (for value shifting purposes) the vendor, and vice- versa, and another entity did not control (for value shifting purposes) the potential head entity and the vendor; and (f) the acquisition, or each of the acquisitions, mentioned in subsection 705-57(4) was a *same asset roll-over or was one to which any of former sections 160ZZN to 160ZZOC, 160ZZPA and 160ZZPJ of the Income Tax Assessment Act 1936 applied; then subsection 705-57(6) does not apply as mentioned in paragraph (a) of this subsection. 705-165 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members Object (1) The object of this section is to ensure that where, on becoming *subsidiary members, entities hold *membership interests in other subsidiary members, the pre-CGT status of membership interests held by the *head company, and not the pre-CGT status of membership interests held by other entities, is used to work out the *pre-CGT factor under section 705-125 for assets of the other subsidiary members. Pre-CGT factor to be worked out from top down (2) If, on becoming *subsidiary members, entities hold *membership interests in any other entities that become subsidiary members, the *pre-CGT factor for the assets of entities holding membership interests must be worked out before the pre-CGT factor for the assets of the entities in which the membership interests are held. Subdivision 705-C-Case where a consolidated group is acquired by another Guide to Subdivision 705-C 705-170 What this Subdivision is about When a consolidated group is acquired by another consolidated group, modifications are made to the operation of Division 701 (the core rules) and Subdivision 705-A (tax cost setting amount where a single entity joins a consolidated group) basically to ensure that the tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former. Table of sections Application and object 705-175 Application and object of this Subdivision Modified application of Division 701 in relation to acquired group etc. 705-180 Modifications of Division 701 Modified application of Subdivision 705-A in relation to acquiring group 705-185 Subdivision 705-A has effect with modifications Modifications of Subdivision 705-A for the purposes of this Subdivision 705-190 Modified application of section 705-50 705-195 Modified application of subsection 705-65(6) 705-200 Modified application of section 705-85 705-205 Modified application of section 705-125 Application and object 705-175 Application and object of this Subdivision Application (1) This Subdivision applies if all of the *members of a *consolidated group (the acquired group) become members of another consolidated group (the acquiring group) at a particular time (the acquisition time) as a result of the *acquisition of *membership interests in the *head company of the acquired group. Object (2) The object of this Subdivision is: (a) to modify the rules in Division 701 (the core rules) to complement the treatment of the acquired group as a single entity that applied before the acquisition time; and (b) to modify Subdivision 705-A (which basically determines the tax cost setting amount for assets of an entity joining a consolidated group) to ensure that the *tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former. Modified application of Division 701 in relation to acquired group etc. 705-180 Modifications of Division 701 Certain provisions of Division 701 not to apply (1) If, because an entity ceases to be a *subsidiary member of the acquired group when this Subdivision applies, a provision of Division 701 (other than section 701-25) would otherwise apply, in relation to the acquired group for the head company core purposes set out in subsection 701-1(2) or for the entity core purposes set out in subsection 701-1(3), the provision does not so apply. Modified application of section 701-5 (2) Section 701-5 (the entry history rule) applies in relation to the acquiring group for the head company core purposes set out in subsection 701-1(2) as if entities that are or have been the *subsidiary members of the acquired group were or had been parts of the *head company of the acquired group. Modified application of section 701-25 (3) The application of section 701-25 (which ensures tax-neutral consequences for a head company ceasing to hold assets when an entity leaves a group), in relation to the acquired group for the head company core purposes set out in subsection 701-1(2) and for the entity core purposes set out in subsection 701-1(3), is modified as follows: (a) the reference in subsection (4) of that section to the end of the income year is taken to be a reference to the end of the income year that ends or, if subsection 701-30(3) as modified by subsection (4) of this section applies, of the income year that is taken to end, when the entity ceases to be a *subsidiary member of the acquired group; (b) the section applies (as modified by paragraph (a) of this subsection) to the entity that is the *head company of the acquired group ceasing to be a *member of that group in the same way as it applies to an entity that is a subsidiary member of that group ceasing to be a subsidiary member. Modified application of section 701-30 (4) If the acquired group only exists for part of the income year, section 701-30 (about an entity not being a subsidiary member of a group for a whole income year) applies in relation to the acquired group for the head company core purposes in the same way as it applies to work out the taxable income, tax payable on that taxable income and loss of each *sort for an entity for a non-membership period. Modified application of Subdivision 705-A in relation to acquiring group 705-185 Subdivision 705-A has effect with modifications (1) Subdivision 705-A has effect in relation to the acquiring group for the head company core purposes set out in subsection 701-1(2) as if: (a) the only *member of the acquired group that is a joining entity of the acquiring group were the entity that, just before the acquisition time, was the *head company of the acquired group; and (b) the operation of this Part for the head company core purposes in relation to the head company and the entities that were *subsidiary members of the acquired group continued to have effect for the purposes of Subdivision 705-A. Note 1: This means that for Subdivision 705-A purposes the subsidiary members of the acquired group are treated as part of the head company of that group, and as a result their assets (other than e.g. internal membership interests) have their tax costs set at the acquisition time. Note 2: It also means e.g. that for Subdivision 705-A purposes the terminating values of the assets of those subsidiary members are worked out as if the assets were those of the head company at the acquisition time, and hence will be based (if applicable) on the tax cost setting amounts for assets that were set at the time entities became subsidiary members of the acquired group. (2) However, that effect of Subdivision 705-A is subject to modifications set out in this Subdivision. Note: The modifications of Subdivision 705-A made in this Subdivision constitute the second exception to Subdivision 705-A: see paragraph 705-15(b). Modifications of Subdivision 705-A for the purposes of this Subdivision 705-190 Modified application of section 705-50 Object (1) The object of this section is to ensure that there is no reduction in the *tax cost setting amount of *over-depreciated assets that were brought into the acquired group by an entity on becoming a *subsidiary member, where the over-depreciation will already be corrected as a result of distributions made to the acquired group before that time. Exclusion of pre-joining distributions to members of acquired group (2) If, before it became a *subsidiary member of the acquired group, an entity that is a subsidiary member of the acquired group at the acquisition time paid a dividend to which paragraph 705- 50(2)(b) applies, paragraph 705-50(3)(b) also has effect as if the reference in that paragraph to a taxpayer who was not entitled to a rebate of income tax under former section 46 or 46A of the Income Tax Assessment Act 1936 included a reference to: (a) if the acquired group existed at that time-a *member of that group; or (b) if not-an entity that later became a member of that group. 705-195 Modified application of subsection 705-65(6) Object (1) The object of this section is to ensure that certain rights or options held by *members of the acquiring group that are part of the cost of acquiring the acquired group are taken into account in working out the acquiring group's *allocable cost amount for the acquired group. Certain rights or options relating to the acquired group to be treated in same way as membership interests under step 1 of allocable cost amount (2) Subsection 705-65(6) has effect as if it also treated as a *membership interest in the *head company of the acquired group a right or option (including a contingent right or option), created or issued by a *subsidiary member of the acquired group, to acquire a membership interest in the subsidiary member, where that right or option was held at the acquisition time by a *member of the acquiring group. 705-200 Modified application of section 705-85 Object (1) The object of this section is to ensure that if any of the following are not held by *members of either group: (a) certain employee share interests in *subsidiary members of the acquired group; (b) certain rights or options to acquire *membership interests in subsidiary members of the acquired group; (c) certain preference share interests in subsidiary members of the acquired group; and are therefore part of the cost of acquiring the acquired group, they increase the acquiring group's *allocable cost amount for the acquired group. Increase for certain membership interests in subsidiary members of acquired group (2) Subsections 705-85(1), (2) and (4) have effect as if a *membership interest in a *subsidiary member of the acquired group were a membership interest in the *head company of that group. Increase for certain rights and options to acquire membership interests in subsidiary members of acquired group (3) Paragraph 705-85(3)(a) has effect as if it also increased the step 2 amount worked out under section 705-70 by the *market value of any right or option (including a contingent right or option), created or issued by a *subsidiary member the acquired group, to acquire a *membership interest in the subsidiary member, where that right or option was held at the acquisition time by a person other than a *member of the acquiring group or acquired group. 705-205 Modified application of section 705-125 Object (1) The object of this section is to make it clear that, in view of the fact that *pre-CGT factors are worked out for assets of the acquired group on acquisition by the acquiring group, pre-CGT factors formerly worked out for assets of entities when they became *subsidiary members of the acquired group cease to have any relevance. Pre-CGT factors for assets of members on joining acquired groups no longer relevant (2) Section 705-125 (which provides for a pre-CGT factor to be worked out for assets of the acquired group) has effect as if a note were added at the end of the section stating that *pre-CGT factors worked out for assets of entities when they became *subsidiary members of the acquired group cease to have any relevance when the acquired group ceases to exist in circumstances in which this Subdivision applies. Subdivision 705-D-Where multiple entities are linked by membership interests Guide to Subdivision 705-D 705-210 What this Subdivision is about When entities that are linked by membership interests join a consolidated group, the tax cost setting amount for the assets of each entity that becomes a subsidiary member is worked out by modifying the rules in Subdivision 705-A, so that the amount reflects the cost to the group of acquiring the entities. Table of sections Application and object 705-215 Application and object of this Subdivision Modified application of Subdivision 705-A 705-220 Subdivision 705-A has effect with modifications 705-225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities 705-227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities 705-230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests 705-235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities 705-240 Modified application of section 705-57 705-245 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members Application and object 705-215 Application and object of this Subdivision Application (1) This Subdivision has effect for the head company core purposes set out in subsection 701-1(2) if: (a) 2 or more entities (each of which is a linked entity) become members of a *consolidated group at the same time as a result of an event that happens in relation to one of them; and (b) the case is not covered by Subdivision 705-C. Note: This is the third exception to Subdivision 705-A: see paragraph 705-15(c). In order for this Subdivision to have effect, one of the entities would need to hold directly or indirectly, just before the joining time, membership interests in all of the other entities. Example: Entities A and B are not members of a consolidated group, but members of such a group, together with entity A, jointly hold all the membership interests in entity B. Members of the group then acquire all the membership interests in entity A and as a result of this event both entities, which are linked by the membership interests that one holds in the other, become members of the group. Object (2) The object of this Subdivision is to modify the rules in Subdivision 705-A (which basically determine the tax cost setting amount for assets of an entity joining an existing consolidated group) so that they take account of the different circumstances that apply where linked entities join. Modified application of Subdivision 705-A 705-220 Subdivision 705-A has effect with modifications (1) Subdivision 705-A has effect in relation to each linked entity becoming a *subsidiary member of the *consolidated group in the same way as that Subdivision operates in relation to an entity becoming a subsidiary member of a consolidated group in circumstances covered by that Subdivision. (2) However, that effect of Subdivision 705-A is subject to modifications set out in this Subdivision. 705-225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities Object (1) The object of this section is to ensure that where, on becoming *subsidiary members, linked entities hold assets consisting of *membership interests in other linked entities, the *head company's cost of becoming the holder of the assets of all of the linked entities correctly reflects the group's cost of acquiring the linked entities. Tax cost setting amounts to be worked out from top down (2) The *tax cost setting amounts for the assets of linked entities holding *membership interests must be worked out before the tax cost setting amounts for the assets of the linked entities in which the membership interests are held. Note: The tax cost setting amount in respect of assets of any linked entity in which members of the group, but no linked entity, hold membership interests can be worked out in any order in relation to the calculations for other linked entities. Tax cost setting amount for higher linked entity's membership interests to be used in working out lower linked entity's tax cost setting amount (3) The *tax cost setting amount worked out for assets of a linked entity mentioned in subsection (2) consisting of *membership interests in another such entity is to be used as the amount for those interests under subsection 705-65(1) (step 1 of allocable cost amount) in working out the tax cost setting amount for assets of that other linked entity. Note 1: Subsection 705-65(1) adds together amounts worked out in accordance with section 705-65 representing the cost of the membership interests that each member of the group holds in the linked entity. If any of those membership interests is held by another linked entity, subsection (3) of this section will replace the amount otherwise applicable with the tax cost setting amount that will have been worked out for the interests in accordance with subsection (2) of this section. Note 2: The tax cost setting amount worked out for the membership interests has no relevance other than for the purpose mentioned in subsection (3) of this subsection. This is because, under the single entity principle, intra group membership interests are ignored while entities are members of the group. If an entity ceases to be a member, section 701-15 and Division 711 set the tax cost of membership interests in the entity at that time. Value shifting etc. provisions not to apply to later CGT events involving membership interests (4) However, despite subsection (3), subsection 705-65(4) (which prevents the later operation of value shifting etc. provisions) still applies to the *membership interests. Rights and options to acquire membership interests (5) For the purposes of this section, if, on becoming a *subsidiary member, a linked entity holds a right or option (including a contingent right or option), created or issued by another linked entity, to acquire a *membership interest in that other linked entity, that right or option is treated as if it were a membership interest in that other linked entity. 705-227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities Object (1) The object of this section is to modify the effect that section 705-93 (step 3A of allocable cost amount) has in accordance with this Subdivision so that it takes account of *membership interests that linked entities hold in other linked entities at the time (the linked entity joining time) when the linked entities become *subsidiary members of the group. Apportionment of step 3A amount among first level interposed entities (2) If: (a) under section 705-93, in its application in accordance with this Subdivision, there is a step 3A amount for the purpose of working out the group's *allocable cost amount for a particular linked entity (the subject entity); and (b) at the linked entity joining time, one or more of the linked entities (the first level entities) in which the *head company holds *membership interests are interposed between the head company and the subject entity; then the step 3A amount is apportioned among the first level entities and the subject entity on the following basis: (c) each first level entity has the following proportion of the step 3A amount: [pic] where: market value of all membership interests in subject entity means the *market value, at the linked entity joining time, of all *membership interests in the subject entity that are held by entities that become *members of the group at that time. market value of first level entity's direct and indirect membership interests in subject entity means so much of the *market value of all membership interests in the subject entity (as defined above) as is attributable to *membership interests that the first level entity holds directly, or indirectly through other linked entities; and (d) the subject entity has the remainder of the step 3A amount. Step 3A amount for assets consisting of membership interests held by linked entities in other linked entities (3) If: (a) before the linked entity joining time: (i) there was a roll-over under Subdivision 126-B (a Subdivision 126-B roll-over) in relation to a *CGT event that happened in relation to an asset (the roll-over asset); or (ii) former section 160ZZO of the Income Tax Assessment Act 1936 applied in relation to a disposal (a section 160ZZO roll- over) of an asset (also the roll-over asset); and (b) the originating company in relation to the Subdivision 126-B roll-over, or the transferor in relation to the section 160ZZO roll-over, was a foreign resident; and (c) the recipient company in relation to the Subdivision 126-B roll- over, or the transferee in relation to the section 160ZZO roll- over, was an Australian resident and was not the entity that became the *head company of the group; and (d) between the Subdivision 126-B roll-over, or the section 160ZZO roll-over, and the linked entity joining time, no other CGT event happened in relation to the roll-over asset for which there was not a Subdivision 126-B roll-over or a section 160ZZO roll-over; and (e) the roll-over asset is a *membership interest in a linked entity, other than one that is held at that time by the entity that becomes the head company of the group; then, subject to subsection (5), there is under section 705-93 a step 3A amount for the purpose of working out the group's *allocable cost amount for the linked entity (the subject entity) that holds the roll-over asset at the linked entity joining time. What the step 3A amount is (4) The step 3A amount is: (a) if, as a result of the Subdivision 126-B roll-over mentioned in subparagraph (3)(a)(i), or the section 160ZZO roll-over mentioned in subparagraph (3)(a)(ii), a *capital loss of the originating company was disregarded or a capital loss of the transferor was not incurred-an increase amount equal to the capital loss; or (b) if, as a result of the Subdivision 126-B roll-over mentioned in subparagraph (3)(a)(i), or the section 160ZZO roll-over mentioned in subparagraph (3)(a)(ii), a *capital gain of the originating company was disregarded or a capital gain of the transferor did not accrue-a reduction amount equal to the capital gain. Apportionment of step 3A amount among first level interposed entities (5) If at the linked entity joining time one or more linked entities, in which the *head company holds *membership interests, are interposed between the head company and the subject entity, then the step 3A amount is apportioned among those entities and the subject entity in the same way as a step 3A amount is apportioned under subsection (2). 705-230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests Object (1) The object of this section is to ensure that, in working out the group's *allocable cost amount for the linked entities, the reduction under step 4 in the table in section 705-60 (about pre- formation time distributions out of certain profits) is made only for profits that have been effectively distributed to the *head company in respect of its direct *membership interests in the entities. This ensures consistency with the ordering rule in section 705-225. When section applies (2) This section applies to a distribution to the extent that the following conditions are satisfied: (a) the distribution is made by a linked entity; (b) in working out the group's *allocable cost amount for the linked entity there would, apart from this section, be a reduction under step 4 in the table in section 705-60 for the distribution. Step 4 reduction only if subject distribution is made to head company (3) There is no reduction as mentioned in subsection (2) for the distribution unless it is made to the *head company of the group. 705-235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities Object (1) The object of this section is to prevent a distortion under section 705-35 in the allocation of *allocable cost amount to a linked entity where that entity has direct or indirect *membership interests in another linked entity that has certain profits or tax losses. Adjustment to allocation of allocable cost amount where direct interest in linked entity with profits/losses (2) If: (a) a linked entity has *membership interests in a second linked entity; and (b) in working out the group's *allocable cost amount for the second linked entity: (i) an amount is required to be added (the second linked entity's profit/loss adjustment amount) under step 3 in the table in section 705-60 (about profits accruing before becoming a subsidiary member of the group); or (ii) an amount is required to be subtracted (also the second linked entity's profit/loss adjustment amount) under step 5 in the table in section 705-60 (about losses accruing before becoming a subsidiary member of the group); then, for the purposes of working out under section 705-35 the *tax cost setting amount for the assets of the first linked entity, the *market value of the first linked entity's membership interests in the second linked entity is reduced (in a subparagraph (b)(i) case) or increased (in a subparagraph (b)(ii) case) by the first linked entity's interest in the second linked entity's profit/loss adjustment amount (see subsection (3)). First linked entity's interest in second linked entity's profit/loss adjustment amount (3) The first linked entity's interest in the second linked entity's profit/loss adjustment amount is worked out using the formula: [pic] Adjustment to allocation of allocable cost amount for indirect interest in linked entity with profits/losses (4) If: (a) a linked entity has *membership interests in a second linked entity; and (b) the second linked entity has, directly or indirectly through one or more interposed linked entities, membership interests in a third linked entity; and (c) in working out the group's *allocable cost amount for the third linked entity: (i) an amount is required to be added (the third linked entity's profit/loss adjustment amount) under step 3 in the table in section 705-60 (about profits accruing before becoming a subsidiary member of the group); or (ii) an amount is required to be subtracted (also the third linked entity's profit/loss adjustment amount) under step 5 in the table in section 705-60 (about losses accruing before becoming a subsidiary member of the group); then, for the purposes of working out under section 705-35 the *tax cost setting amount for the assets of the first linked entity, the *market value of the first linked entity's membership interests in the second linked entity is reduced (in a subparagraph (c)(i) case) or increased (in a subparagraph (c)(ii) case) by the first linked entity's interest in the third linked entity's profit/loss adjustment amount (see subsection (5)). First linked entity's interest in third linked entity's profit/loss adjustment amount (5) The first linked entity's interest in the third linked entity's profit/loss adjustment amount is worked out using the formula: [pic] where: market value of first linked entity's membership interests in third linked entity held through second linked entity means the *market value of all *membership interests in the third linked entity that the first linked entity holds indirectly through the second linked entity (including through that entity and one or more other linked entities that are interposed between the second linked entity and the third linked entity). 705-240 Modified application of section 705-57 Object (1) The object of this section is to ensure that, in working out *tax cost setting amounts for *trading stock, *depreciating assets or *revenue assets of the linked entities, section 705-57 (about loss of pre-CGT status of certain membership interests) only applies if the *membership interests held directly by the *head company of the group are affected. Modified application of section 705-57-basic modification (2) For the purposes of applying section 705-57 in accordance with this Subdivision, a reference in that section to a *membership interest that a *member of the joined group holds in the joining entity at the joining time is taken to be a reference to a membership interest that the *head company of the *consolidated group holds directly in a linked entity at the time the linked entity becomes a *subsidiary member. Modified application of section 705-57-additional modifications where section 705-225 applies (3) Also, if a linked entity (the first linked entity) holds a *membership interest (the subject membership interest) in another linked entity (the second linked entity), section 705-57 (as modified in accordance with subsection (2)) is to be applied in relation to the subject membership interest as follows. (4) First work out whether there would be a reduction under that section in the *tax cost setting amount for the subject membership interest that is used as mentioned in subsection 705-225(3) (the subsection 705-225(3) tax cost setting amount) if: (a) the subject membership interest, if it is not a revenue etc. asset of the first linked entity, were taken to be such an asset; and (b) paragraphs 705-57(2)(c) and (d) and subsection 705-57(7) did not apply to the subject membership interest. (5) Next, if there would be such a reduction (whose amount is the notional section 705-57 reduction amount): (a) apply section 705-57 to reduce the *tax cost setting amount for any revenue etc. asset of the second linked entity; and (b) if the second linked entity holds a *membership interest in another linked entity-apply section 705-57 in relation to that interest in accordance with subsection (3) of this section; and for those purposes: (c) the subject membership interest is taken to be a membership interest that the *head company of the group holds directly in the second linked entity; and (d) the requirements of paragraphs 705-57(2)(a) and (b) are taken to be satisfied in relation to the subject membership interest; and (e) the subject membership interest is taken to have a *cost base and *reduced cost base equal to the subsection 705-225(3) tax cost setting amount; and (f) the subject membership interest is taken to have a loss of pre- CGT status adjustment amount equal to the notional section 705- 57 reduction amount. Note: If the head company actually held any membership interests in the second linked entity, or if other linked entities held membership interests in the second linked entity to which this subsection also applied, those membership interests would also be taken into account in working out the reduction under paragraph (a) and in applying paragraph (b). 705-245 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members Object (1) The object of this section is to ensure that, where linked entities hold *membership interests in other linked entities, the pre-CGT status of membership interests held by the *head company, and not the pre-CGT status of membership interests held by other linked entities, is used to work out the *pre-CGT factor under section 705-125 for assets of the other linked entities. Pre-CGT factor to be worked out from top down (2) If linked entities hold *membership interests in any other linked entities, the *pre-CGT factor for the assets of linked entities holding membership interests must be worked out before the pre-CGT factor for the assets of the linked entities in which the membership interests are held. Subdivision 705-E-Adjustments for errors etc. Guide to Subdivision 705-E 705-300 What this Subdivision is about Errors in making tax cost setting amount calculations are reversed by means of an immediate capital gain or loss if it would be unreasonable to require the calculations to be re-done. Table of sections Operative provisions 705-305 Object of this Subdivision 705-310 Operation of Part IVA of the Income Tax Assessment Act 1936 705-315 Errors that attract special adjustment action 705-320 Tax cost setting amounts taken to be correct Operative provisions 705-305 Object of this Subdivision The object of this Subdivision is to avoid the time and expense involved in correcting errors affecting *tax cost setting amount calculations. This is done by providing for *capital gains or *capital losses to reverse the errors. 705-310 Operation of Part IVA of the Income Tax Assessment Act 1936 To avoid doubt, this Subdivision does not limit the operation of Part IVA of the Income Tax Assessment Act 1936. 705-315 Errors that attract special adjustment action (1) Section 705-320 (about later adjustments to correct *tax cost setting amount calculation errors) applies if the conditions in this section are satisfied. Tax cost setting amount taken into account (2) The first condition is that the *head company of a *consolidated group worked out a *tax cost setting amount, in purported compliance with this Division, for an asset of an entity that becomes a *subsidiary member of the group that is an asset of a kind referred to in section 705-35 as a reset cost base asset. Error in calculation (3) The second condition is that: (a) the *head company made one or more errors in working out the *tax cost setting amount; and (b) those errors caused the tax cost setting amount to differ from its correct amount. If the errors caused the tax cost setting amount to be more, the difference is an overstated amount. If the errors caused the tax cost setting amount to be less, the difference is an understated amount. Unreasonable to require recalculation (4) The third condition is that, having regard to the following factors: (a) the net size of the errors compared to the size of the *allocable cost amount for the joining entity; (b) the number of *tax cost setting amounts that would have to be recalculated, and the difficulty of making the recalculations; (c) the number of adjustments, in assessments that could be amended and in future *income tax returns, that would be necessary to correct the errors; (d) the difficulty in obtaining any necessary information; it is not reasonable to require a recalculation of the amounts involved. Exception where error due to fraud or evasion (5) However, the conditions in this section are not satisfied if the errors were to any extent due to fraud or evasion. Requirement to notify (6) The *head company of the *consolidated group must, as soon as practicable after becoming aware that it made one or more errors in working out the *tax cost setting amount, notify the Commissioner in the *approved form: (a) that it had made the errors; and (b) of the amount of the overstated amount or understated amount. 705-320 Tax cost setting amounts taken to be correct (1) For the purposes of this Act (other than this Subdivision) and for the purposes of the Taxation Administration Act 1953, any *tax cost setting amounts that were worked out by the *head company, so far as they were due to the errors, are taken to have been correct if the conditions in section 705-315 are satisfied. Note 1: If the conditions in section 705-315 are satisfied, CGT event L6 happens (see section 104-525). Note 2: Subsection (1) means that the Commissioner cannot amend any assessments necessary to correct the errors, and that (except as mentioned in subsection (2)) no offences or administrative penalties arise in respect of the errors. (2) Subsection (1) does not apply for the purposes of determining whether there is an offence against section 8N of the Taxation Administration Act 1953, or an administrative penalty under section 284-75 or 284-145 in Schedule 1 to that Act, in relation to statements made before the Commissioner became aware of the errors. Note 1: Section 8N of the Taxation Administration Act 1953 deals with false or misleading statements. Sections 284-75 and 284- 145 in Schedule 1 to that Act set out the circumstances in which an entity is liable for an administrative penalty. Note 2: The offence and administrative penalty provisions however apply on a modified basis-see subsection 8W(1C) of the Taxation Administration Act 1953, and subsections 284-80(2) and 284-150(2) in Schedule 1 to that Act. Division 707-Losses for head companies when entities become members etc. Table of Subdivisions 707-A Transfer of previously unutilised losses to head company 707-B Can a transferred loss be utilised? 707-C Amount of transferred losses that can be utilised 707-D Special rules about losses Subdivision 707-A-Transfer of previously unutilised losses to head company Guide to Subdivision 707-A 707-100 What this Subdivision is about A loss made but not utilised by an entity before the time it becomes a member of a consolidated group is transferred to the head company of the group at that time if the entity could have utilised the loss had the entity not become a member of the group. Table of sections 707-105 Who can utilise the loss? Objects 707-110 Objects of this Subdivision Application 707-115 What losses this Subdivision applies to Transfer of loss from joining entity to head company 707-120 Transfer of loss from joining entity to head company 707-125 Modified same business test for companies' post-1999 losses 707-130 Modified pattern of distributions test 707-135 Transferring loss transferred to joining entity because same business test was passed Effect of transfer of loss 707-140 Effect of transfer of loss Cancelling the transfer of the loss 707-145 Cancelling the transfer of the loss What happens if the loss is not transferred? 707-150 Loss cannot be utilised for income year ending after the joining time 707-105 Who can utilise the loss? (1) If the loss is transferred, the head company is treated for income years ending after the transfer as having made the loss, so the head company can utilise the loss for those income years to the extent permitted by: (a) the general rules (outside this Part) about an entity utilising a loss it has made; and (b) the special rules about transferred losses in the other Subdivisions of this Division that supplement and modify those general rules. Note: If the entity from which the loss was transferred became a subsidiary member of the consolidated group, the entity cannot utilise the loss for those income years because of section 701-1 (single entity rule) and section 707-140. (2) If the loss is not transferred, then, for an income year ending after the time the entity became a member of the consolidated group, the loss cannot be utilised by any entity. Note: The loss will not be transferred if the entity would not have been able to utilise it or if the transfer is cancelled under section 707-145. Objects 707-110 Objects of this Subdivision (1) The main objects of this Subdivision are: (a) to provide for the transfer of a loss from an entity (the joining entity) becoming a *member of a *consolidated group to the *head company of the group (so the head company may be able to *utilise it), if the joining entity could have utilised the loss if it had not become a member of the group; and (b) to prevent the utilisation by any entity of a loss made by the joining entity, if the joining entity could not have utilised the loss if it had not become a member of the group. Utilising a loss (2) An entity utilises a loss: (a) in the case of a *tax loss-to the extent it is deducted from an amount of the entity's assessable income or *exempt income; and (b) in the case of a *net capital loss-to the extent that it is applied to reduce an amount of the entity's *capital gains. Application 707-115 What losses this Subdivision applies to (1) This Subdivision applies to a loss of any *sort if: (a) an entity (the joining entity) becomes a *member of a *consolidated group (the joined group) at a time (the joining time) in an income year (the joining year); and (b) the loss was made by the joining entity for an income year ending before the joining time. Note 1: If the joining entity had a loss transferred to it by a previous operation of this Subdivision (when the entity was the head company of a consolidated group), this Subdivision operates later as if the joining entity had made the loss. See section 707-140. Note 2: Section 707-405 may affect the income year for which the joining entity is treated as having made the loss, if the joining entity made the loss and the loss is referable to part of an income year. (2) This Subdivision applies to the loss only to the extent to which the loss is not utilised or otherwise reduced for: (a) an income year ending before the joining time; or (b) a non-membership period mentioned in section 701-30 that ended before the joining time. Transfer of loss from joining entity to head company 707-120 Transfer of loss from joining entity to head company (1) At the joining time, the loss is transferred from the joining entity to the *head company of the joined group (even if they are the same entity), to the extent (if any) that the loss could have been *utilised by the joining entity for an income year consisting of the *trial year if: (a) at the joining time, the joining entity had not become a *member of the joined group (but had been a *wholly-owned subsidiary of the head company if the joining entity is not the head company); and (b) the amount of the loss that could be utilised for the trial year were not limited by the joining entity's income or gains for the trial year. What is the trial year? (2) The trial year is the period: (a) starting at the latest of these times: (i) the time 12 months before the joining time; (ii) the time the joining entity came into existence; (iii) the time the joining entity last ceased to be a *subsidiary member of a *consolidated group, if the joining entity had been a member of a consolidated group before the joining time but was not a *member of a consolidated group just before the joining time; and (b) ending just after the joining time. Same business test involving trial year (3) When working out whether the joining entity carried on the same business throughout the *trial year (or a period including the trial year) as it carried on at a particular time, assume that the entity carried on at and just after the joining time the same business that it carried on just before the joining time. Transfer of loss for income year overlapping trial year (4) If the loss was made by the joining entity for an income year all or part of which occurs in the *trial year, the transfer of the loss under subsection (1) is not prevented by the fact that the loss was made for that income year. 707-125 Modified same business test for companies' post-1999 losses (1) This section operates if: (a) the joining entity made the loss for an income year starting after 30 June 1999; and (b) section 165-13 or subsection 165-15(2) or (3) or 166-5(5) or (6) is relevant to working out (under subsection 707-120(1)) whether the loss is transferred from the joining entity. (2) Work out whether the loss is transferred on the basis that section 165-13 required the joining entity to satisfy the *same business test for: (a) the period (the same business test period) consisting of: (i) the *trial year; and (ii) the income year that included the *test time worked out for section 165-13 for the joining entity (disregarding paragraph (b) of this subsection), if that income year started before the trial year; and (b) the time (the test time) just before the end of the income year for which the loss was made by the joining entity. (3) Work out whether the loss is transferred on the basis that: (a) subsection 165-15(2) specified that the period (the same business test period) for the *same business test consisted of: (i) the *trial year; and (ii) the income year in which the person began to control, or became able to control, the voting power in the company, if that income year started before the trial year; and (b) subsection 165-15(3) required the same business test to be applied to the company's business immediately before the time (the test time) just before the end of the income year for which the loss was made by the joining entity. (4) If Subdivision 166-A would apply to the joining entity for an income year consisting of the *trial year, work out whether the loss is transferred on the basis that: (a) subsection 166-5(5) treated the joining entity as having satisfied the condition in section 165-13 if the joining entity satisfied the *same business test for the period (the same business test period) consisting of: (i) the trial year; and (ii) the income year described in subsection (5) of this section, if that income year started before the trial year; and (b) subsection 166-5(6) required the same business test to be applied to the *business that the joining entity carried on at the time (the test time) just before the end of the income year for which the loss was made by the joining entity. Note: Subdivision 166-A applies to widely held companies and eligible Division 166 companies unless they choose that Subdivision 165-A apply to them without the modifications made by Subdivision 166-A. (5) For the purposes of subparagraph (4)(a)(ii), the income year is: (a) the income year in which occurred the first time mentioned in subsection 166-5(6); or (b) the income year of the joining entity containing the time at which the joining entity is taken under subsection 707-210(5) to fail to meet the condition in section 165-12, if that subsection is relevant to working out whether the joining entity can *utilise the loss. Note 1: Section 707-205 affects the start of the test period if the joining entity made the loss under a previous operation of this Subdivision. Note 2: Section 707-210 is about whether a company can utilise certain losses transferred to it under this Subdivision from a company. (6) Subsection (4) of this section has effect despite subsection 707-210(6). Note: Subsection 707-210(6) modifies section 166-5 for working out whether a company can utilise certain losses transferred to it under this Subdivision from a company. 707-130 Modified pattern of distributions test (1) This section operates for the purpose of working out (under subsection 707-120(1)) whether the loss is transferred from the joining entity, if section 267-20 in Schedule 2F to the Income Tax Assessment Act 1936 is relevant for that purpose. Note 1: That section is relevant if the joining entity has been a non-fixed trust (as defined in that Schedule) at any time in the period from the start of the income year in which the entity made the loss until the time it became a subsidiary member of the joined group (and was not an excepted trust, as defined in that Schedule, at all times in the period). Note 2: That section prevents an entity from utilising a tax loss unless the entity meets the conditions in subsection 267- 30(2) (if applicable) and section 267-35 in that Schedule by passing the pattern of distributions test for certain income years. (2) Section 267-30 in that Schedule has effect as if the income year mentioned in that section were the joining year, and not the *trial year. Note: Section 267-30 in that Schedule requires the joining entity to pass the pattern of distributions test for the income year mentioned in that section if that entity distributed income or capital in that income year or within 2 months after the end of that income year. (3) Section 267-35 in that Schedule has effect as if the reference in that section to an earlier income year were to an income year earlier than the joining year. (4) Disregard each distribution (if any) of income or capital (within the meaning of that Schedule) made by the joining entity after the joining time, so far as it was made from an amount of the entity's income or capital attributable to a time after the joining time, in working out: (a) whether section 267-30 in that Schedule requires the joining entity to pass the pattern of distributions test (as defined in that Schedule); and (b) whether the joining entity passes that test as required by section 267-30 or 267-35 in that Schedule. Note: Disregarding that percentage of a distribution may affect a test year distribution of income or a test year distribution of capital, as those terms are defined in section 269-65 in that Schedule, and thus affect whether the joining entity passes the pattern of distributions test under section 269-60 in that Schedule. 707-135 Transferring loss transferred to joining entity because same business test was passed (1) This section operates if the loss had been transferred to the joining entity (by a previous operation of this Subdivision) because the entity from which the loss was transferred carried on during a particular period the same business as it carried on at a particular time. (2) The loss is not transferred from the joining entity to the *head company of the joined group (despite section 707-120), unless the joining entity satisfies the *same business test for: (a) the *trial year (the same business test period); and (b) the time (the test time) just before the end of the income year in which the loss was transferred to the joining entity. Effect of transfer of loss 707-140 Effect of transfer of loss (1) To the extent that the loss is transferred under section 707- 120 from the joining entity to the *head company of the joined group, this Act operates (except so far as the contrary intention appears) for the purposes of income years ending after the transfer as if: (a) the head company had made the loss for the income year in which the transfer occurs; and (b) the joining entity had not made the loss for the income year for which the joining entity actually made the loss. Head company may utilise loss for income year of transfer (2) The *head company is not prevented from *utilising the loss for the income year in which the transfer occurs merely because this Act operates as if the head company had made the loss (to the extent of the transfer) for that year. Debt forgiveness in income year for which loss is made (3) If a debt of the *head company of the joined group is forgiven (as defined in Subdivision 245-B in Schedule 2C to the Income Tax Assessment Act 1936) in the income year in which the transfer occurs, subsections 245-105(5) and (6) in that Schedule operate as if the head company had made the loss for an earlier income year. Note: This subsection has the effect that the loss may be reduced in accordance with one of those subsections by applying the total net forgiven amount for the income year in which the transfer occurs. Cancelling the transfer of the loss 707-145 Cancelling the transfer of the loss (1) The *head company of the joined group may choose to cancel the transfer of the loss. (2) If the *head company of the joined group does so, this Act (except this section) operates for all income years ending after the transfer as if it had not occurred under section 707-120. (3) The choice cannot be revoked. What happens if the loss is not transferred? 707-150 Loss cannot be utilised for income year ending after the joining time To the extent that the loss is not transferred under section 707-120 from the joining entity to the *head company of the joined group, the loss cannot be *utilised by any entity for an income year ending after the joining time. Subdivision 707-B-Can a transferred loss be utilised? Guide to Subdivision 707-B 707-200 What this Subdivision is about This Subdivision modifies rules about a company maintaining the same ownership to be able to utilise a loss transferred to it under Subdivision 707-A, and specifies what things happening before the transfer are to be taken into account in working out whether the company can utilise the loss. Table of sections Operative provisions 707-205 Modified period for test for maintaining same ownership 707-210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier Operative provisions 707-205 Modified period for test for maintaining same ownership (1) This section modifies Divisions 165 and 166 for the purposes of working out whether a company can *utilise a loss of any *sort that it made because of a transfer under Subdivision 707-A. (2) Subdivision 165-A and Division 166 operate for those purposes as if the *loss year started at the time of the transfer. Note 1: This means that the ownership test period defined by subsection 165-12(1) and the test period defined by subsection 166-5(2) start at the time of the transfer. Note 2: Without this section, those periods would start at the start of the income year in which the transfer occurred, so events occurring before the transfer (such as changes in holdings of voting power, rights to dividends or rights to capital) could affect whether the company could utilise the tax loss or net capital loss. 707-210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier (1) This section has effect for the purposes of working out whether a company (the latest transferee) can *utilise for an income year a loss it made because of a *COT transfer from a company (the latest transferor). (1A) A transfer of a loss under Subdivision 707-A from a company to a company is a COT transfer of the loss if the transfer occurs because: (a) the transferor meets the conditions in section 165-12; and (b) the conditions in one or more of paragraphs 165-15(1)(a), (b) and (c) do not exist in relation to the transferor. Meeting conditions in section 165-12 (2) The latest transferee is taken to meet the conditions in section 165-12 for the income year in relation to the loss if and only if the company (the test company) described in subsection (3) would have met those conditions for the income year had the circumstances described in subsection (4) existed. Note 1: The latest transferee and the test company may be the same company. Note 2: Section 707-405 may affect the income year for which the test company is treated as having made the loss, if the loss is referable to part of an income year. (3) The test company is the first company to make the loss. However, if: (a) the loss was made by the latest transferor because of one or more earlier transfers of the loss under Subdivision 707-A from a company to a company; and (b) one or more of those earlier transfers was not a *COT transfer; the test company is the company to which the loss was transferred in the most recent transfer described in paragraph (b). (4) The circumstances are that: (a) the test company was not treated by Subdivision 707-A for the income year as not having made the loss; and (b) if the test company made the loss apart from that Subdivision and transferred the loss to itself under that Subdivision-the test company was not treated by that Subdivision for the income year as having made the loss for the income year in which the transfer occurred; and (c) nothing happened, after the time the loss was transferred from the test company to the *head company of a *consolidated group, to *membership interests or voting power: (i) in an entity that was at that time a *subsidiary member of the group; or (ii) in an entity that was at that time interposed between the test company and the head company; that would affect whether the test company would meet the conditions in section 165-12 for the income year; and (d) if the loss has later been transferred under that Subdivision to the head company of another consolidated group-nothing happened, after the time of the later transfer, to membership interests or voting power: (i) in the later transferor; or (ii) in an entity that was at that time interposed between the later transferor and the head company; that would affect whether the test company would meet the conditions in section 165-12 for the income year. Failing to meet conditions in section 165-12 (5) The latest transferee is taken to fail to meet a condition in section 165-12 only at: (a) the first time the test company would have failed to meet the condition had the circumstances described in subsection (4) existed; or (b) the test time described in subsection 166-5(6) for the test company, if Division 166 is relevant to working out whether the test company could have *utilised the loss had the circumstances described in subsection (4) existed. Same business test applying to latest transferee under Division 166 (6) If subsection 166-5(5) affects whether the latest transferee can *utilise the loss for the income year because the latest transferee is a *widely held company or an *eligible Division 166 company, or both, during the year, subsection 166-5(6) operates as if it required the *same business test to be applied to the *business the latest transferee carried on just before the time described in subsection (5) of this section. If the test company made the loss because of a transfer (7) If the test company made the loss because of a transfer under Subdivision 707-A from another entity, Divisions 165 and 166 operate in relation to the test company for the purposes of subsection (2) as if the test company's *loss year started at the time of the transfer. Subdivision 707-C-Amount of transferred losses that can be utilised Guide to Subdivision 707-C 707-300 What this Subdivision is about Losses transferred to the head company of a consolidated group under Subdivision 707-A can be utilised for an income year only against a fraction of the income or gains remaining after the company has utilised other losses and deductions. Table of sections Object 707-305 Object of this Subdivision How much of a transferred loss can be utilised? 707-310 How much of a transferred loss can be utilised? 707-315 What is a bundle of losses? 707-320 What is the available fraction for a bundle of losses? 707-325 Modified market value of an entity becoming a member of a consolidated group 707-330 Losses transferred from former head company 707-335 Limit on utilising transferred losses if circumstances change during income year 707-340 Utilising transferred losses while exempt income remains 707-345 Other provisions are subject to this Subdivision Object 707-305 Object of this Subdivision (1) The main object of this Subdivision is to limit, in a way that gives effect to the principles in subsections (2) and (3), the amount of losses transferred under Subdivision 707-A that can be *utilised for an income year by the transferee. (2) One principle is that the transferee is to *utilise the transferred losses for an income year only to the extent to which it has income or gains for the income year remaining after reduction by its other losses and deductions. (3) The other principle is that the amount of a transferred loss that the transferee can *utilise is to reflect the amount of the loss that the transferor could have *utilised for the income year if the transferor of the loss (whether the original maker of the loss or not) had not become a *member of a *consolidated group at the time of the transfer. (4) To give effect to those principles, this Subdivision operates on the assumption that, if each transferor of a loss to the transferee had not become a *member of a *consolidated group at the time of the transfer: (a) all the transferors of transferred losses to the transferee would have made income or gains for the year whose total did not exceed the transferee's income or gains for the year remaining after reduction by its other losses and deductions; and (b) a particular transferor's income or gains for the year would have equalled a fraction of the transferee's income or gains for the year remaining after reduction by its other losses and deductions. (5) The fraction is worked out by reference to the transferor's *market value at the time of the transfer (on the assumption that market value reflects capacity to generate income or gains in future). How much of a transferred loss can be utilised? 707-310 How much of a transferred loss can be utilised? (1) This section limits the amount of losses in a particular *bundle of losses transferred under Subdivision 707-A that can be *utilised by the transferee. The limit is set by reference to the *available fraction for the bundle. Note: Section 707-335 of this Act and section 707-350 of the Income Tax (Transitional Provisions) Act 1997 set different limits on utilising losses in a bundle of losses in certain circumstances. Basic rule (2) The transferee cannot *utilise more of the losses in the *bundle than the transferee would have been able to utilise (apart from this section) under the conditions in subsections (3), (4) and (5). (3) The first condition is that the only amount of the transferee's *ordinary income, *statutory income or gains (if any) of a kind described in column 1 of an item of the table for the income year is the *available fraction of the amount worked out as described in column 2 of the item having regard to: (a) the transferee's *ordinary income, *statutory income or gains for the income year apart from this section; and (b) the transferee's deductions for the income year and losses, except losses transferred to the transferee under Subdivision 707-A. |Income and gains | |Column 1 |Column 2 | |The transferee's |Are worked out by reference to | |ordinary income, |this amount: | |statutory income or | | |gains of this kind: | | |1 *Capital gains |The result of: | | |(a) step 2 of the method | | |statement in subsection 102-5(1);| | |or | | |(b) step 3 of the method | | |statement in section 165-111; | | |(as appropriate) for the | | |transferee and the income year | |3 *Exempt film income|The transferee's *net exempt film| | |income for the income year | | |remaining after deduction of the | | |transferee's *film losses (if | | |any) | |4 *Assessable film |The transferee's *net assessable | |income |film income for the income year | | |remaining after deduction of the | | |transferee's *film losses (if | | |any) | |5 *Exempt income |The amount of the transferee's | |other than *exempt |*net exempt income for the income| |film income |year that would have remained | | |after deducting from it the | | |transferee's *tax losses (if | | |any), assuming the amount of that| | |income were what it would have | | |been had the transferee not had | | |*exempt film income for the year | |6 Assessable income |The amount (if any) that would | |that is not |have been the transferee's | |attributable to |taxable income (if any) for the | |*capital gains and is|income year if the transferee had| |not *assessable film |not had for the income year: | |income |(a) any *net capital gain; or | | |(b) any *net assessable film | | |income; | | |reduced by the amount (the | | |transferee's grossed-up franking | | |offset amount) worked out in | | |accordance with paragraph (3A)(c)| (3A) For the purposes of subsection (3): (a) the transferee's *tax losses to which paragraph (b) of, or the table in, that subsection applies are to be worked out on the assumption that the transferee chooses to deduct under subsection 36-17(2) all of the tax losses and that subsection 36-17(5) does not apply to that choice; and (b) except as mentioned in paragraph (a) of this subsection, amounts worked out as described in column 2 of an item of the table in subsection (3) are to be worked out making the same choices as the transferee actually makes in working out its taxable income as stated in its *income tax return for the income year; and (c) the transferee's grossed-up franking offset amount mentioned in column 2 of item 6 in the table is the amount worked out using the formula: [pic] where: franking offsets means the total amount of *tax offsets to which the transferee is entitled for the income year under Division 207 and Subdivision 210-H (except those that are subject to the refundable tax offset rules because of section 67-25). (4) The second condition is that once the amounts of the transferee's income or gains have been worked out under subsection (3) they are not reduced by: (a) deductions, or losses, other than losses in the *bundle; or (b) taxes or expenses described in subsection 375-805(4) (which is about *net exempt film income). Note: One of the effects of subsection (4) is that, for working out how much of a film loss in the bundle can be deducted from the transferee's net exempt film income or net assessable film income: (a) the transferee's net exempt film income will be the same as its exempt film income worked out under subsection (3); and (b) the transferee's net assessable film income will be the same as its assessable film income worked out under subsection (3). (5) The third condition is that once the amounts of the transferee's *exempt income have been worked out under subsection (3), assume that the transferee had no losses, outgoings or taxes described in subsection 36-20(1) (which is about *net exempt income), in working out how much of a *tax loss in the *bundle can be deducted from the transferee's net exempt income. 707-315 What is a bundle of losses? (1) A bundle of losses comes into existence at the time (the initial transfer time) a loss of any *sort that has not previously been transferred under Subdivision 707-A is transferred under that Subdivision from an entity (the real loss-maker) to the *head company of a *consolidated group (the joined group). (2) At the initial transfer time, the bundle consists of every loss (regardless of its *sort) that: (a) is transferred at that time under that Subdivision from the real loss-maker to the *head company of the joined group; and (b) has not been transferred under that Subdivision before that time. Note: For certain purposes, section 707-327 of the Income Tax (Transitional Provisions) Act 1997 treats the bundle as including certain other losses too. (3) The bundle still exists at a later time if it includes at that later time at least one loss of any *sort that could be *utilised or otherwise reduced by an entity for an income year ending after that time (even if one or more losses have ceased to be included in the bundle before that later time). Note: A bundle continues to exist even if the losses in it are transferred again under Subdivision 707-A after the initial transfer time. (4) A loss ceases to be included in a *bundle at the first time for which it is true that the loss cannot be *utilised or otherwise reduced by any entity for an income year ending after that time. (5) If, had a loss been made by a company as assumed under a provision of Division 170, the loss would have been transferred under Subdivision 707-A, this Subdivision and other provisions that relate to or may affect the *available fractions for one or more *bundles of losses (including sections 707-140 and 719-325) operate as if the transfer had occurred. Note: Section 707-140 provides for a choice to cancel a transfer under Subdivision 707-A. Section 719-325 provides for a choice to cancel all losses in certain bundles of losses. A choice under one of those sections may result in a bundle not coming into existence, or not being in existence after a certain time. (6) To avoid doubt, a choice under section 707-145 or 719-325, as it operates because of subsection (5) of this section, relating to the loss does not affect or prevent: (a) a transfer of the loss that would have occurred under Subdivision 707-A as described in another application of that subsection involving a different company; or (b) *utilisation of the loss by the company that actually made the loss and is different from the company assumed under Division 170 to have made the loss. Note: Therefore a choice under section 707-145 or 719-325, as operating because of subsection (5) of this section, will be able to cause only one bundle not to exist, and will not affect the existence of other bundles that are treated as existing because of other operations of that subsection. 707-320 What is the available fraction for a bundle of losses? (1) The available fraction for a *bundle of losses at a time is: [pic] where: transferee's adjusted market value at the initial transfer time means the amount that would be the *market value, at the initial transfer time, of the transferee to which the losses in the *bundle were transferred at that time if: (a) the transferee did not have a loss of any *sort for an income year ending before that time; and (b) the balance of the transferee's *franking account were nil at that time. Note: The value for the transferee will be worked out on the basis that subsidiary members of the consolidated group headed by the transferee are part of the transferee, because of section 701-1 (the single entity rule). (2) However, if an event described in an item of the table happens, the available fraction for the *bundle is reduced or maintained just after the event by multiplying it by the factor identified in the item: |Factors affecting the available fraction | |Item|Event |Factor | |1 |One or more losses in the |The lesser of 1 and this| | |*bundle are transferred |fraction: | | |for the second or |[pic] | | |subsequent time | | |2 |At the same time as the |The result of dividing | | |losses in the *bundle were|the lesser of: | | |most recently transferred,|(a) the available | | |losses in one or more |fraction (apart from | | |other bundles were |this subsection) for the| | |transferred from the same |bundle of losses that | | |transferor to the same |had not been transferred| | |transferee, and the losses|before; and | | |in the bundle or one of |(b) 1; | | |the other bundles had not |by the sum of the | | |been transferred before |available fractions for | | | |all the bundles (apart | | | |from this item applying | | | |to transfers at the | | | |time) | |3 |The company to which the |[pic] | | |losses in the *bundle were| | | |most recently transferred | | | |has transferred to it at a| | | |later time losses in one | | | |or more other bundles | | |4 |There is an increase in |[pic] | | |the *market value of the | | | |company to which the | | | |losses in the *bundle were| | | |most recently transferred,| | | |because of an event | | | |described in subsection | | | |707-325(4) (but not | | | |covered by subsection | | | |707-325(5)) | | |5 |The available fractions |[pic] | | |(apart from this item) for| | | |all the *bundles of losses| | | |most recently made by the | | | |company that most recently| | | |made the losses in the | | | |bundle total more than | | | |1.000 | | (3) If the transfer under Subdivision 707-A of one or more losses in a *bundle causes events described in 2 or more items of the table in subsection (2) to happen and require calculations of the available fraction for that bundle and for one or more other bundles: (a) make the calculations required by those items in the order in which the items appear in the table; and (b) take account of the results of a calculation under an earlier item in making a calculation under a later item. (4) For a *bundle of losses: (a) subject to paragraph (b)-the available fraction is worked out to 3 decimal places, rounding up if the fourth decimal place is 5 or more; or (b) if the available fraction worked out under paragraph (a) is 0.000 and, if it were worked out to more decimal places, it would include one or more non-zero digits-the available fraction is worked out to the number of decimal places that includes the first or only such digit, rounding up if the next decimal place is 5 or more. Examples: For 0.000328, the available fraction is 0.0003. For 0.000086, the available fraction is 0.00009. (4A) Subsections (1) and (2) have effect subject to subsection (4). (5) If, apart from this subsection, the available fraction for a *bundle of losses would need to be worked out by dividing a number by 0, work out the available fraction by dividing the number by 1. (6) The available fraction for a *bundle of losses is 0 if, apart from this subsection, it would be negative. 707-325 Modified market value of an entity becoming a member of a consolidated group Basic rule (1) The modified market value of an entity that becomes a *member of a *consolidated group at a particular time is the amount that would be the *market value of the entity at that time if: (a) the entity had no loss of any *sort for any income year, and the balance of its *franking account at that time were nil; and (b) the *subsidiary members of the group at that time were separate entities and not just parts of the *head company of the group; and (c) the entity's market value did not include an amount attributable (directly or indirectly) to a *membership interest in a member of the group (other than the entity): (i) that is a *corporate tax entity; or (ii) that transferred a loss under Subdivision 707-A to the head company of the group at or before that time; and (d) the contribution to the entity's market value made by a trust (other than one that is a member described in paragraph (c)) were limited to the amount attributable to the entity's *fixed entitlements (if any) at that time to income or capital of the trust that is not attributable (directly or indirectly) to a membership interest in such a member. Note 1: Section 707-330 affects the modified market value of an entity that becomes a subsidiary member of the consolidated group, if the entity was the head company of another consolidated group just beforehand. Note 2: Section 707-325 of the Income Tax (Transitional Provisions) Act 1997 provides for an entity's modified market value to be increased in certain circumstances for the purposes of working out the available fraction for a bundle of losses transferred from the entity. Rule to prevent inflation of modified market value (2) However, if: (a) one or more of the events described in subsection (4) occurred in the 4 years before the time; and (b) the amount worked out under subsection (1) exceeds what it would have been if none of those events had occurred; the modified market value of the entity at the time is the amount worked out under subsection (1), reduced by the amount worked out under subsection (3). (3) The amount of the reduction is the lesser of: (a) the excess described in paragraph (2)(b); and (b) the total increase in the *market value of the entity that occurred immediately after each event mentioned in paragraph (2)(a) because of the event. (4) These are the events: (a) an injection of capital into the entity or an entity that was an *associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the injection; (b) a transaction that: (i) did not take place at arm's length; and (ii) involved the entity or an entity that was an associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the transaction. (5) For the purposes of paragraph (2)(a), disregard an injection of capital if, and only if, it is made: (a) into a *listed public company through a *dividend reinvestment *scheme involving the issue of a *share in the company to an entity that held a share in the company before the injection; or (b) in association with the acquisition of a *share in a company in relation to which: (i) the conditions in subsection 703-35(5) are met; or (ii) the conditions in paragraphs 703-35(5)(a), (b), (d) and (e) are met and in relation to which the Commissioner has made a determination under subsection 139CD(8) of the Income Tax Assessment Act 1936; or (c) in association with the acquisition of a *share, in a body corporate, in relation to which the conditions in subsection 703-37(4) are met. Note 1: Section 703-35 of this Act and section 139CD of the Income Tax Assessment Act 1936 deal with shares acquired under arrangements for employee shareholdings. Note 2: Section 703-37 of this Act deals with certain preference shares following an ADI restructure. 707-330 Losses transferred from former head company (1) This section has effect for working out the *available fraction for a *bundle of losses if: (a) an entity (the ex-head company) becomes a *subsidiary member of a *consolidated group (the bigger group) at a time (the joining time); and (b) just before the joining time the ex-head company was the *head company of another consolidated group (the old group); and (c) at the joining time the losses are transferred under Subdivision 707-A from the ex-head company to the head company of the bigger group. (2) Work out the ex-head company's *modified market value or *market value as if each *member of the bigger group that had been a *subsidiary member of the old group just before the joining time were a part of the ex-head company, and not a separate member of the bigger group, when the transfer occurred. (3) Also, work out the ex-head company's *modified market value as if each *subsidiary member of the old group had been a part of the ex-head company while it was a subsidiary member of the old group. 707-335 Limit on utilising transferred losses if circumstances change during income year (1) This section limits the amount of losses in a particular *bundle of losses transferred under Subdivision 707-A that can be *utilised by the transferee for an income year if: (a) the losses in the bundle are transferred to the transferee after the start of the income year; or (b) the value of the *available fraction for the bundle changes at a time within the period (the transferee's loss-holding period) described in subsection (2). (2) The transferee's loss-holding period: (a) starts at the start of the income year or, if the losses in the *bundle were transferred to the transferee from another entity during the income year, at the time of the transfer; and (b) ends when one of these events occurs: (i) the income year ends; (ii) the transferee becomes a *subsidiary member of a *consolidated group. (3) The transferee cannot *utilise for the income year more of the losses than is reasonable having regard to: (a) the method in section 707-310 for working out the maximum amount of the losses the transferee could utilise for the income year (apart from this section); and (b) the number of days in the transferee's loss-holding period; and (c) the value or values of the *available fraction for the *bundle during the transferee's loss-holding period; and (d) the number of days in the transferee's loss-holding period for which the available fraction for the bundle has a particular value; and (e) the principle that, if the transferee transferred the losses to itself under Subdivision 707-A after the start of the income year, the amount of the losses it can utilise for the income year should be worked out as if: (i) the losses had been included in the bundle from the start of the income year; and (ii) the available fraction for the bundle had been 1 from the start of the income year until the time of the transfer; and (f) any other relevant matters. (4) Section 707-310 has effect subject to this section. 707-340 Utilising transferred losses while exempt income remains Transferred film losses and net exempt film income (1) If: (a) the transferee of *film losses in a *bundle of losses has deducted from its *net exempt film income for an income year an amount of those losses that: (i) is equal to the amount of *exempt film income worked out under subsection 707-310(3) for the transferee and the bundle; or (ii) if section 707-335 affects the transferee's utilisation of losses in the bundle-is reasonable, having regard to that section; and (b) the transferee still has net exempt film income for the year and film losses remaining in the bundle; the fact the transferee still has net exempt film income does not stop it deducting film losses remaining in the bundle from its *net assessable film income for the year. Transferred tax losses and net exempt income (2) If: (a) the transferee of *tax losses (other than *film losses) in a *bundle of losses has deducted from its *net exempt income for an income year an amount of its tax losses (other than film losses) in the bundle that: (i) is equal to the amount of *exempt income worked out under subsection 707-310(3) for the transferee and the bundle; or (ii) if section 707-335 affects the transferee's utilisation of losses in the bundle-is reasonable, having regard to that section; and (b) the transferee still has net exempt income for the year and tax losses (other than film losses) remaining in the bundle; the fact the transferee still has net exempt income does not stop it deducting tax losses (other than film losses) remaining in the bundle from its assessable income for the year. Limit on deduction (3) This section does not allow the deduction for an income year of an amount of losses in a *bundle so as to exceed the limit set by section 707-310 or 707-335 on *utilisation for the year of losses of that *sort in the bundle. 707-345 Other provisions are subject to this Subdivision The rules in this Subdivision are additional to the provisions of this Act about *utilising losses that are outside this Subdivision. Those provisions have effect subject to this Subdivision. Subdivision 707-D-Special rules about losses Table of sections 707-400 Head company's business before and after consolidation not compared 707-410 Exit history rule does not treat entity as having made a loss 707-400 Head company's business before and after consolidation not compared (1) If: (a) the *same business test applies to a company that becomes a *head company of a *consolidated group at a time; and (b) apart from this section, the same business test period would start before that time and end after it; the same business test period starts at that time (and ends when it would end apart from this section), for the purposes of that application of the same business test. (2) Subsection (1) does not apply for the purposes of working out whether the company can transfer to itself a loss under section 707- 120. 707-410 Exit history rule does not treat entity as having made a loss (1) To avoid doubt, if the *head company of a *consolidated group makes a loss of a particular *sort and an entity ceases to be a *subsidiary member of the group, the entity is not taken because of section 701-40 (the exit history rule): (a) to have made the loss; or (b) to have made another loss of the same sort because of the circumstances that caused the head company to make the loss. (2) It does not matter whether the *head company makes the loss because of a transfer under Subdivision 707-A (whether from the entity or another entity) or because of another provision. Division 709-Other rules applying when entities become subsidiary members etc. Table of Subdivisions 709-A Franking accounts 709-B Imputation issues 709-C Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group 709-D Deducting bad debts Subdivision 709-A-Franking accounts Guide to Subdivision 709-A 709-50 What this Subdivision is about Only the head company of a consolidated group has an operating franking account. The subsidiary members' franking accounts do not operate while they are subsidiary members. Debits or credits that would otherwise arise in subsidiary members' franking accounts arise instead in the head company's franking account. Table of sections Object 709-55 Object of this Subdivision Treatment of franking accounts at joining time 709-60 Nil balance franking account for joining entity Treatment of subsidiary member's franking account 709-65 Subsidiary member's franking account does not operate Treatment of head company's franking account 709-70 Credits arising in head company's franking account 709-75 Debits arising in head company's franking account Franking distributions by subsidiary member 709-80 Subsidiary member's distributions on employee shares and certain preference shares taken to be distributions by the head company 709-85 Non-share distributions by subsidiary members taken to be distributions by head company 709-90 Subsidiary member's distributions to foreign resident taken to be distributions by head company Payment of group liability by former subsidiary member 709-95 Payment of group liability by former subsidiary member 709-100 Refund of income tax to former subsidiary member Object 709-55 Object of this Subdivision The object of this Subdivision is for each *consolidated group to operate what is in substance a single *franking account, by ensuring that: (a) there is a nil balance in the franking accounts of entities becoming *subsidiary members of the group; and (b) the franking accounts of those subsidiary members do not operate while they are subsidiary members; and (c) debits or credits that would otherwise arise in the franking accounts of the subsidiary members arise instead in the franking account of the *head company of the group; and (d) the head company is the only *member of the group that can frank distributions. Treatment of franking accounts at joining time 709-60 Nil balance franking account for joining entity (1) This section operates if an entity (the joining entity) becomes a *subsidiary member of a *consolidated group at a time (the joining time). (2) If the joining entity's *franking account is in surplus just before the joining time: (a) a debit equal to the *franking surplus arises at the joining time in the joining entity's franking account; and (b) a credit equal to the franking surplus arises at the joining time in the franking account of the *head company of the group. (3) If the joining entity's *franking account is in deficit just before the joining time: (a) a credit equal to the *franking deficit arises at the joining time in the joining entity's franking account; and (b) the joining entity is liable to pay *franking deficit tax as if the joining entity's income year had ended just before the joining time; and (c) despite item 5 of the table in section 205-15, a credit does not arise under that item in the joining entity's franking account because of that liability. Treatment of subsidiary member's franking account 709-65 Subsidiary member's franking account does not operate The *franking account of an entity that is a *subsidiary member of a *consolidated group does not operate during the period: (a) beginning just after the entity becomes a subsidiary member of the group; and (b) ending when the entity ceases to be a subsidiary member of the group. Treatment of head company's franking account 709-70 Credits arising in head company's franking account (1) This section operates if a credit would arise in the *franking account of a *subsidiary member of a *consolidated group at a time (the crediting time) apart from section 709-65. (2) A credit arises in the *franking account of the *head company of the group at the crediting time. Note: A credit can also arise in the head company's franking account at any time under section 205-15. (3) The amount of the credit is the same as the amount of the credit that would arise in the *franking account of the *subsidiary member. (4) This section does not apply to a credit arising in the *subsidiary member's *franking account under paragraph 709- 60(3)(a). Note: Such a credit arises if the entity that became the subsidiary member had a deficit in its franking account just before the time it became the subsidiary member. The credit equals the deficit, creating a nil balance in the account from that time. 709-75 Debits arising in head company's franking account (1) This section operates if a debit would arise in the *franking account of a *subsidiary member of a *consolidated group at a time (the debiting time) apart from section 709-65. (2) A debit arises in the *franking account of the *head company of the group at the debiting time. Note: A debit can also arise in the head company's franking account at any time under section 205-30. (3) The amount of the debit is the same as the amount of the debit that would arise in the *franking account of the *subsidiary member. (4) This section does not apply to a debit arising in the *subsidiary member's *franking account under paragraph 709- 60(2)(a). Note: Such a debit arises if the entity that became the subsidiary member had a surplus in its franking account just before the time it became the subsidiary member. The debit equals the surplus, creating a nil balance in the account from that time. Franking distributions by subsidiary member 709-80 Subsidiary member's distributions on employee shares and certain preference shares taken to be distributions by the head company (1) This section operates if: (a) a *subsidiary member of a *consolidated group makes a *frankable distribution; and (b) the distribution is made because an entity (the shareholder) owns a *share in the subsidiary member; and (c) the share must be disregarded under subsection 703-35(4) or 703- 37(4); and (d) the distribution is made to the shareholder, or to another entity because the shareholder owns the share; and (e) the entity to which the distribution is made is not a *member of the group. Note 1: Subsection 703-35(4) requires certain shares held under employee share schemes to be disregarded. Note 2: Subsection 703-37(4) requires certain preference shares to be disregarded following an ADI restructure. (2) Part 3-6 operates as if the *distribution were a *frankable distribution made by the *head company of the group to a *member of the head company. Note: Part 3-6 deals with imputation. 709-85 Non-share distributions by subsidiary members taken to be distributions by head company (1) This section operates if: (a) an entity holds a *non-share equity interest in a *subsidiary member of a *consolidated group; and (b) the subsidiary member makes a *non-share distribution to the entity as holder of the interest; and (c) the distribution is a *frankable distribution; and (d) the entity to which the distribution is made is not a *member of the group. (2) Part 3-6 operates as if the *distribution were a *frankable distribution made by the *head company of the group to a *member of the head company. Note: Part 3-6 deals with imputation. 709-90 Subsidiary member's distributions to foreign resident taken to be distributions by head company Part 3-6 operates as if a *frankable distribution made by a *subsidiary member of a *consolidated group (the foreign-held subsidiary) were a frankable distribution made by the *head company of the group to a *member of the head company if: (a) the foreign-held subsidiary meets the set of requirements in section 703-45, section 701C-10 of the Income Tax (Transitional Provisions) Act 1997 or section 701C-15 of that Act; and (b) the frankable distribution is made to a foreign resident. Note: Part 3-6 deals with imputation. Payment of group liability by former subsidiary member 709-95 Payment of group liability by former subsidiary member (1) This section operates if: (a) an entity (the former subsidiary) ceases to be a *subsidiary member of a *consolidated group (the old group) at a particular time (the leaving time); and (b) at or after the leaving time, the former subsidiary: (i) *pays a PAYG instalment for which it was jointly and severally liable under subsection 721-15(1) because it was a subsidiary member of the old group; or (ii) *pays income tax for which it was jointly and severally liable under that subsection because it was a subsidiary member of the old group; and (c) apart from this section, a *franking credit would arise under section 205-15 in the *franking account of the former subsidiary at a time (the crediting time) because of that payment. (2) The credit: (a) does not arise at the crediting time in the *franking account of the former subsidiary; and (b) instead, arises at the crediting time in the franking account of the entity that was the *head company of the old group at the leaving time. 709-100 Refund of income tax to former subsidiary member (1) This section operates if: (a) an entity (the former subsidiary) ceases to be a *subsidiary member of a *consolidated group (the old group) at a particular time (the leaving time); and (b) at or after the leaving time, the former subsidiary *receives a refund of income tax for which it was jointly and severally liable under subsection 721-15(1) because it was a subsidiary member of the old group; and (c) apart from this section, a *franking debit would arise under section 205-30 in the *franking account of the former subsidiary at a time (the debiting time) because of that payment. (2) The debit: (a) does not arise at the debiting time in the *franking account of the former subsidiary; and (b) instead, arises at the debiting time in the franking account of the entity that was the *head company of the old group at the leaving time. Subdivision 709-B-Imputation issues Guide to Subdivision 709-B 709-150 What this Subdivision is about This Subdivision modifies the way Division 208 (exempting entities and former exempting entities) operates in relation to consolidated groups. Table of sections Operative provisions 709-155 Testing consolidated groups 709-160 Subsidiary member is exempting entity 709-165 Subsidiary member is former exempting entity 709-170 Head company and subsidiary are exempting entities 709-175 Head company is former exempting entity Operative provisions 709-155 Testing consolidated groups (1) To determine whether a *consolidated group is an *exempting entity or *former exempting entity, the tests in Division 208 are applied to the *head company of the group. (2) However, there are some additional rules that can alter the way that Division 208 applies to a *consolidated group. These are set out in sections 709-160 to 709-175. (3) In applying those rules to an entity that is a *member of a *consolidated group: (a) Division 208 is to be applied before those rules; and (b) that Division is to be applied just after the entity became a member of the group but, for a *subsidiary member, it is to be applied on the assumption that the subsidiary was not a member of the group at that time. (4) Except as mentioned in paragraph (3)(b), Division 208 has no application to a *subsidiary member of a *consolidated group. 709-160 Subsidiary member is exempting entity (1) This section operates if: (a) the *head company of a *consolidated group is neither an exempting entity nor a *former exempting entity; and (b) a *corporate tax entity becomes a *subsidiary member of the group at a time (the joining time); and (c) the entity is an *exempting entity at the joining time. (2) These rules apply to the *consolidated group. |Rules applying to *consolidated group | |Item |Rule | |1 |The *head company becomes a *former exempting | | |entity at the joining time | |2 |The *head company has both a *franking account | | |and an *exempting account | |3 |If the *subsidiary member's *franking account has| | |a *franking surplus at the joining time: | | |(a) a debit equal to that surplus arises in that | | |account at the joining time; and | | |(b) a credit equal to that surplus arises in the | | |*exempting account of the *head company at the | | |joining time | |4 |Subsection 709-60(2) (about franking surplus) | | |does not apply to the *subsidiary member | |5 |Item 1 of the table in section 208-115 does not | | |apply to the *head company | |6 |Item 1 of the table in section 208-120 does not | | |apply to the *head company | |7 |Item 1 of the table in section 208-130 does not | | |apply to the *head company | |8 |Item 1 of the table in section 208-145 does not | | |apply to the *head company | Note 1: If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709- 60(3). Note 2: The subsidiary's franking account does not operate while it is a member of the group: see section 709-65. 709-165 Subsidiary member is former exempting entity (1) This section operates if: (a) the *head company of a *consolidated group is neither an exempting entity nor a *former exempting entity; and (b) a *corporate tax entity becomes a *subsidiary member of the group at a time (also the joining time); and (c) the entity is a *former exempting entity at the joining time. (2) These rules apply to the *consolidated group. |Rules applying to *consolidated group | |Item |Rule | |1 |The *head company becomes a *former exempting | | |entity at the joining time | |2 |The *head company has both a *franking account | | |and an *exempting account | |3 |If the *subsidiary member's *exempting account | | |has an *exempting surplus at the joining time: | | |(a) a debit equal to that surplus arises in that | | |account at the joining time; and | | |(b) a credit equal to that surplus arises in the | | |exempting account of the *head company at the | | |joining time | |4 |If the *subsidiary member's *exempting account | | |has an *exempting deficit at the joining time: | | |(a) a credit equal to that deficit arises in that| | |account at the joining time; and | | |(b) a debit equal to that deficit arises in the | | |subsidiary's *franking account just before the | | |joining time | |5 |The *subsidiary member's *exempting account does | | |not operate during the period: | | |(a) starting just after the joining time; and | | |(b) ending when the entity ceases to be a | | |subsidiary member of the group | |6 |Item 1 of the table in section 208-115 does not | | |apply to the *head company | |7 |Item 1 of the table in section 208-120 does not | | |apply to the *head company | |8 |Item 1 of the table in section 208-130 does not | | |apply to the *head company | |9 |Item 1 of the table in section 208-145 does not | | |apply to the *head company | Note 1: Any surplus in the subsidiary's franking account will be transferred to the head company's franking account: see subsection 709-60(2). Note 2: If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709- 60(3). This deficit may be increased by item 4 in the table in subsection (2). Note 3: The subsidiary's franking account does not operate while it is a member of the group: see section 709-65. 709-170 Head company and subsidiary are exempting entities There is no change to the status of the *head company of a *consolidated group if: (a) the head company is an *exempting entity; and (b) a *corporate tax entity becomes a *subsidiary member of the group at a time (also the joining time); and (c) the entity is an exempting entity at the joining time. Note 1: If the subsidiary's franking account is in surplus, that surplus will be transferred to the head company's franking account: see subsection 709-60(2). Note 2: If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709- 60(3). Note 3: The subsidiary's franking account does not operate while it is a member of the group: see section 709-65. 709-175 Head company is former exempting entity (1) Subsection (2) operates if: (a) the *head company of a *consolidated group is a *former exempting entity; and (b) a *corporate tax entity becomes a *subsidiary member of the group at a time (also the joining time); and (c) the entity is an *exempting entity at the joining time. (2) These rules apply to the *consolidated group. |Rules applying to *consolidated group | |Item |Rule | |1 |There is no change to the status of the *head | | |company | |2 |If the subsidiary member's *franking account has | | |a *franking surplus at the joining time: | | |(a) a debit equal to that surplus arises in that | | |account at the joining time; and | | |(b) a credit equal to that surplus arises in the | | |*exempting account of the *head company at the | | |joining time | |3 |Subsection 709-60(2) (about franking surplus) | | |does not apply to the *subsidiary member | Note 1: If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709- 60(3). Note 2: The subsidiary's franking account does not operate while it is a member of the group: see section 709-65. (3) Subsection (4) operates if: (a) the *head company of a *consolidated group is a *former exempting entity; and (b) a *corporate tax entity becomes a *subsidiary member of the group at a time (also the joining time); and (c) the entity is a *former exempting entity at the joining time. (4) These rules apply to the *consolidated group. |Rules applying to *consolidated group | |Item |Rule | |1 |There is no change to the status of the *head | | |company | |2 |If the *subsidiary member's *exempting account | | |has an *exempting surplus at the joining time: | | |(a) a debit equal to that surplus arises in that | | |account at the joining time; and | | |(b) a credit equal to that surplus arises in the | | |exempting account of the *head company at the | | |joining time | |3 |If the *subsidiary member's *exempting account | | |has an *exempting deficit at the joining time: | | |(a) a credit equal to that deficit arises in that| | |account at the joining time; and | | |(b) a debit equal to that deficit arises in the | | |subsidiary's *franking account just before the | | |joining time | |4 |The *subsidiary member's *exempting account does | | |not operate during the period: | | |(a) starting just after the joining time; and | | |(b) ending when the entity ceases to be a | | |subsidiary member of the group | Note 1: If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709- 60(3). This deficit may be increased by item 3 in the table in subsection (4). Note 2: The subsidiary's franking account does not operate while it is a member of the group: see section 709-65. (5) There is no change to the status of the *head company of a *consolidated group if: (a) the head company is a *former exempting entity; and (b) a *corporate tax entity becomes a *subsidiary member of the group; and (c) the entity is neither an *exempting entity nor a former exempting entity at the joining time. Note 1: If the subsidiary's franking account is in surplus, that surplus will be transferred to the head company's franking account: see subsection 709-60(2). Note 2: If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709- 60(3). Note 3: The subsidiary's franking account does not operate while it is a member of the group: see section 709-65. Subdivision 709-C-Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group Guide to Subdivision 709-C 709-180 What this Subdivision is about This Subdivision provides that any excess in the tax offset arising from a franking deficit tax liability of an entity that becomes a subsidiary member of a consolidated group is transferred to the head company of the group. Table of sections 709-185 Joining entity's excess franking deficit tax offsets transferred to head company 709-190 Exit history rule not to treat leaving entity as having a franking deficit tax offset excess 709-185 Joining entity's excess franking deficit tax offsets transferred to head company (1) This section operates if: (a) an entity (the joining entity) becomes a *subsidiary member of a *consolidated group at a time (the joining time); and (b) the joining entity is entitled to a *tax offset under section 205-70 for the income year that ends or, if subsection 701-30(3) applies, that is taken by subsection (3) of that section to end, at the joining time; and (c) the offset exceeds (the excess being the joining entity's excess) the amount that would have been the joining entity's income tax liability for that income year if it did not have that offset (but had all its other tax offsets). Transfer of excess to head company (2) For the purpose of applying subsection 205-70(1) to the *head company of the *consolidated group for the income year in which the joining time occurs: (a) if the head company does not, after taking into account any application of this section to any other entity that became a *subsidiary member of the group before the joining time, have an excess mentioned in paragraph 205-70(1)(c) for the previous income year-the head company is taken to have an excess mentioned in that paragraph for the previous income year equal to the joining entity's excess; and (b) if the head company does have such an excess-that excess is taken to be increased by the amount of the joining entity's excess. Joining entity prevented from utilising excess in later income years (3) For the purpose of applying subsection 205-70(1) to the joining entity for any income year after that in which the joining time occurs, the joining entity's excess is disregarded. 709-190 Exit history rule not to treat leaving entity as having a franking deficit tax offset excess To avoid doubt, if: (a) the *head company of a *consolidated group is entitled to a *tax offset under section 205-70 for an income year; and (b) the offset exceeds the amount that would have been the head company's income tax liability for that income year if it did not have that offset (but had all its other tax offsets); and (c) an entity ceases to be a *subsidiary member of the group in the income year; the entity is not taken because of section 701-40 (the exit history rule): (d) to have the excess mentioned in paragraph (b); or (e) to have another excess of that kind because of the circumstances that caused the head company to have the excess. Subdivision 709-D-Deducting bad debts Guide to Subdivision 709-D 709-200 What this Subdivision is about An entity can deduct a bad debt that: (a) has for a period been owed to a member of a consolidated group; and (b) has for another period been owed to an entity that was not a member of that group; only if each entity that has been owed the debt for such a period could have deducted the debt had it been written off as bad at the end of the period. This applies even if the debt is owed to the same entity for different periods. Table of sections Application and object 709-205 Application of this Subdivision 709-210 Object of this Subdivision Limit on deduction of bad debt 709-215 Limit on deduction of bad debt Extension of Subdivision to debt/equity swap loss 709-220 Limit on deduction of swap loss Application and object 709-205 Application of this Subdivision (1) This Subdivision affects whether an entity (the claimant) that is or has been a *member of a *consolidated group and writes off a debt, or part of a debt, as bad may deduct the debt or part if the conditions in subsection (2) exist. Note: This Subdivision affects similarly whether an entity that is or has been a member of a consolidated group and extinguishes a debt as part of a debt/equity swap may deduct a loss resulting from the swap. See section 709-220. (2) The conditions are that, in the time starting when the debt was incurred (whether to the claimant or another entity) and ending when the claimant wrote off the debt or part: (a) the debt was owed to an entity (whether the claimant or another entity) for a period (a debt test period) when the entity was a *member of a *consolidated group; and (b) the debt was owed to an entity (whether the claimant or another entity) for a period (also a debt test period) when the entity was a not a member of that group. Note 1: The debt must have been owed to the claimant for at least one of the debt test periods for the claimant to have been able to write it off. Note 2: One effect of section 701-1 (Single entity rule) is that a debt is taken to be owed to the head company of a consolidated group while the debt is owed to a subsidiary member of the group. (3) Ignore section 701-5 (Entry history rule) and section 701-40 (Exit history rule) in identifying a debt test period. Note: Subsection (3) does not affect sections 701-5 and 701-40 so far as they operate to treat the debt, or part of the debt, as having been included in the claimant's assessable income. That inclusion is generally a condition under section 25-35 for the claimant to be able to deduct the debt. (4) This Subdivision does not apply in relation to a debt merely because it is assigned: (a) from an entity that is a *member of a *consolidated group to an entity that is not a member of that group; or (b) from an entity that is not a member of a consolidated group to an entity that is a member of a consolidated group; or (c) from an entity that is a member of a consolidated group to an entity that is a member of another consolidated group. This subsection has effect despite subsections (1) and (2). Note: There is not an assignment of a debt from one entity to another merely because section 701-1 (Single entity rule) starts or ceases to apply in relation to the entities so that the debt ceases to be a debt owed to one entity and becomes a debt owed to the other entity. 709-210 Object of this Subdivision The main object of this Subdivision is to ensure that the claimant can deduct the debt, or part of it, only if each entity that was owed the debt for a debt test period could have deducted the debt if it had been written off as bad at the end of the period. Limit on deduction of bad debt 709-215 Limit on deduction of bad debt (1) The claimant can deduct the debt, or part of the debt, if, and only if: (a) section 8-1 or 25-35 permits the deduction (ignoring subsection 25-35(5) and the provisions mentioned in that subsection); and (b) the condition in subsection (2) is met for each debt test period. (2) The condition is that the entity that was owed the debt for the debt test period could have deducted the debt for an income year (the debt test income year) starting and ending at the times identified in subsection (3) if: (a) the entity had written off the debt as bad at the end of the period; and (b) these provisions (the modified provisions) had effect as described in this section: (i) sections 165-123 and 165-126 (which are about conditions that must be met for a company to be able to deduct a bad debt); (ii) sections 266-35, 266-85, 266-120, 266-160 and 267-25 in Schedule 2F to the Income Tax Assessment Act 1936 (which are about conditions that must be met for certain kinds of trusts to be able to deduct a bad debt); (iii) other provisions of this Act so far as they relate to a section listed in subparagraph (i) or (ii); and (c) these provisions did not apply: (i) subsections 165-120(2) and (3); (ii) section 63G of the Income Tax Assessment Act 1936; (iii) section 267-65 in Schedule 2F to that Act. Note 1: Some of the other provisions of this Act that relate to a section listed in subparagraph (2)(b)(i) are sections 165- 120, 165-129 and 165-132 and Subdivision 166-C. Note 2: Some of the other provisions of this Act that relate to a section listed in subparagraph (2)(b)(ii) are sections 266- 40, 266-45, 266-90, 266-125, 266-165, 267-30, 267-35, 267-40 and 267-45 in Schedule 2F to the Income Tax Assessment Act 1936. Debt test income year (3) The table shows when the debt test income year starts and ends. |Start and end of debt test income year | | |If: |The start of |The end of the| | | |the debt test |debt test | | | |income year |income year | | | |is: |is: | |1 |Both these conditions |The later of |The end of the| | |are met: |these times |income year in| | |(a) the entity that is|(or either of |which the | | |owed the debt for the |them if they |write-off time| | |debt test period is |are the same):|occurs | | |the claimant; | | | | |(b) the period ends at|(a) the start | | | |the time (the |of the income | | | |write-off time) the |year in which | | | |claimant actually |the write-off | | | |writes off the debt or|time occurs; | | | |part of the debt |(b) the start | | | | |of the debt | | | | |test period | | |2 |Either: |The later of |The end of the| | |(a) the entity that is|these times |debt test | | |owed the debt for the |(or either of |period | | |debt test period is |them if they | | | |not the claimant; or |are the same):| | | |(b) that entity is the| | | | |claimant but that |(a) 12 months | | | |period ends before the|before the end| | | |claimant actually |of the debt | | | |writes off the debt or|test period; | | | |part of the debt |(b) the start | | | | |of the debt | | | | |test period | | Continuity periods, ownership test periods and test periods (4) For the purposes of subsection (2), the modified provisions have effect as if: (a) the *first continuity period started at the start time shown in the table and ended at the start of the debt test income year; and (b) the *second continuity period were the debt test income year or, for the purposes of section 165-123 and Subdivision 166-C defining periods by reference to the second continuity period, the period: (i) starting at the start of the debt test income year; and (ii) ending at the end time shown in the table; and (c) each section listed in subparagraph (2)(b)(ii) specified that the test period identified in the section: (i) started at the start time shown in the table; and (ii) ended at the end time shown in the table. |Start time and end time | | |If: |The start |The end | | | |time is: |time is: | |1 |All these conditions are met: |The start |The end of| | |(a) the entity that is owed |of the |the income| | |the debt for the debt test |debt test |year in | | |period is the claimant; |period |which the | | |(b) the period ends at the | |write-off | | |time (the write-off time) the | |time | | |claimant actually writes off | |occurs | | |the debt or part of the debt; | | | | |(c) the claimant is the *head | | | | |company of a *consolidated | | | | |group at the write-off time | | | |2 |All these conditions are met: |Just |The end of| | |(a) the entity that is owed |before the|the income| | |the debt for the debt test |start of |year in | | |period is the claimant; |the debt |which the | | |(b) the period ends at the |test |write-off | | |time (the write-off time) the |period |time | | |claimant actually writes off | |occurs | | |the debt or part of the debt; | | | | |(c) the claimant is not the | | | | |*head company of a | | | | |*consolidated group at the | | | | |write-off time | | | |3 |The debt test period: |The start |Just after| | |(a) starts at a time other |of the |the end of| | |than a time when the entity |debt test |the debt | | |that is owed the debt for the |period |test | | |period ceases to be a *member | |period | | |of a *consolidated group; and | | | | |(b) ends when the entity | | | | |becomes a member of such a | | | | |group; | | | | |(whether or not the entity was| | | | |the *head company of another | | | | |such group during the period) | | | |4 |Both these conditions are met:|The start |The end of| | | |of the |the debt | | |(a) the entity that is owed |debt test |test | | |the debt for the debt test |period |period | | |period is the *head company of| | | | |a *consolidated group; | | | | |(b) the period ends when: | | | | |(i) a *subsidiary member of | | | | |the group becomes a *member of| | | | |another consolidated group; or| | | | | | | | | |(ii) the entity ceases to be | | | | |the head company of the group | | | | |without becoming a member of | | | | |another consolidated group | | | |5 |The debt test period: |Just |Just after| | |(a) starts when the entity |before the|the end of| | |that is owed the debt for the |start of |the debt | | |period ceases to be a *member |the debt |test | | |of a *consolidated group; and |test |period | | |(b) ends later when the entity|period | | | |becomes a member of a | | | | |consolidated group | | | (5) For the purposes of subsection (2), the modified provisions have effect as if section 267-25 in Schedule 2F to the Income Tax Assessment Act 1936 applied in relation to debts whether they were incurred in the income year or an earlier income year. Test time for same business test under section 165-126 (6) For the purposes of subsection (2), the modified provisions have effect as if subsection 165-126(2) specified that the test time were the later of these times (or either of them if they are the same): (a) the first time at which it is not practicable to show that the company will meet the conditions in section 165-123 (as modified by this section); (b) the time just after the start of the debt test period. Business at and just after the end of the debt test period (7) If: (a) the debt test period ends when the entity that was owed the debt for the period becomes a *member of a *consolidated group; and (b) under the modified provisions, the *business that the entity carried on at or just after the end of the period is relevant to the question whether the entity could have deducted the debt as described in subsection (2); those provisions have effect for the purposes of that subsection as if the entity carried on at those times the business it carried on just before the end of the period. Extension of Subdivision to debt/equity swap loss 709-220 Limit on deduction of swap loss Object (1) The object of this section is to limit the circumstances in which an entity can deduct a swap loss (as defined in section 63E of the Income Tax Assessment Act 1936) resulting from a debt/equity swap (as defined in that section) to circumstances similar to those in which this Subdivision lets an entity deduct a debt it writes off as bad. Modified operation of sections 709-205, 709-210 and 709-215 (2) Sections 709-205, 709-210 and 709-215 (except subsection 709- 215(2)) apply in relation to the extinction (however described) of a debt as part of a debt/equity swap in the same way as they apply in relation to the writing off of a debt as bad. (3) Subsection 709-215(1): (a) applies in relation to a swap loss from a debt/equity swap in the same way as it applies in relation to a debt, or part of a debt; and (b) applies as if paragraph 709-215(1)(a) referred to subsection 63E(3) of the Income Tax Assessment Act 1936 instead of sections 8-1 and 25-35. (4) This section has effect despite subsection 63E(5) of the Income Tax Assessment Act 1936. Division 711-Tax cost setting amount for membership interests where entities cease to be subsidiary members of consolidated groups Guide to Division 711 711-1 What this Division is about If an entity ceases to be a subsidiary member of a consolidated group, the tax cost setting amount for the group's membership interests in the entity reflects the group's cost for the entity's net assets. Table of sections Application and object of this Division 711-5 Application and object of this Division Tax cost setting amount for membership interests etc. 711-10 Tax cost setting amount worked out under this Division 711-15 Tax cost setting amount where no multiple exit 711-20 What is the old group's allocable cost amount for the leaving entity? 711-25 Terminating values of assets that the leaving entity takes with it-step 1 in working out allocable cost amount 711-30 What is the head company's terminating value for an asset? 711-35 If head company becomes entitled to certain deductions- step 2 in working out allocable cost amount 711-40 Liabilities owed to the leaving entity by members of the old group-step 3 in working out allocable cost amount 711-45 Liabilities etc. owed by the leaving entity-step 4 in working out allocable cost amount 711-55 Tax cost setting amount for membership interests where multiple exit 711-65 Membership interests treated as having been acquired before 20 September 1985-simple case 711-70 Membership interests treated as having been acquired before 20 September 1985-multiple exit case Application and object of this Division 711-5 Application and object of this Division Application (1) This Division has effect: (a) for the head company core purposes set out in subsection 701- 1(2); and (b) for the entity core purposes set out in subsection 701-1(3); if an entity (the leaving entity) ceases to be a *subsidiary member of a *consolidated group (the old group) at a particular time (the leaving time). Object (2) The object of this Division is, when entities cease to be *subsidiary members, to preserve the alignment of the *head company's costs for *membership interests in entities and their assets that is established when entities become subsidiary members. Note: The reasons for preserving this alignment are set out in subsection 705-10(3). (3) This is achieved by recognising the *head company's cost for those interests, just before the leaving time, as an amount equal to the cost of the leaving entity's assets at the leaving time reduced by the amount of its liabilities. (4) If multiple entities cease to be *subsidiary members at the same time, the cost of any *membership interests that one holds in another is treated in a similar way. Tax cost setting amount for membership interests etc. 711-10 Tax cost setting amount worked out under this Division If this Division applies, the amount of the following is worked out under the Division: (a) the *tax cost setting amount for the purposes of item 2 in the table in section 701-60 for each *membership interest in the leaving entity that *members of the old group held; and (b) if 2 or more entities cease to be *subsidiary members of the group at the same time because of an event happening in relation to one of them-the tax cost setting amount for the purposes of item 4 in the table in that section for each membership interest that the leaving entity holds in any of the other entities. 711-15 Tax cost setting amount where no multiple exit (1) The *tax cost setting amount for each *membership interest in the leaving entity that *members of the old group held, where paragraph 711-10(b) does not apply, is worked out by: (a) first, working out the old group's *allocable cost amount for the leaving entity in accordance with section 711-20; and (b) next, if there is more than one class of membership interests in the leaving entity-allocating the allocable cost amount to each class in proportion to the *market value of all of the membership interests in the class; and (c) next, allocating the result under paragraph (a) or (b) to each of the membership interests, or membership interests in the class, by dividing the result by the number of those membership interests; and (d) finally, if the leaving entity is a trust-for each membership interest in the trust that satisfies these conditions: (i) it is neither a unit nor an interest in the trust; (ii) the member of the old group that held it began to hold it only because money or property was settled on the trust; (iii) it either had no *cost base or it had a cost base of nil; reducing the result under paragraph (c) to nil. Note: Compare the treatment of such interests when an entity joins a group: see section 713-20. Rights and options to acquire membership interests (2) For the purposes of this section, if at the leaving time a *member of the old group holds a right or option (including a contingent right or option), created or issued by the leaving entity, to acquire a *membership interest in the leaving entity, that right or option is treated as if: (a) it were a membership interest in the leaving entity; and (b) it were of a different class than any other membership interest in the leaving entity. 711-20 What is the old group's allocable cost amount for the leaving entity? (1) Work out the old group's allocable cost amount for the leaving entity in this way: |Working out the old group's allocable cost amount for | |the leaving entity | |Step |What the step requires |Purpose of the step | |1 |Start with the step 1 |To ensure that the | | |amount worked out under |allocable cost amount | | |section 711-25, which is |includes the cost of | | |about the *terminating |the assets. | | |values of assets that the | | | |leaving entity takes with | | | |it when it ceases to be a | | | |*subsidiary member. | | |2 |Add to the result of step |To ensure that the | | |1 the step 2 amount worked|value of the | | |out under section 711-35, |deductions is | | |which is about the value |reflected in the | | |of deductions inherited by|allocable cost amount.| | |the leaving entity that | | | |are not reflected in the | | | |*terminating value of the | | | |assets that the leaving | | | |entity takes with it. | | |3 |Add to the result of step |To ensure that the | | |2 the step 3 amount worked|liabilities, which are| | |out under section 711-40, |not recognised while | | |which is about liabilities|the leaving entity is | | |owed by *members of the |taken to be part of | | |old group to the leaving |the *head company by | | |entity at the leaving |subsection 701-1(1), | | |time. |are reflected in the | | | |allocable cost amount.| |4 |Subtract from the result |To ensure that the | | |of step 3 the step 4 |allocable cost amount | | |amount worked out under |is reduced to reflect | | |section 711-45, which is |the liabilities and | | |about: |the *market value of | | |(a) the liabilities that |the membership | | |the leaving entity takes |interests. | | |with it when it ceases to | | | |be a *subsidiary member; | | | |and | | | |(b) *membership interests | | | |in the leaving entity that| | | |are not held by *members | | | |of the old group. | | |5 |If the amount remaining | | | |after step 4 is positive, | | | |it is the old group's | | | |allocable cost amount for | | | |the leaving entity. | | | |Otherwise the old group's | | | |allocable cost amount is | | | |nil. | | Note: If the amount remaining after step 4 is negative, the head company is taken to have made a capital gain equal to the amount: see CGT event L5. Recalculation in order to work out amount of capital loss (2) If it is necessary to work out whether the *head company makes a capital loss for a *CGT event that happens at or after the leaving time in relation to any of the *membership interests, the old group's allocable cost amount for the leaving entity is instead worked out as if the head company's *terminating value for any asset covered by subsection 705-30(4) (as it applies for the purposes of section 711-30) were instead equal to the asset's *reduced cost base just before the leaving time. 711-25 Terminating values of assets that the leaving entity takes with it- step 1 in working out allocable cost amount (1) For the purposes of step 1 in the table in subsection 711- 20(1), the step 1 amount is worked out by adding up the *head company's *terminating values of all the assets that the head company holds at the leaving time because the leaving entity is taken by subsection 701-1(1) (the single entity rule) to be a part of the head company. Goodwill (2) If loss of control and ownership of the leaving entity by the *head company would decrease the *market value of the goodwill associated with assets or businesses of the old group (other than those of the leaving entity), the head company's *cost base of the asset consisting of goodwill that it holds at the leaving time because of its control and ownership of the leaving entity is added to the step 1 amount. Note: If the asset arose because the head company acquired control and ownership of a joining entity, subsection 705- 35(3) would have applied in relation to the joining entity. The asset could also have arisen e.g. because the head company acquired a business from an entity without acquiring the entity. Increase in step 1 amount for certain former privatised assets (3) If: (a) the *head company of the old group *holds a *depreciating asset at the leaving time because the leaving entity is taken by subsection 701-1(1) (the single entity rule) to be a part of the head company; and (b) the asset's *tax cost was set at the *tax cost setting amount when an entity (whether the leaving entity or another entity) became a *subsidiary member of the old group; and (c) the tax cost setting amount for the asset was reduced because of section 705-47 (which is about certain assets that were *privatised assets); the amount of the reduction is added to the step 1 amount. Increase in step 1 amount for certain privatised assets (4) If: (a) the *head company of the old group *holds a *depreciating asset at the leaving time because the leaving entity is taken by subsection 701-1(1) (the single entity rule) to be a part of the head company; and (b) the first element of the *cost of the asset was worked out by reference to subsection 58-70(5) because a *member of the old group acquired the asset as described in subsection 58-5(4) on or after 1 July 2002; and (c) the amount of the first element of the cost of the asset is less than the amount it would have been apart from item 11 of the table in subsection 40-180(2) (which makes subsection 58- 70(5) relevant to working out that element); the difference between the amounts is added to the step 1 amount. 711-30 What is the head company's terminating value for an asset? (1) The *head company's terminating value for an asset that it holds at the leaving time because the leaving entity is taken by subsection 701-1(1) to be a part of the head company is worked out as follows. (2) The amount is worked out by applying section 705-30 in a corresponding way to the way that section applies to work out the *terminating value for an asset that a joining entity holds at the joining time. (3) However, that amount is the asset's *market value at the leaving time if: (a) the asset is a right to receive lease payments under a lease; and (b) the asset's *tax cost was set when an entity (whether the leaving entity or another entity) became a *subsidiary member of the old group; and (c) the asset was taken to be a *retained cost base asset for the purposes of Division 705 when its tax cost was set, because of paragraph 705-56(3)(b). 711-35 If head company becomes entitled to certain deductions-step 2 in working out allocable cost amount (1) For the purposes of step 2 in the table in subsection 711- 20(1), the step 2 amount is worked out using the following formula: [pic] where: acquired deductions means all deductions covered by subsection (2) for expenditure that constituted an acquired deduction of the *head company under subsection 705-115(1) when an entity (whether or not the leaving entity) became a *subsidiary member of the old group. owned deductions means the sum of all deductions covered by subsection (2) that are not acquired deductions. (2) This subsection covers any deduction to which the leaving entity becomes entitled under section 701-40 as a result of the leaving entity ceasing to be a *subsidiary member of the old group, other than a deduction for expenditure: (a) that is, forms part of or reduces, the cost of an asset that becomes an asset of the leaving entity because subsection 701- 1(1) (the single entity rule) ceases to apply; or (b) to which section 110-40 (about expenditure on assets acquired before 7.30 pm on 13 May 1997) applies. 711-40 Liabilities owed to the leaving entity by members of the old group- step 3 in working out allocable cost amount (1) For the purposes of step 3 in the table in subsection 711- 20(1), the step 3 amount is the total, for all liabilities owed by *members of the old group to the leaving entity at the leaving time, of the *market values of the corresponding assets of the leaving entity. Where cost of liability is less than its market value (2) However, if subsection (3) applies to any of the liabilities, the cost amount mentioned in that subsection, instead of the *market value, is to be used under subsection (1) for the liability in working out the step 3 amount. (3) This subsection applies to a liability if: (a) the *member of the old group would have made a *capital gain or a *capital loss for the *CGT event that, disregarding subsection 701-1(1) (the single entity principle), would have happened when the liability arose; and (b) the amount (the cost amount) of: (i) if the CGT event is or would have been CGT event D1-the *incidental costs; or (ii) if the CGT event is CGT event D2, D3 or F1-the expenditure incurred; or (iii) in any other case-the *cost base or *reduced cost base; that would be taken into account is less than the *market value of the liability. 711-45 Liabilities etc. owed by the leaving entity-step 4 in working out allocable cost amount (1) For the purposes of step 4 in the table in subsection 711- 20(1), the step 4 amount is worked out by adding up the amounts of each thing (an accounting liability) that, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability of the leaving entity at the leaving time that can or must be identified in the entity's statement of financial position. Exclusion where transfer of accounting liability (2) An amount is not to be added for an accounting liability that arises because of the leaving entity's ownership of an asset if, on *disposal of the asset, the accounting liability will transfer to the new owner. Example: A liability to rehabilitate a mine site, where, under legislation or a licence, the liability will be transferred to the new owner on disposal of the mine. Exclusion where liability is obligation to make finance lease payments (2A) An amount is not to be added for an accounting liability that is the leaving entity's obligation as lessee to make lease payments under a lease, if: (a) subsection 705-56(4) applied in relation to the liability, at a time when an entity (whether the leaving entity or another entity) became a *subsidiary member of the old group; and (b) the liability was not taken into account under subsection 705- 70(1) at that time, because of paragraph 705-56(4)(b). Reduction for future deduction (3) If some or all of an accounting liability will result in a deduction to the leaving entity, the amount to be added for the accounting liability is reduced by the following amount: [pic] where: double-counting adjustment means the amount of any reduction that has already occurred in the accounting liability under subsection (1) to take account of the future availability of the deduction. Amount for intra-group liabilities (4) If an accounting liability of the leaving entity is owed to a *member of the old group, the amount to be added for the liability is the *market value of the corresponding asset of the member. Adjustment for unrealised gains and losses (5) If, for income tax purposes, an accounting liability, or a change in the amount of an accounting liability, (other than one owed to a *member of the old group) is taken into account at a later time than is the case in accordance with *accounting standards or statements of accounting concepts made by the Australian Accounting Standards Board, the amount to be added for the accounting liability is equal to the payment that would be necessary to discharge the liability just before the leaving time without an amount being included in the assessable income of, or allowable as a deduction to, the *head company. Note: An example is accrued employee leave entitlements or foreign exchange gains and losses. Increase in step 4 amount for employee share interests (6) If any *membership interest (an employee share interest) in the leaving entity needed to be disregarded under section 703-35 in order for the leaving entity to be a *wholly-owned subsidiary of the *head company at the leaving time, the step 4 amount is increased by the sum of the *market values of those interests. Increase to cover ADI restructure preference share interests (6A) If any *share in the leaving entity needed to be disregarded under section 703-37 in order for the leaving entity to be a *wholly-owned subsidiary of the *head company at the leaving time, the step 4 amount is increased by the sum of the *market values of those shares. Increase to cover certain equity interests (7) The step 4 amount is increased by the *market value of each thing that, in accordance with *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is equity in the leaving entity at the leaving time, where the thing is also a *debt interest. Adjustment where amount of liability differed for purpose of calculating allocable cost amount on entry (8) If: (a) a leaving entity's liability mentioned in any preceding subsection was taken into account in working out the *allocable cost amount for a *subsidiary member (whether or not the leaving entity) of the old group in accordance with Division 705 (the entry ACA); and (b) the amount (the entry amount) of the liability that was so taken into account is different from the amount (the exit amount) of the liability taken into account in applying the subsection; and (c) the entry ACA was different from what it would have been if the exit amount, instead of the entry amount, had been taken into account in working it out; then, for the purpose of applying the subsection, the liability is taken to be of an amount equal to the entry amount. 711-55 Tax cost setting amount for membership interests where multiple exit (1) If 2 or more entities cease to be *subsidiary members of the old group at the same time because of an event happening in relation to one of them, the *tax cost setting amount for each *membership interest mentioned in paragraphs 711-10(a) and (b) is worked out in accordance with this section. Object (2) The object of this section is to ensure that the *tax cost setting amount for *membership interests that each entity holds in another entity reflects a proportion of the other entity's cost for its net assets. Tax cost setting amounts to be worked out for certain membership interests in all of the entities (3) A *tax cost setting amount must be worked out for each *membership interest (the subject interest) that one of the entities holds in another of the entities just before the leaving time, and this must be done: (a) by applying section 711-15 to the subject interest as if: (i) a reference in that section, or any provision of this Division that relates to it, to any membership interest that *members of the old group hold in the leaving entity were a reference to the subject interest; and (ii) a reference in that section, or any provision of this Division that relates to it, to liabilities owed by members of the old group included a reference to liabilities owed by any of the entities that cease to be *subsidiary members of the old group at the leaving time; and (b) by working out the tax cost setting amount for membership interests in entities that are held by other entities before working out the tax cost setting amount for membership interests in those other entities. Tax cost setting amount for membership interests acquired by head company (4) Then work out the *tax cost setting amount mentioned in paragraph 711-10(a) for the *membership interests held by the *head company in the same way as under section 711-15. Note: In doing so, tax cost setting amounts worked out under subsection (3) of this section for membership interests held by the leaving entity in other entities will be taken into account in working out the allocable cost amount for the leaving entity. Those tax cost setting amounts will in turn have been affected by any other tax cost setting amounts worked out under subsection (3) for membership interests in other entities. Tax cost setting amount for membership interests acquired by leaving entity (5) The *tax cost setting amount mentioned in paragraph 711-10(b) for *membership interests of which the leaving entity becomes the holder will be one of the tax cost setting amounts worked out under subsection (3) of this section. Example: Companies A, B, C, D and E are all subsidiary members that leave the old group at the same time. Just before the leaving time, company A owned shares in company B and company C, and company B owned shares in companies D and E. First, work out company A's tax cost setting amount for membership interests in company C and company B's tax cost setting amount for membership interests in companies D and E by applying section 711-15 in accordance with paragraph (3)(a) above. Next, work out company A's tax cost setting amount for membership interests in company B under that section as so applied, taking into account the tax cost setting amount just worked out for company B's assets consisting of shares in companies D and E. Finally, work out the head company's tax cost setting amount for membership interests in company A under section 711-15 in accordance with subsection (4) above, taking into account the tax cost setting amounts worked out for companies B and C. 711-65 Membership interests treated as having been acquired before 20 September 1985-simple case When this section applies (1) This section applies if: (a) any of the assets (a pre-CGT factor asset), that the *head company of the old group holds at the leaving time because the leaving entity is taken by subsection 701-1(1) to be a part of the head company, has a *pre-CGT factor under section 705-125; and (b) section 711-70 (about the multiple exit of *subsidiary members) does not apply; and (c) the leaving entity does not cease to be a subsidiary member of the old group where Subdivision 705-C (about the old group joining another consolidated group) applies. Interests treated as if purchased before 20 September 1985 (2) If this section applies, a number of the *membership interests in the leaving entity that *members of the old group hold are taken to have been acquired before 20 September 1985. Note: Because of the deemed acquisition of the membership interests, this section is the only basis on which any of these interests can be pre-CGT assets. Number of pre-CGT membership interests (3) The number is the result of the formula in subsection (4), rounded down to: (a) the nearest whole number if the result is not already a whole number; or (b) zero if the result is a number more than zero but less than one. Formula (4) The formula is: [pic] where: leaving entity's pre-CGT proportion is the amount worked out under subsection (5). Pre-CGT proportion (5) Work out the leaving entity's pre-CGT proportion in this way: Leaving entity's pre-CGT proportion Step 1. For each *pre-CGT factor asset, multiply its *market value before the leaving time by its *pre-CGT factor. Step 2. Add up all the results of step 1. Step 3. Add up the *market values of all the assets that the *head company holds at the leaving time because the leaving entity is taken by section 701-1 to be a part of the head company. Step 4. Divide the result of step 2 by the result of step 3. Dealing with classes of membership interests (6) If there are 2 or more classes of *membership interests in the leaving entity, this section operates separately in relation to each class as if the interests in that class were all the interests in the entity. Allocation of the number to particular membership interests (7) The *head company must choose which particular *membership interests comprise the number worked out under subsection (2). Modification if leaving entity is a trust (8) If the leaving entity is a trust, a *membership interest in it is not taken into account under this section unless the membership interest is either a unit or an interest in the trust. 711-70 Membership interests treated as having been acquired before 20 September 1985-multiple exit case (1) If 2 or more entities (multiple exit entities) cease to be *subsidiary members of the old group at the same time because of an event happening in relation to one of them (other than where Subdivision 705-C applies), a number of the *membership interests (subject interests) held in any multiple exit entity by: (a) *members of the old group; or (b) other multiple exit entities; or (c) any combination of paragraphs (a) and (b); are taken to have been acquired before 20 September 1985. Numbers to be worked out first for bottom entities (2) Numbers are to be worked out first for subject interests in multiple exit entities that do not themselves hold any of the subject interests in other multiple exit entities. Numbers to be worked out progressively up to those subject interests held only by members of the old group (3) If the holders of other subject interests are or include multiple exit entities, numbers must be worked out for the former subject interests before both the latter and any subject interests whose holders consist entirely of *members of the old group. How to work out the numbers (4) The number for subject interests in a particular multiple exit entity that is required to be worked out under subsection (2) or (3) is worked out by applying subsections 711-65(3) to (6) as if: (a) a reference in those subsections to *membership interests that members of the old group hold in the leaving entity were a reference to the subject interests; and (b) assets (previously numbered assets) of the multiple exit entity consisting of other subject interests for which a number has been worked out as required by subsection (2) or (3) of this section were assets that the *head company holds at the leaving time because the entity is taken by section 701-1 to be a part of the *head company; and (c) each previously numbered asset were treated as having a *pre- CGT factor of 1. Example: Companies A, B, C, D and E are all subsidiary members that leave the old group at the same time. Just before the leaving time, company A owned shares in company B and company C, and company B owned shares in companies D and E. First, work out company A's number for membership interests in company C and company B's number for membership interests in companies D and E. Next, work out company A's number for membership interests in company B, taking into account the number just worked out for company B's assets consisting of shares in companies D and E. Finally, work out the old group's number for membership interests in company A, taking into account the numbers worked out for its assets consisting of shares in companies B and C. Note: Because of the deemed acquisition of the membership interests, this section is the only basis on which any of the subject interests can be pre-CGT assets. Allocation of the number to particular membership interests (5) The *head company must: (a) choose which particular *membership interests comprise any number worked out under this section; and (b) if any *membership interest that is so chosen is held by a multiple exit entity-inform that entity of the fact. Modification if leaving entity is a trust (6) A *membership interest in a trust that is one of the multiple exit entities is not taken into account under this section unless the membership interest is either a unit or an interest in the trust. Division 713-Rules for particular kinds of entities Table of Subdivisions 713-A Trusts 713-C Some unit trusts treated like head companies of consolidated groups 713-E Partnerships 713-L Life insurance companies 713-M General insurance companies Subdivision 713-A-Trusts Table of sections Working out a joined group's allocable cost amount for a joining trust 713-20 Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests 713-25 Undistributed, realised profits that accrue to joined group before joining time and could be distributed tax free- step 3 in working out allocable cost amount Determining destination of distribution by non-fixed trust 713-50 Factors to consider Working out a joined group's allocable cost amount for a joining trust 713-20 Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests (1) The object of this section is to increase the step 1 amount worked out under section 705-65 (for the purpose of working out the joined group's allocable cost amount) if: (a) the joining entity is a trust; and (b) some or all of the *membership interests in the trust are neither units nor interests in the trust; and (c) some or all of the trust capital is settled capital that could be distributed tax free at the joining time. The increase in the step 1 amount takes account of the settled capital that could be distributed tax free. Note 1: As a result, the settled capital that could be distributed tax free is treated in a way that is analogous to the group's cost of acquiring the trust: see subsection 705- 10(2). Note 2: Paragraph (1)(b) reflects the position that a distribution in respect of a unit or interest in the trust is generally covered by CGT event E4 and so is not tax-free: see section 104-70. (2) The step 1 amount worked out under section 705-65 is increased by the amount worked out under the following method statement if, at the joining time, there are *membership interests (the discretionary interests) in the trust each of which satisfies these conditions: (a) it is neither a unit nor an interest in the trust; (b) the entity that owned it at the joining time began to own it only because money or property was settled on the trust; (c) it either has no *cost base or it has a cost base of nil. Note: If a membership interest has a cost base greater than nil, the cost base is already taken into account in working out the step 1 amount under section 705-65. Method statement Step 1. Add up: (a) each amount settled on the trust before or at the joining time; and (b) the *market value of each item of property settled on the trust before or at the joining time, worked out as at when the item was settled; except to the extent that that amount or market value forms part of the *cost base of a *membership interest in the trust that was taken into account in working out the step 1 amount under section 705-65. Step 2. Work out how much of the step 1 amount would have been paid in respect of the discretionary interests if, at the joining time: (a) the entire trust capital and trust income had been realised and distributed; and (b) the trust had ended. Note: This may involve determining how a power of appointment would have been exercised. Section 713-50 lists matters to have regard to in determining this. Step 3. Reduce the step 2 amount by so much of it as: (a) would have been included in the assessable income of any *member of the trust who owned any of the discretionary interests at the joining time; or (b) would have been taken into account in working out a *capital gain or *capital loss made by such a member. Step 4. Work out how much of the step 1 amount consists of one or more of these: (a) an amount settled on the trust directly by the *head company of the *consolidated group (whether or not the group was in existence when the amount or item was settled on the trust); (b) an amount settled on the trust directly by any other entity not excluded by subsection (3) (which covers entities that are not independent and unconnected donors to the trust); (c) the *market value of an item of property settled on the trust directly by the head company; (d) the market value of an item of property settled on the trust directly by any other entity not excluded by subsection (3). Step 5. The step 1 amount worked out under section 705-65 is increased by the lesser of: (a) the step 3 amount worked out under this method statement; and (b) the step 4 amount worked out under this method statement. (3) This subsection excludes these entities for the purposes of step 4 of the method statement in subsection (2): |Entities that are not independent and unconnected | |donors to the trust | |Item |This entity is excluded: | |1 |An entity that is a *member of the *consolidated | | |group at the joining time | |2 |An entity that has been a *member of the | | |*consolidated group at any time before the joining| | |time, even if it was not such a member when it | | |settled the amount or item of property on the | | |joining entity | |3 |An entity that, because of a *scheme, will or may | | |become a *member of the *consolidated group at | | |some time after the joining time | |4 |An entity that, when the amount or item of | | |property was settled on the joining entity, was an| | |*associate of an entity covered by item 1, 2 or 3 | |5 |An entity that, in settling the amount or item of | | |property on the joining entity, acted in | | |accordance with the directions, instructions or | | |wishes of one or more entities, at least one of | | |which is covered by item 1, 2, 3 or 4 (whether | | |those directions, instructions or wishes were | | |communicated directly or indirectly, including | | |through interposed entities) | |6 |A company or trust that an entity covered by | | |item 1, 2 or 3 would be taken to *control (for | | |value shifting purposes) when the company or trust| | |settled the amount or item of property on the | | |joining entity, if each entity covered by item 1, | | |2, 3 or 4 had been at that time an *associate of | | |every other entity covered by item 1, 2, 3 or 4 | |7 |A partnership if, when the partnership settled the| | |amount or item of property on the joining entity, | | |a *member of the partnership was an entity covered| | |by item 1, 2, 3, 4 or 6 | 713-25 Undistributed, realised profits that accrue to joined group before joining time and could be distributed tax free-step 3 in working out allocable cost amount (1) For the purposes of step 3 in the table in section 705-60, if the joining entity is a trust, the step 3 amount is the sum of the trust's realised profits, to the extent that: (a) they accrued to the joined group before the joining time (as defined in subsection 705-90(7)); and (b) as at the joining time, they have not been distributed to *members of the trust; and (c) if each of them were distributed as mentioned in paragraphs 705- 90(7)(a) and (b): (i) they would be distributed otherwise than in respect of a unit or an interest in the trust; or (ii) their non-assessable parts for the purposes of section 104-70 would be disregarded in working out whether or not a *capital gain had been made because of CGT event E4; except to the extent that they recouped losses of any *sort that accrued to the joined group before the joining time (as defined in subsection 705-90(8)). Note: If the joining entity, or an entity interposed between the head company and the joining entity, is a non-fixed trust, this section may involve determining how a power of appointment would have been exercised. Section 713-50 lists matters to have regard to in determining this. Trusts not covered (2) Subsection (1) does not apply to a trust that is a *corporate tax entity at the joining time. Note: This excludes corporate unit trusts and public trading trusts, which are covered by the imputation system. Determining destination of distribution by non-fixed trust 713-50 Factors to consider In working out, for the purposes of this Part, how much of something a *non-fixed trust would have distributed to an entity, or in respect of a *membership interest in the trust, have regard to all relevant factors, including: (a) the pattern of any previous distributions by the trust; and (b) by whom the trust has from time to time been *controlled (for value shifting purposes). Subdivision 713-C-Some unit trusts treated like head companies of consolidated groups Guide to Subdivision 713-C 713-120 What this Subdivision is about A corporate unit trust or public trading trust can sometimes choose to form a consolidated group and be treated like a company and head company of the group. The treatment affects the trust, the trustee and other entities connected with the trust (such as members of the trust and entities the trustee holds membership interests in). Table of sections Object of this Subdivision 713-125 Object of this Subdivision Choice to form a consolidated group 713-130 Choosing to form a consolidated group Effects of choice 713-135 Effects of choice 713-140 Modifications of the applied law Object of this Subdivision 713-125 Object of this Subdivision (1) The main object of this Subdivision is to provide, by the means described in subsections (2) and (3), for certain unit trusts to be treated like companies, and therefore like *head companies of *consolidated groups, with consequent effects on other entities including: (a) the trustees; and (b) *members of the trusts; and (c) entities the trustees hold *membership interests in. (2) The first means is letting a *corporate unit trust, or *public trading trust, that could become the *head company of a *consolidated group if the trust were a company, choose to form such a group (with other entities as *subsidiary members). (3) The second means is changing the way in which the law relating to income tax applies on and after the time the choice takes effect, so that law (with some modifications) applies in relation to the trust or the trustee (as appropriate) in a way corresponding to the way in which that law applies in relation to a company. Note: The law relating to income tax includes legislation relating to associated imposts (such as those connected with the imputation system). Choice to form a consolidated group 713-130 Choosing to form a consolidated group A trust may make a choice under section 703-50 (Choice to consolidate a consolidatable group), as if the trust were a company (the assumed company), but only if: (a) the assumed company could make the choice, if it beneficially owned the *membership interests in other entities that are legally owned by the trustee; and (b) the day specified in the choice is the first day of an income year for which the trust is a *corporate unit trust or a *public trading trust. Note: Assuming that a trust is a company also involves assuming: (a) that the company has characteristics of the trust, such as the location of the central management and control (which is relevant to residence), the business of the trust, not being incorporated etc.; and (b) that membership interests in the trust are membership interests in the company (owned by the same persons and in the same way as membership interests in the trust are owned); and (c) that the company's taxable income is taxed at the same rate as the trust's net income. Effects of choice 713-135 Effects of choice (1) If the trust makes the choice, the law (the applied law) described in subsection (2) applies in relation to the trust in a way corresponding to the way in which that law applies to a company. The applied law applies in that way in relation to the trust or trustee (as appropriate): (a) with the appropriate modifications (including those described in section 713-140, so far as they are appropriate); and (b) in relation to all times at or after the start of the day specified in the choice; and (c) so far as it is relevant to the operation of the applied law in relation to the trust and a time at or after the start of that day-in relation to a time when the trust existed before the start of that day. Note 1: The application of the applied law in this way affects not only the trust and the trustee but also other entities connected with the trust, such as members of the trust and entities in which the trustee holds membership interests. Some examples of that effect are that: (a) a consolidated group comes into existence on the day specified in the choice; and (b) there may be a scrip for scrip roll-over for an entity exchanging its shares in a company for membership interests in the trust. Note 2: The application of the applied law in this way involves treatment of characteristics, things and persons relating to the trust corresponding to the treatment by the applied law of analogous characteristics, things and persons relating to a company (as envisaged in the note to section 713-130). These are some examples of analogous things and analogous persons: (a) units in the trust and shares in a company; (b) unitholders in the trust and shareholders in a company; (c) trust voting interests and voting shares in a company. (2) The applied law is: (a) this Act (other than this Subdivision); and (b) an Act that imposes any impost payable under this Act; and (c) the Income Tax Rates Act 1986; and (d) the Taxation Administration Act 1953, so far as it relates to an Act covered by paragraph (a), (b) or (c); and (e) any other Act, so far as it relates to an Act covered by paragraph (a), (b), (c) or (d); and (f) regulations and other legislative instruments under an Act covered by any of the preceding paragraphs. (3) Subsection (1) does not make an entity liable to a criminal, civil or administrative penalty. Note: An entity is liable to such a penalty under the applied law only if that law, as it applies apart from subsection (1), makes the entity liable. 713-140 Modifications of the applied law Overview (1) This section describes modifications of the applied law in its application in relation to a trust or trustee under section 713- 135, but does not limit the modifications of that law that are appropriate for the purposes of that section. General modifications (2) A reference in the applied law to a thing or person described in column 2 of an item of the table includes a reference to a thing or person described in column 3 of the item. |General modifications | |Column 1|Column 2 |Column 3 | | |A reference in the |Includes a reference | |Item |applied law to: |to: | |1 |A body corporate |The trust or trustee | | | |(as appropriate) | |2 |A dividend |A distribution from | | | |the trust, so far as | | | |the distribution is | | | |from profits | |3 |A share capital account|The amount of the | | | |trust estate that is | | | |not attributable to | | | |profits | |4 |A director (of a |The trustee or, if the| | |company, body corporate|trustee is a body | | |or corporation) |corporate, a director | | | |of the trustee (as | | | |appropriate) | Note: An expression in column 2 of an item of the table has the meaning that the expression has in the provision of the applied law containing the reference. (3) The trust is not covered by a reference in the applied law to a trust. Note: Subsections (3) and (4) of this section do not affect an entity's liability for criminal, civil and administrative penalties under the applied law, as those subsections modify (so far as appropriate) the applied law as it applies because of subsection 713-135(1), and that subsection does not affect liability for such penalties (see subsection 713- 135(3)). (4) The trustee is not covered by a reference in the applied law to a trustee (except a reference in section 254 of the Income Tax Assessment Act 1936). Note: Section 254 of the Income Tax Assessment Act 1936 deals with obligations and liabilities of trustees. Modifications of specific provisions (5) A provision of an Act identified in an item of the table is modified as set out in the item. |Modifications of specific provisions | |Item |Act(s) |Provision |Modification | |1 |Income Tax |Subsection|The subsection has effect | | |Assessment |128TK(2) |as if it did not refer to | | |Act 1936 | |the purposes of Division 4| | | | |of Part 3.6 of the | | | | |Corporations Act 2001. | |2 |Income Tax |Paragraph |The paragraph has effect | | |Assessment |128TK(4)(b|as if it referred to a | | |Act 1936 |) |person or firm who is | | | | |eligible to consent to | | | | |being appointed as the | | | | |auditor of a company in | | | | |accordance with the | | | | |Corporations Act 2001. | |3 |Income Tax |Division 1|The Division does not | | |Assessment |3A of |apply in relation to a | | |Act 1936 |Part III |share or right acquired | | | | |under an employee share | | | | |scheme (within the meaning| | | | |of that Division) before | | | | |the day specified in the | | | | |choice if the Division did| | | | |not apply in relation to | | | | |the share or right before | | | | |that day. | |4 |Income Tax |Part 3-90 |The Part has effect as if | | |Assessment |(of each |an entity were a | | |Act 1997 |Act) |*wholly-owned subsidiary | | |and Income | |of the trust if the entity| | |Tax | |would have been one had | | |(Transition| |the trustee owned | | |al | |beneficially *membership | | |Provisions)| |interests in the entity | | |Act 1997 | |that the trustee owned | | | | |legally. | Subdivision 713-E-Partnerships Guide to Subdivision 713-E 713-200 What this Subdivision is about This Subdivision modifies tax cost setting rules in Divisions 701, 705 and 711 so that they take account of the special characteristics of partnerships. The modifications apply in these situations: (a) an entity that is a partner in a partnership becomes a subsidiary member of a consolidated group; (b) a partnership becomes, or ceases to be, a subsidiary member of a consolidated group. Table of sections Objects 713-205 Objects of this Subdivision Partnership cost setting interests etc. 713-210 Partnership cost setting interests 713-215 Terminating value for partnership cost setting interest Setting tax cost of partnership cost setting interests 713-220 Set tax cost of partnership cost setting interests if partner joins consolidated group 713-225 Tax cost setting amount for partnership cost setting interest 713-230 Reduction in allocable cost amount if partnership asset is over-depreciated Special rules where partnership joins consolidated group 713-235 Partnership joins group-set tax cost of partnership assets 713-240 Partnership joins group-tax cost setting amount for partnership asset 713-245 Partnership joins group-pre-CGT factor for partnership asset Special rules where partnership leaves consolidated group 713-250 Partnership leaves group-standard provisions modified 713-255 Partnership leaves group-tax cost setting amount for partnership cost setting interests 713-260 Partnership leaves group-tax cost setting amount for assets consisting of being owed certain liabilities 713-265 Partnership leaves group-adjustments to leaving partner's allocable cost amount 713-270 Partnership leaves group-certain partnership cost setting interests treated as having been acquired before 20 September 1985 Objects 713-205 Objects of this Subdivision (1) The first object of this Subdivision is to ensure that if: (a) an entity that is a partner in a partnership becomes a *subsidiary member of a *consolidated group; and (b) the partnership does not become a *subsidiary member of the group; the provisions mentioned in subsection (3) operate as if the *partnership cost setting interests of the entity in the partnership were the entity's only assets relating to the partnership. Note: In general, the head company of the consolidated group is treated as a partner in the partnership, in accordance with section 701-1 (the single entity rule). (2) The second object of this Subdivision is to ensure that where a partnership becomes a *subsidiary member of a *consolidated group, the provisions mentioned in subsection (3) operate: (a) as if the group became the holder of the assets of the partnership; and (b) to set the *tax cost of the assets of the partnership at an appropriate amount, taking into account the taxation treatment of partnerships. Note: While the partnership is a subsidiary member of the group, it loses its separate tax identity (under the single entity rule in subsection 701-1(1)). Therefore, in general, the assets of the partnership are treated as assets of the head company of the group and partnership cost setting interests in the partnership are ignored. (3) The provisions are: (a) section 701-10 (about setting the tax cost of assets of an entity joining a group); and (b) Subdivision 705-A; and (c) any other provision of this Act giving Subdivision 705-A a modified effect in circumstances other than those covered by that Subdivision. Note: An example of provisions covered by paragraph (c) are the provisions of Subdivision 705-B giving Subdivision 705-A a modified effect when a consolidated group is formed. (4) The third object of this Subdivision is to ensure that, where a partnership ceases to be a *subsidiary member of a *consolidated group, the provisions mentioned in subsection (5) operate: (a) as if the group's *partnership cost setting interests were the group's only assets relating to the partnership; and (b) to set the *tax cost of those interests at an appropriate amount, taking into account the fact that the group ceases to be the holder of the assets of the partnership. (5) The provisions are: (a) sections 701-15 and 701-50 (about setting the tax cost of membership interests in an entity that leaves the group); and (b) sections 701-20 and 701-45 (about the cost of assets consisting of certain liabilities owed by or to an entity that leaves the group); and (c) Division 711. Partnership cost setting interests etc. 713-210 Partnership cost setting interests A partnership cost setting interest in a partnership is the asset that is comprised of: (a) an interest in an asset of the partnership; or (b) an interest in the partnership that is not covered by paragraph (a); but does not include an asset that is comprised of a *membership interest in the partnership. Note 1: A partner may have more than one partnership cost setting interest that relates to an asset of the partnership (see section 106-5). Note 2: A partnership cost setting interest may relate to an asset of the partnership, but the asset of the partnership is not a partnership cost setting interest in the partnership. 713-215 Terminating value for partnership cost setting interest (1) This section modifies the way in which the *terminating value of a *partnership cost setting interest in a partnership is worked out under section 705-30. (2) For the purposes of this Subdivision, the *terminating value of the *partnership cost setting interest at a time is: (a) if the interest relates to an asset of the partnership-the interest's individual share of the terminating value of that asset (worked out in accordance with subsection (3)) at that time; or (b) otherwise-the terminating value of the interest at that time worked out under section 705-30. (3) To work out the amount of the *terminating value of the asset of the partnership mentioned in paragraph (2)(a), apply section 705- 30 as if: (a) the time mentioned in subsection (2) were the joining time mentioned in that section; and (b) the partnership were, at the time mentioned in subsection (2), the joining entity mentioned in that section. Setting tax cost of partnership cost setting interests 713-220 Set tax cost of partnership cost setting interests if partner joins consolidated group (1) This section applies if an entity (the joining entity) that is a partner in a partnership becomes a *subsidiary member of a *consolidated group at a time (the joining time). Note: If the partnership becomes a subsidiary member of the group at the joining time, the application of this section is affected by section 713-235. (2) In applying the provisions mentioned in subsection 713-205(3) in relation to the joining entity: (a) work out the *tax cost setting amount for each *partnership cost setting interest in the partnership that the joining entity holds at the joining time, in accordance with section 713-225; and (b) except for the purposes of section 713-235 (which applies only if the partnership joins the group), do not work out tax cost setting amounts for the assets of the partnership; and (c) do not work out tax cost setting amounts for the *membership interests in the partnership held by the joining entity. Note 1: Because of paragraphs (b) and (c), no amount of allocable cost amount for the joining entity is allocated to the assets of the partnership, or to membership interests in the partnership held by the joining entity. Note 2: If assets of the partnership are held on revenue account, the related partnership cost setting interests held by the joining entity have their tax cost set at the joining time. However, that tax cost does not alter calculations of the net income or exempt income of the partnership, or of a partnership loss, for the purposes of section 92 of the Income Tax Assessment Act 1936. 713-225 Tax cost setting amount for partnership cost setting interest (1) This section modifies the way in which the *tax cost setting amounts are worked out under Division 705 for the *partnership cost setting interests mentioned in paragraph 713-220(2)(a). Partnership cost setting interest takes character of partnership asset-general (2) Work out the *tax cost setting amounts for those *partnership cost setting interests as if any partnership cost setting interest that relates to an asset (the underlying partnership asset) of the partnership were an asset of the same kind as the underlying partnership asset. Note: The kinds of assets mentioned in subsection (2) include the following: (a) retained cost base assets; (b) reset cost base assets that are held on revenue account (however, if such assets are trading stock or depreciating assets, the special rule in subsection (4) will apply) or on capital account; (c) excluded assets (see subsection (3)); (d) current assets (within the meaning of subsection 705- 125(2)). Example: The partnership has an asset that is Australian currency (which is a retained cost base asset). A partnership cost setting interest of the joining entity in that asset is treated as a retained cost base asset for the purpose of working out the tax cost setting amounts for the joining entity's partnership cost setting interests in the partnership. Partnership cost setting interest takes character of partnership asset-excluded assets (3) If: (a) tax cost setting amounts were to be worked out for the assets of the partnership under Division 705; and (b) in working out those amounts, the underlying partnership asset mentioned in subsection (2) would be an excluded asset for the purposes of section 705-35; then subsection (2) operates so that the *tax cost setting amounts for those *partnership cost setting interests are worked out as if any partnership cost setting interest that relates to the underlying partnership asset were an excluded asset for the purposes of section 705-35. Special character of partnership cost setting interest in partnership asset that is trading stock or depreciating asset (4) Despite subsection (2), if an asset of the partnership is *trading stock or a *depreciating asset, work out the *tax cost setting amounts for those *partnership cost setting interests as if: (a) a partnership cost setting interest relating to that asset were a *retained cost base asset; and (b) the tax cost setting amount for that partnership cost setting interest were equal to its *terminating value (worked out in accordance with section 713-215). Reduction in allocable cost amount for over-depreciated partnership assets (5) If one or more assets of the partnership are *over-depreciated at the joining time, reduce the group's allocable cost amount for the joining entity in accordance with section 713-230. Partnership liabilities-working out allocable cost amount (6) If: (a) according to *accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, a thing (the partnership liability) is a liability of the partnership at the joining time that can or must be recognised in the partnership's statement of financial position; and (b) for that reason, the partnership liability is not an accounting liability of the joining entity at the joining time for the purposes of section 705-70; then sections 705-70, 705-75 and 705-80 operate as if the partnership liability were an accounting liability of the joining entity at the joining time, to the extent of the joining entity's individual share of the partnership liability. Partnership deductions-working out allocable cost amount (7) Section 705-115 operates as if: (a) a deduction to which the partnership is entitled (the partnership deduction) were a deduction to which the joining entity was entitled, to the extent of the joining entity's individual share of the partnership deduction; and (b) the deduction to which the joining entity was entitled were of the same kind as the partnership deduction. Note: These kinds of deductions include acquired deductions and owned deductions (within the meaning of section 705- 115). 713-230 Reduction in allocable cost amount if partnership asset is over- depreciated (1) The object of this section is to reduce the group's allocable cost amount for the joining entity, if one or more assets of the partnership are *over-depreciated at the joining time. The amount of the reduction is calculated under section 705-50 in relation to the joining entity's *partnership cost setting interests (the reduction interests) relating to those assets. (2) Reduce the allocable cost amount mentioned in subsection 713- 225(5) by the reduction amount worked out under subsection (3). (3) The reduction amount is the total of the amounts that would be reduced under section 705-50 for all the reduction interests if: (a) this Subdivision did not include subsection 713-225(5) or this section; and (b) subsection 713-225(4) did not apply to any of the reduction interests; and Note: This means that the reduction interests would be treated as over-depreciated assets, in accordance with subsection 713-225(2). (c) the *adjustable value of a particular reduction interest were equal to its individual share of the adjustable value of the asset of the partnership to which it relates; and (d) the *cost of the interest were equal to its individual share of the cost of the asset of the partnership to which it relates; and (e) section 705-50 did not include subsection 705-50(4). Special rules where partnership joins consolidated group 713-235 Partnership joins group-set tax cost of partnership assets (1) This section applies if a partnership becomes a *subsidiary member of a *consolidated group at a time (the joining time). (2) In applying the provisions mentioned in subsection 713-205(3) in relation to the partnership: (a) do not work out an allocable cost amount for the partnership; and (b) work out the *tax cost setting amount for each asset of the partnership covered by subsection (3), in accordance with section 713-240. Note: If a partner in the partnership becomes a subsidiary member of the group at the joining time, tax cost setting amounts are worked out for the assets of the partner (including partnership cost setting interests) before tax cost setting amounts are worked out for the assets of the partnership. (3) An asset of the partnership at the joining time is covered by this subsection, unless it would be an excluded asset for the purposes of section 705-35 on the assumption that tax cost setting amounts were worked out for the assets of the partnership under Division 705 (instead of section 713-240). 713-240 Partnership joins group-tax cost setting amount for partnership asset (1) Work out the *tax cost setting amounts for the assets covered by subsection 713-235(3) as follows: (a) firstly, add up the subsection (2) amounts for all the partnership cost setting interests in the partnership at the joining time (the result is the partnership cost pool); Note 1: Partnership cost setting interests held by a partner that becomes a subsidiary member of the group at the joining time are included in the calculation in paragraph (a). The operation of the cost setting rules in relation to that partner at the joining time may affect the subsection (2) amounts for those interests. Note 2: Partnership cost setting interests are included in the calculation in paragraph (a), even if the cost setting rules have not applied in relation to the interests (for example, if the interests were acquired directly by the head company). (b) secondly, work out the tax cost setting amounts for the assets covered by subsection 713-235(3) that are *retained cost base assets, in accordance with section 705-25; (c) thirdly, work out the tax cost setting amounts for the rest of the assets covered by subsection 713-235(3), in accordance with subsection (3). Subsection (2) amount for a partnership cost setting interest (2) For the purposes of paragraph (1)(a), the subsection (2) amount for a *partnership cost setting interest is the amount specified in the following table: |Working out the subsection (2) amount | |Item |If the market value|the subsection (2) | | |of the partnership |amount for the | | |cost setting |partnership cost | | |interest is ... |setting interest is | | | |... | |1 |equal to or greater|its cost base | | |than its *cost base| | |2 |less than its *cost|its *market value | | |base but greater | | | |than its *reduced | | | |cost base | | |3 |less than or equal |its reduced cost | | |to its *reduced |base | | |cost base | | Allocating partnership cost pool to partnership assets that are not retained cost base assets (3) Work out the *tax cost setting amounts for the assets mentioned in paragraph (1)(c) by applying sections 705-35, 705-40, 705-45 and 705-47 to those assets, as if: (a) the partnership were, at the joining time, the joining entity mentioned in those sections; and (b) the assets of the partnership were the assets covered by subsection 713-235(3); and (c) the allocable cost amount mentioned in paragraph 705-35(1)(a) were the partnership cost pool. (4) For the purposes of this section, section 104-510 (CGT event L3) applies as if the group's allocable cost amount for the entity mentioned in that section were the partnership cost pool. 713-245 Partnership joins group-pre-CGT factor for partnership asset (1) The *pre-CGT factor for each asset covered by subsection 713- 235(3) is worked out under subsections (2) and (3) (instead of subsection 705-125(3)). (2) Firstly, identify the *partnership cost setting interests (the pre-CGT interests) in the partnership, relating to assets of the partnership, for which there is a *pre-CGT factor at the joining time. Note: The pre-CGT factor for such a partnership cost setting interest is worked out at the time the partner holding the interest became a subsidiary member of the group (whether that time is the joining time or was an earlier time). (3) Secondly, work out the *pre-CGT factor for each asset covered by subsection 713-235(3) in this way: Partnership assets' pre-CGT factor Step 1. For each pre-CGT interest, multiply its *market value at the joining time by its *pre-CGT factor. Step 2. Add up all the results of step 1. Step 3. Add up the *market values of all the assets of the partnership at the joining time. Step 4. Divide the result of step 2 by the result of step 3. Special rules where partnership leaves consolidated group 713-250 Partnership leaves group-standard provisions modified (1) This section applies if a partnership ceases to be a *subsidiary member of a *consolidated group at a time (the leaving time). Note: The section applies whether or not any partner that is a subsidiary member of the group also ceases to be a subsidiary member at the leaving time. (2) Apply the provisions mentioned in subsection 713-205(5) subject to the modifications in the provisions that follow under this *group heading. 713-255 Partnership leaves group-tax cost setting amount for partnership cost setting interests Overview (1) Instead of working out *tax cost setting amounts for *membership interests in the partnership, a special rule requires *partnership cost setting interests in the partnership to be worked out. Where other entities cease to be *subsidiary members at the same time, the normal tax cost setting amount rules are applied for membership interests in the other entities, but the special rule is applied for partnership cost setting interests in the partnership. Tax cost setting amounts for membership interests in partnership not to be worked out (2) Do not work out *tax cost setting amounts for *membership interests in the partnership. Partnership is only entity that exits-tax cost setting amount for partnership cost setting interests (3) Except where the partnership ceases to be a *subsidiary member in circumstances covered by subsection (5), work out in accordance with subsection (4) the *tax cost setting amount just before the leaving time for each *partnership cost setting interest in the partnership held by a partner that is a *member of the group just before the leaving time. Tax cost setting amount (4) The *tax cost setting amount is equal to the partner's individual share of the *terminating value of the partnership asset to which the *partnership cost setting interest relates. Note: For income tax purposes there is no disposal by the head