Income Tax Assessment Act 1997 Act No. 38 of 1997 as amended This compilation was prepared on 9 July 2008 taking into account amendments up to Act No. 64 of 2008 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 19 701-60 Tax cost setting amount 20 701-65 Net income and losses for trusts and partnerships 21 Exceptions 22 701-70 Adjustments to taxable income where identities of parties to arrangement merge on joining group 22 701-75 Adjustments to taxable income where identities of parties to arrangement re-emerge on leaving group 25 701-80 Accelerated depreciation 27 701-85 Other exceptions etc. to the rules 28 Division 703-Consolidated groups and their members 29 Guide to Division 703 29 703-1 What this Division is about 29 Basic concepts 30 703-5 What is a consolidated group? 30 703-10 What is a consolidatable group? 31 703-15 Members of a consolidated group or consolidatable group 31 703-20 Certain entities that cannot be members of a consolidated group or consolidatable group 33 703-25 Australian residence requirements for trusts 35 703-30 When is one entity a wholly-owned subsidiary of another? 35 703-33 Transfer time for sale of shares in company 36 703-35 Treating entities as wholly-owned subsidiaries by disregarding employee shares 37 703-37 Disregarding certain preference shares following an ADI restructure 39 703-40 Treating entities held through non-fixed trusts as wholly-owned subsidiaries 41 703-45 Subsidiary members or nominees interposed between the head company and a subsidiary member of a consolidated group or a consolidatable group 41 Choice to consolidate a consolidatable group 42 703-50 Choice to consolidate a consolidatable group 42 Consolidated group created when MEC group ceases to exist 43 703-55 Creating consolidated groups from certain MEC groups 43 Notice of events affecting consolidated group 44 703-60 Notice of events affecting consolidated group 44 Effects of choice to continue group after shelf company becomes new head company 45 703-65 Application 45 703-70 Consolidated group continues in existence with interposed company as head company and original company as a subsidiary member 46 703-75 Interposed company treated as substituted for original company at all times before the completion time 46 703-80 Effects on the original company's tax position 48 Division 705-Tax cost setting amount for assets where entities become subsidiary members of consolidated groups 49 Guide to Division 705 49 705-1 What this Division is about 49 Subdivision 705-A-Basic case: a single entity joining an existing consolidated group 49 Guide to Subdivision 705-A 49 705-5 What this Subdivision is about 49 Application and object 51 705-10 Application and object of this Subdivision 51 705-15 Cases where this Subdivision does not have effect 52 Tax cost setting amount for assets that joining entity brings into joined group 53 705-20 Tax cost setting amount worked out under this Subdivision 53 705-25 Tax cost setting amount for retained cost base assets 53 705-30 What is the joining entity's terminating value for an asset? 54 705-35 Tax cost setting amount for reset cost base assets 56 705-40 Tax cost setting amount for reset cost base assets held on revenue account 57 705-45 Reduction in tax cost setting amount for accelerated depreciation assets 58 705-47 Reduction in tax cost setting amount for some privatised assets 59 705-50 Reduction in tax cost setting amount for over- depreciated assets 61 705-55 Order of application of sections 705-40, 705-45, 705- 47 and 705-50 65 705-56 Modification for tax cost setting in relation to finance leases 65 705-57 Adjustment to tax cost setting amount where loss of pre-CGT status of membership interests in joining entity 67 705-58 Assets and liabilities not set off against each other 70 705-59 Exception: treatment of linked assets and liabilities 70 How to work out the allocable cost amount 74 705-60 What is the joined group's allocable cost amount for the joining entity? 74 705-65 Cost of membership interests in the joining entity- step 1 in working out allocable cost amount 76 705-70 Liabilities of the joining entity-step 2 in working out allocable cost amount 80 705-75 Liabilities of the joining entity-reductions for purposes of step 2 in working out allocable cost amount 81 705-80 Liabilities of the joining entity- reductions/increases for purposes of step 2 in working out allocable cost amount 83 705-85 Liabilities of the joining entity-increases for purposes of step 2 in working out allocable cost amount 84 705-90 Undistributed, taxed profits accruing to joined group before joining time-step 3 in working out allocable cost amount 85 705-93 If pre-joining time roll-over from foreign resident company-step 3A in working out allocable cost amount 89 705-95 Pre-joining time distributions out of certain profits-step 4 in working out allocable cost amount 90 705-100 Losses accruing to joined group before joining time- step 5 in working out allocable cost amount 91 705-105 Continuity of holding membership interests-steps 3 to 5 in working out allocable cost amount 91 705-110 If joining entity transfers a loss to the head company-step 6 in working out allocable cost amount 92 705-115 If head company becomes entitled to certain deductions-step 7 in working out allocable cost amount 92 How to work out a pre-CGT factor for assets of joining entity 93 705-125 Pre-CGT factor for assets of joining entity 93 Subdivision 705-B-Case of group formation 95 Guide to Subdivision 705-B 95 705-130 What this Subdivision is about 95 Application and object 96 705-135 Application and object of this Subdivision 96 Modified application of Subdivision 705-A 96 705-140 Subdivision 705-A has effect with modifications 96 705-145 Order in which tax cost setting amounts are to be worked out where subsidiary members have membership interests in other subsidiary members 97 705-147 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by subsidiary members in other such members 98 705-150 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 101 705-155 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests 104 705-160 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain entities that become subsidiary members 107 705-163 Modified application of section 705-57 109 705-165 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members 112 Subdivision 705-C-Case where a consolidated group is acquired by another 113 Guide to Subdivision 705-C 113 705-170 What this Subdivision is about 113 Application and object 114 705-175 Application and object of this Subdivision 114 Modified application of Division 701 in relation to acquired group etc. 114 705-180 Modifications of Division 701 114 Modified application of Subdivision 705-A in relation to acquiring group 116 705-185 Subdivision 705-A has effect with modifications 116 Modifications of Subdivision 705-A for the purposes of this Subdivision 117 705-190 Modified application of section 705-50 117 705-195 Modified application of subsection 705-65(6) 117 705-200 Modified application of section 705-85 118 705-205 Modified application of section 705-125 119 Subdivision 705-D-Where multiple entities are linked by membership interests 120 Guide to Subdivision 705-D 120 705-210 What this Subdivision is about 120 Application and object 121 705-215 Application and object of this Subdivision 121 Modified application of Subdivision 705-A 121 705-220 Subdivision 705-A has effect with modifications 121 705-225 Order in which tax cost setting amounts are to be worked out where linked entities have membership interests in other linked entities 122 705-227 Adjustment in working out step 3A of allocable cost amount to take account of membership interests held by linked entities in other linked entities 123 705-230 Adjustments to restrict step 4 reduction of allocable cost amount to effective distributions to head company in respect of direct membership interests 126 705-235 Adjustment to allocation of allocable cost amount to take account of owned profits or losses of certain linked entities 127 705-240 Modified application of section 705-57 129 705-245 Working out pre-CGT factors where subsidiary members have membership interests in other subsidiary members 131 Subdivision 705-E-Adjustments for errors etc. 132 Guide to Subdivision 705-E 132 705-300 What this Subdivision is about 132 Operative provisions 132 705-305 Object of this Subdivision 132 705-310 Operation of Part IVA of the Income Tax Assessment Act 1936 132 705-315 Errors that attract special adjustment action 132 705-320 Tax cost setting amounts taken to be correct 134 Division 707-Losses for head companies when entities become members etc. 135 Subdivision 707-A-Transfer of previously unutilised losses to head company 135 Guide to Subdivision 707-A 135 707-100 What this Subdivision is about 135 707-105 Who can utilise the loss? 136 Objects 136 707-110 Objects of this Subdivision 136 Application 137 707-115 What losses this Subdivision applies to 137 Transfer of loss from joining entity to head company 138 707-120 Transfer of loss from joining entity to head company 138 707-125 Modified same business test for companies' post-1999 losses 139 707-130 Modified pattern of distributions test 141 707-135 Transferring loss transferred to joining entity because same business test was passed 142 Effect of transfer of loss 142 707-140 Effect of transfer of loss 142 Cancelling the transfer of the loss 143 707-145 Cancelling the transfer of the loss 143 What happens if the loss is not transferred? 143 707-150 Loss cannot be utilised for income year ending after the joining time 143 Subdivision 707-B-Can a transferred loss be utilised? 144 Guide to Subdivision 707-B 144 707-200 What this Subdivision is about 144 Operative provisions 144 707-205 Modified period for test for maintaining same ownership 144 707-210 Utilisation of certain losses transferred from a company depends on company that made the losses earlier 145 Subdivision 707-C-Amount of transferred losses that can be utilised 147 Guide to Subdivision 707-C 147 707-300 What this Subdivision is about 147 Object 148 707-305 Object of this Subdivision 148 How much of a transferred loss can be utilised? 149 707-310 How much of a transferred loss can be utilised? 149 707-315 What is a bundle of losses? 151 707-320 What is the available fraction for a bundle of losses? 153 707-325 Modified market value of an entity becoming a member of a consolidated group 155 707-330 Losses transferred from former head company 157 707-335 Limit on utilising transferred losses if circumstances change during income year 158 707-340 Utilising transferred losses while exempt income remains 159 707-345 Other provisions are subject to this Subdivision 161 Subdivision 707-D-Special rules about losses 161 707-400 Head company's business before and after consolidation not compared 161 707-410 Exit history rule does not treat entity as having made a loss 161 Division 709-Other rules applying when entities become subsidiary members etc. 163 Subdivision 709-A-Franking accounts 163 Guide to Subdivision 709-A 163 709-50 What this Subdivision is about 163 Object 164 709-55 Object of this Subdivision 164 Treatment of franking accounts at joining time 165 709-60 Nil balance franking account for joining entity 165 Treatment of subsidiary member's franking account 165 709-65 Subsidiary member's franking account does not operate 165 Treatment of head company's franking account 166 709-70 Credits arising in head company's franking account 166 709-75 Debits arising in head company's franking account 166 Franking distributions by subsidiary member 167 709-80 Subsidiary member's distributions on employee shares and certain preference shares taken to be distributions by the head company 167 709-85 Non-share distributions by subsidiary members taken to be distributions by head company 167 709-90 Subsidiary member's distributions to foreign resident taken to be distributions by head company 168 Payment of group liability by former subsidiary member 168 709-95 Payment of group liability by former subsidiary member 168 709-100 Refund of income tax to former subsidiary member 169 Subdivision 709-B-Imputation issues 170 Guide to Subdivision 709-B 170 709-150 What this Subdivision is about 170 Operative provisions 170 709-155 Testing consolidated groups 170 709-160 Subsidiary member is exempting entity 171 709-165 Subsidiary member is former exempting entity 172 709-170 Head company and subsidiary are exempting entities 173 709-175 Head company is former exempting entity 173 Subdivision 709-C-Treatment of excess franking deficit tax offsets when entity becomes a subsidiary member of a consolidated group 176 Guide to Subdivision 709-C 176 709-180 What this Subdivision is about 176 709-185 Joining entity's excess franking deficit tax offsets transferred to head company 176 709-190 Exit history rule not to treat leaving entity as having a franking deficit tax offset excess 177 Subdivision 709-D-Deducting bad debts 178 Guide to Subdivision 709-D 178 709-200 What this Subdivision is about 178 Application and object 178 709-205 Application of this Subdivision 178 709-210 Object of this Subdivision 180 Limit on deduction of bad debt 180 709-215 Limit on deduction of bad debt 180 Extension of Subdivision to debt/equity swap loss 184 709-220 Limit on deduction of swap loss 184 Division 711-Tax cost setting amount for membership interests where entities cease to be subsidiary members of consolidated groups 186 Guide to Division 711 186 711-1 What this Division is about 186 Application and object of this Division 187 711-5 Application and object of this Division 187 Tax cost setting amount for membership interests etc. 187 711-10 Tax cost setting amount worked out under this Division 187 711-15 Tax cost setting amount where no multiple exit 188 711-20 What is the old group's allocable cost amount for the leaving entity? 189 711-25 Terminating values of assets that the leaving entity takes with it-step 1 in working out allocable cost amount 190 711-30 What is the head company's terminating value for an asset? 192 711-35 If head company becomes entitled to certain deductions-step 2 in working out allocable cost amount 192 711-40 Liabilities owed to the leaving entity by members of the old group-step 3 in working out allocable cost amount 193 711-45 Liabilities etc. owed by the leaving entity-step 4 in working out allocable cost amount 194 711-55 Tax cost setting amount for membership interests where multiple exit 197 711-65 Membership interests treated as having been acquired before 20 September 1985-simple case 199 711-70 Membership interests treated as having been acquired before 20 September 1985-multiple exit case 201 Division 713-Rules for particular kinds of entities 204 Subdivision 713-A-Trusts 204 Working out a joined group's allocable cost amount for a joining trust 205 713-20 Increasing the step 1 amount for settled capital that could be distributed tax free in respect of discretionary interests 205 713-25 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 208 Determining destination of distribution by non-fixed trust 209 713-50 Factors to consider 209 Subdivision 713-C-Some unit trusts treated like head companies of consolidated groups 209 Guide to Subdivision 713-C 209 713-120 What this Subdivision is about 209 Object of this Subdivision 210 713-125 Object of this Subdivision 210 Choice to form a consolidated group 211 713-130 Choosing to form a consolidated group 211 Effects of choice 211 713-135 Effects of choice 211 713-140 Modifications of the applied law 213 Subdivision 713-E-Partnerships 215 Guide to Subdivision 713-E 215 713-200 What this Subdivision is about 215 Objects 216 713-205 Objects of this Subdivision 216 Partnership cost setting interests etc. 217 713-210 Partnership cost setting interests 217 713-215 Terminating value for partnership cost setting interest 218 Setting tax cost of partnership cost setting interests 218 713-220 Set tax cost of partnership cost setting interests if partner joins consolidated group 218 713-225 Tax cost setting amount for partnership cost setting interest 219 713-230 Reduction in allocable cost amount if partnership asset is over-depreciated 221 Special rules where partnership joins consolidated group 222 713-235 Partnership joins group-set tax cost of partnership assets 222 713-240 Partnership joins group-tax cost setting amount for partnership asset 223 713-245 Partnership joins group-pre-CGT factor for partnership asset 224 Special rules where partnership leaves consolidated group 225 713-250 Partnership leaves group-standard provisions modified 225 713-255 Partnership leaves group-tax cost setting amount for partnership cost setting interests 225 713-260 Partnership leaves group-tax cost setting amount for assets consisting of being owed certain liabilities 227 713-265 Partnership leaves group-adjustments to leaving partner's allocable cost amount 227 713-270 Partnership leaves group-certain partnership cost setting interests treated as having been acquired before 20 September 1985 228 Subdivision 713-L-Life insurance companies 230 Guide to Subdivision 713-L 230 713-500 What this Subdivision is about 230 General modifications for life insurance companies 231 713-505 Head company treated as a life insurance company 231 713-510 Certain subsidiaries of life insurance companies cannot be members of consolidated group 232 Life insurance companies' liabilities on joining consolidated group 233 713-511 Treatment of certain liabilities for income year when life insurance company joins consolidated group 233 Tax cost setting rules for life insurance companies joining consolidated group 234 713-515 Certain assets taken to be retained cost base assets where life insurance company joins group 234 713-520 Valuing certain liabilities where life insurance company joins group 235 713-525 Obligation to value certain assets and liabilities at joining time 236 Losses of life insurance companies joining consolidated group 236 713-530 Treatment of certain losses of life insurance company 236 Losses of life insurance companies' subsidiaries joining consolidated group 237 713-535 Losses of entities whose membership interests are complying superannuation/FHSA assets of life insurance company 237 713-540 Losses of entities whose membership interests are segregated exempt assets of life insurance company 238 Imputation rules for life insurance companies joining consolidated group 239 713-545 Treatment of franking surplus in franking account of life insurance subsidiary joining group 239 713-550 Treatment of head company's franking account after joining 241 Annuity payable by life insurance company to another member of a consolidated group 241 713-553 Special rules relating to segregated exempt assets 241 713-555 Transfer from segregated exempt assets because policyholder and life insurance company are in group 242 713-560 If valuation of segregated exempt assets is delayed 245 Liabilities for life insurance companies leaving consolidated group 246 713-565 Treatment of certain liabilities for income year when life insurance company leaves consolidated group 246 Losses for life insurance companies leaving consolidated group 248 713-570 Certain losses transferred to leaving company 248 Tax cost setting rules for life insurance companies leaving consolidated group 249 713-575 Terminating value of certain assets where life insurance company leaves group 249 713-580 Valuing certain liabilities where life insurance company leaves group 249 713-585 Obligation to value certain assets and liabilities at leaving time 250 Subdivision 713-M-General insurance companies 251 Guide to Subdivision 713-M 251 713-700 What this Subdivision is about 251 Tax cost setting rules for general insurance companies joining consolidated group 251 713-705 Certain assets taken to be retained cost base assets where general insurance company joins group 251 Liabilities and reserves of general insurance companies joining and leaving consolidated groups 252 713-710 Treatment of liabilities and reserves for income year when general insurance company joins or leaves group 252 713-715 If general insurance company joins consolidated group 253 713-720 If general insurance company leaves consolidated group 253 Division 715-Interactions between this Part and other areas of the income tax law 255 Subdivision 715-A-Treatment of unrealised losses existing when ownership or control of a company changes before or during consolidation 255 Object 257 715-15 Object of this Subdivision 257 Effect on Subdivision 165-CC of a company becoming a member of a consolidated group 258 715-25 Subdivision 165-CC stops applying to earlier changeover time 258 715-30 Meaning of 165-CC tagged asset 259 715-35 Meaning of final RUNL 259 165-CC tagged assets that affect tax cost setting amounts 259 715-50 Step 1 amount is reduced if membership interest in subsidiary member is 165-CC tagged asset and same business test is failed 259 715-55 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 261 165-CC tagged assets that form loss denial pools of head company when consolidated group is formed 262 715-60 Assets that the head company already owns 262 715-70 Assets of subsidiary member that become those of head company 263 How Subdivision 165-CC applies to consolidated groups 265 715-75 Extension of single entity rule and entry history rule 265 Effect on Subdivision 165-CC of entity leaving consolidated group 265 715-80 Application of sections 715-85 to 715-110 265 715-85 First changeover time for leaving company at or after leaving time 266 715-90 How same business test applies if leaving time is changeover time for leaving company 266 715-95 If ownership and control of leaving entity have not changed since head company's last changeover time 267 715-100 First choice: adjustable values of leaving assets reduced to nil 268 715-105 Second choice: head company's final RUNL applied in reducing adjustable values of leaving assets that are loss assets 268 715-110 Third choice: loss denial pool of leaving entity created 269 Effect of assets in loss denial pool of head company becoming assets of leaving entity 269 715-120 What happens 269 715-125 First choice: adjustable values of leaving assets reduced to nil 270 715-130 Second choice: pool's loss denial balance applied in reducing adjustable values of leaving assets that are loss assets 270 715-135 Third choice: loss denial pool of leaving entity created 271 Effect of first and second choices on various kinds of assets 272 715-145 Effect of choice on adjustable value of leaving asset 272 General provisions about loss denial pools 273 715-155 When asset leaves pool 273 715-160 How loss denial balance is applied to losses realised on assets in pool 274 715-165 When pool ceases to exist 274 Choices under this Subdivision 275 715-175 When choice must be made 275 715-180 Head company to notify leaving entity of choice 275 715-185 Leaving entity may choose to cancel loss denial pool by reducing adjustable values of assets in the pool 275 Subdivision 715-B-How Subdivision 165-CD applies to consolidated groups and leaving entities 276 How Subdivision 165-CD applies to consolidated groups 276 715-215 Extension of single entity rule and entry history rule 276 715-225 Working out adjusted unrealised loss using individual asset method 277 715-230 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715-H 278 How Subdivision 165-CD applies to leaving entity that is a company 278 715-240 Application of sections 715-245 to 715-260 278 715-245 If ownership or control of leaving entity has altered since head company's last alteration time or formation of group 279 715-250 If head company has had an alteration time but ownership and control of leaving entity have not altered since 280 715-255 Consequences if leaving entity is a loss company at the leaving time 281 715-260 If neither of sections 715-245 and 715-250 applies 282 How Subdivision 165-CD applies to leaving entity that is a trust 283 715-270 Subdivision 165-CD applies 283 Subdivision 715-C-Common rules for the purposes of Subdivisions 715-A and 715-B 284 715-290 Additional assumptions to be made when using reference time 284 Subdivision 715-D-Treatment of company's deferred losses under Subdivision 170-D on joining a consolidated group 285 Key terminology 285 715-310 What is a 170-D deferred loss, and when it revives 285 Deferred loss on 165-CC tagged asset 286 715-355 Head company's own deferred losses at formation time 286 715-360 Deferred losses brought in by subsidiary member 287 715-365 How loss denial balance is applied when 170-D deferred loss revives 288 Subdivision 715-G-How value shifting rules apply to a consolidated group 289 715-410 Extension of single entity rule and entry history rule 289 715-450 No reductions or other consequences for interests subject to loss cancellation under Subdivision 715-H 289 Subdivision 715-H-Cancelling loss on realisation event for direct or indirect interest in a subsidiary member of a consolidated group 290 715-610 Cancellation of loss 290 715-615 Exception for interests in entity leaving consolidated group 291 715-620 Exception if loss attributable to certain matters 292 Subdivision 715-J-Entry history rule and choices 293 Head company's choice overriding entry history rule 293 715-660 Head company's choice overriding entry history rule 293 Choices head company can make ignoring entry history rule to override inconsistencies 296 715-665 Head company's choice to override inconsistency 296 Choices with ongoing effect 300 715-670 Ongoing effect of choices made by entities before joining group 300 715-675 Head company adopting choice with ongoing effect 301 Subdivision 715-K-Exit history rule and choices 301 Choices leaving entity can make ignoring exit history rule 302 715-700 Choices leaving entity can make ignoring exit history rule 302 Choices leaving entity can make ignoring exit history rule to overcome inconsistencies 304 715-705 Choices leaving entity can make ignoring exit history rule to overcome inconsistencies 304 Subdivision 715-U-Effect on conduit foreign income 307 715-875 Extension of single entity rule and entry history rule 307 715-880 No CFI for leaving entity 307 Subdivision 715-V-Entity ceasing to be exempt from income tax on becoming subsidiary member of consolidated group 307 715-900 Transition time taken to be just before joining time 307 Division 716-Miscellaneous special rules 309 Subdivision 716-A-Assessable income and deductions spread over several membership or non-membership periods 309 Guide to Subdivision 716-A 309 716-1 What this Division is about 309 Operative provisions 310 716-15 Assessable income spread over 2 or more income years 310 716-25 Deductions spread over 2 or more income years 312 716-70 Capital expenditure that is fully deductible in one income year 314 Assessable income and deductions arising from share of net income of a partnership or trust, or from share of partnership loss 316 716-75 Application 316 716-80 Head company's assessable income and deductions 317 716-85 Entity's assessable income and deductions for a non- membership period 318 716-90 Entity's share of assessable income or deductions of partnership or trust 319 716-95 Special rule if not all partnership or trust's assessable income or deductions taken into account in working out amount 320 716-100 Spreading period 320 Subdivision 716-E-Tax cost setting for exploration and prospecting assets 321 716-300 Prime cost method of working out decline in value 321 Subdivision 716-G-Low-value and software development pools 322 Assets in joining entity's low-value pool 322 716-330 Head company's deductions for decline in value of assets in joining entity's low-value pool 322 Entity leaving group with asset allocated to head company's low-value pool 325 716-335 Entity leaving group with asset allocated to head company's low-value pool 325 Depreciating assets arising from expenditure in joining entity's software development pool 327 716-340 Depreciating assets arising from expenditure in joining entity's software development pool 327 Software development pools if entity leaves consolidated group 330 716-345 Head company taken not to have incurred expenditure 330 Subdivision 716-Z-Other 331 716-800 Allocating amounts to periods if head company and subsidiary member have different income years 331 716-850 Grossing up threshold amounts for periods of less than 365 days 331 716-855 Working out the cost base or reduced cost base of a pre-CGT asset after certain roll-overs 332 Division 717-International tax rules 334 Subdivision 717-A-Foreign income tax offsets 334 717-1 What this Subdivision is about 334 Object 334 717-5 Object of this Subdivision 334 Foreign income tax on amounts in head company's assessable income 335 717-10 Head company taken to be liable for subsidiary member's foreign income tax 335 Subdivision 717-D-Transfer of certain surpluses under CFC, FIF and FLP provisions: entry rules 335 Guide to Subdivision 717-D 335 717-200 What this Subdivision is about 335 Object 336 717-205 Object of this Subdivision 336 Transfers 336 717-210 Attribution surpluses 336 717-220 FIF attribution surpluses 337 717-227 Deferred attribution credits 338 717-230 Calculating FIF income where a company joins the group 338 Subdivision 717-E-Transfer of certain surpluses under CFC, FIF and FLP provisions: exit rules 339 Guide to Subdivision 717-E 339 717-235 What this Subdivision is about 339 Object 340 717-240 Object of this Subdivision 340 Transfers 340 717-245 Attribution surpluses 340 717-255 FIF attribution surpluses 341 717-262 Deferred attribution credits 342 717-265 Calculating FIF income where a company leaves the group 343 Subdivision 717-O-Offshore banking units 344 Guide to Subdivision 717-O 344 717-700 What this Subdivision is about 344 717-705 Object of this Subdivision 345 717-710 Head company treated as OBU 345 Division 719-MEC groups 346 Subdivision 719-A-Modified application of Part 3-90 to MEC groups 346 719-2 Modified application of Part 3-90 to MEC groups 346 Subdivision 719-B-MEC groups and their members 346 719-4 What this Subdivision is about 346 Basic concepts 348 719-5 What is a MEC group? 348 719-10 What is a potential MEC group? 351 719-15 What is an eligible tier-1 company? 354 719-20 What is a top company and a tier-1 company? 355 719-25 Head company and subsidiary members of a MEC group 357 719-30 Treating entities as wholly-owned subsidiaries by disregarding employee shares 357 719-35 Treating entities held through non-fixed trusts as wholly-owned subsidiaries 359 719-40 Special conversion event-potential MEC group 359 719-45 Application of sections 703-20 and 703-25 360 Choice to consolidate a potential MEC group 361 719-50 Eligible tier-1 companies may choose to consolidate a potential MEC group 361 719-55 When choice starts to have effect 363 Provisional head company 364 719-60 Appointment of provisional head company 364 719-65 Qualifications for the provisional head company of a MEC group 365 719-70 Income year of new provisional head company to be the same as that of former provisional head company 366 Head company 367 719-75 Head company 367 Notice of events affecting group 368 719-80 Notice of events affecting MEC group 368 Effects of change of head company 369 719-85 Application 369 719-90 New head company treated as substituted for old head company at all times before the transition time 370 719-95 No consequences of old head company becoming, and new head company ceasing to be, subsidiary member of the group 371 Subdivision 719-C-MEC group cost setting rules: joining cases 372 Guide to Subdivision 719-C 372 719-150 What this Subdivision is about 372 Application and object 372 719-155 Object of this Subdivision 372 Modified application of tax cost setting rules for joining 373 719-160 Tax cost setting rules for joining have effect with modifications 373 719-165 Trading stock value not set for assets of eligible tier-1 companies 374 719-170 Modified effect of subsections 705-175(1) and 705- 185(1) 374 Subdivision 719-F-Losses 375 Guide to Subdivision 719-F 375 719-250 What this Subdivision is about 375 Maintaining the same ownership to be able to utilise loss 376 719-255 Special rules 376 719-260 Special test for utilising a loss because a company maintains the same owners 377 719-265 What is the test company? 378 719-270 Assumptions about the test company having made the loss for an income year 382 719-275 Assumptions about nothing happening to affect direct and indirect ownership of the test company 384 719-280 Assumptions about the test company failing to meet the conditions in section 165-12 386 Same business test and change of head company 387 719-285 Same business test and change of head company 387 Bundles of losses and their available fractions 388 719-300 Application 388 719-305 Subdivision 707-C affects utilisation of losses made by ongoing head company while it was head company 389 719-310 Adjustment of available fractions for bundles of losses previously transferred to ongoing head company 390 719-315 Further adjustment of available fractions for all bundles 390 719-320 Limit on utilising losses other than the prior group losses 391 719-325 Cancellation of all losses in a bundle 392 Subdivision 719-H-Imputation issues 393 719-425 Guide to Subdivision 719-H 393 Operative provisions 393 719-430 Transfer of franking account balance on cessation event 393 719-435 Distributions by subsidiary members of MEC group taken to be distributions by head company 394 Subdivision 719-I-Bad debts 394 Guide to Subdivision 719-I 394 719-450 What this Subdivision is about 394 Maintaining the same ownership to be able to deduct bad debt 395 719-455 Special test for deducting a bad debt because a company maintains the same owners 395 719-460 Assumptions about nothing happening to affect direct and indirect ownership of the test company 397 719-465 Assumptions about the test company failing to meet the conditions in section 165-123 397 Subdivision 719-J-MEC group cost setting rules: leaving cases 399 Guide to Subdivision 719-J 399 719-500 What this Subdivision is about 399 719-505 Application and object of this Subdivision 399 719-510 Modified operation of paragraphs 711-15(1)(b) and (c) 399 Subdivision 719-K-MEC group cost setting rules: pooling cases 400 Guide to Subdivision 719-K 400 719-550 What this Subdivision is about 400 719-555 Application and object of this Subdivision 400 719-560 Pooled interests 401 719-565 Setting cost of reset interests 401 719-570 Cost setting amount 402 Subdivision 719-T-Interactions between this Part and other areas of the income tax law: special rules for MEC groups 403 How Subdivision 165-CC applies to MEC groups 404 719-700 Changeover times under section 165-115C or 165-115D 404 719-705 Additional changeover times for head company of MEC group 405 How Subdivision 165-CD applies to MEC groups 406 719-720 Alteration times under section 165-115L or 165-115M 406 719-725 Additional alteration times for head company of MEC group 407 719-730 Some alteration times only affect interests in top company 408 719-735 Some alteration times affect only pooled interests 408 How indirect value shifting rules apply to a MEC group 409 719-755 Effect on MEC group cost setting rules if head company is losing entity or gaining entity for indirect value shift 409 Cancelling loss on realisation event for direct or indirect interest in a subsidiary member of a MEC group 409 719-775 Cancellation of loss 409 719-780 Exception for pooled interests in eligible tier-1 companies 411 719-785 Exception for interests in top company 411 719-790 Exception for interests in entity leaving MEC group 411 719-795 Exception if loss attributable to certain matters 412 Division 721-Liability for payment of tax where head company fails to pay on time 413 Guide to Division 721 413 721-1 What this Division is about 413 Object 414 721-5 Object of this Division 414 When this Division operates 414 721-10 When this Division operates 414 Joint and several liability of contributing member 417 721-15 Head company and contributing members jointly and severally liable to pay group liability 417 721-17 Notice of joint and several liability for general interest charge 419 721-20 Limit on liability where group first comes into existence 419 Tax sharing agreements 420 721-25 When a group liability is covered by a tax sharing agreement 420 721-30 TSA contributing members liable for contribution amounts 421 721-32 Notice of general interest charge liability under TSA 422 721-35 When a TSA contributing member has left the group clear of the group liability 423 721-40 TSA liability and group liability are linked 423 Part 3-95-Value shifting 425 Division 723-Direct value shifting by creating right over non- depreciating asset 425 Subdivision 723-A-Reduction in loss from realising non-depreciating asset 425 723-1 Object 425 723-10 Reduction in loss from realising non-depreciating asset over which right has been created 426 723-15 Reduction in loss from realising non-depreciating asset at the same time as right is created over it 428 723-20 Exceptions 429 723-25 Realisation event that is only a partial realisation 430 723-35 Multiple rights created to take advantage of the $50,000 threshold 430 723-40 Application to CGT asset that is also trading stock or revenue asset 431 723-50 Effects if right created over underlying asset is also trading stock or a revenue asset 431 Subdivision 723-B-Reducing reduced cost base of interests in entity that acquires non-depreciating asset under roll-over 432 723-105 Reduced cost base of interest reduced when interest realised at a loss 432 723-110 Direct and indirect roll-over replacement for underlying asset 433 Division 725-Direct value shifting affecting interests in companies and trusts 435 Guide to Division 725 435 725-1 What this Division is about 435 Subdivision 725-A-Scope of the direct value shifting rules 436 725-45 Main object 436 725-50 When a direct value shift has consequences under this Division 437 725-55 Controlling entity test 437 725-65 Cause of the value shift 437 725-70 Consequences for down interest only if there is a material decrease in its market value 438 725-80 Who is an affected owner of a down interest? 439 725-85 Who is an affected owner of an up interest? 439 725-90 Direct value shift that will be reversed 440 725-95 Direct value shift resulting from reversal 440 Subdivision 725-B-What is a direct value shift 441 725-145 When there is a direct value shift 441 725-150 Issue of equity or loan interests at a discount 442 725-155 Meaning of down interests, decrease time, up interests and increase time 443 725-160 What is the nature of a direct value shift? 444 725-165 If market value decrease or increase is only partly attributable to the scheme 444 Subdivision 725-C-Consequences of a direct value shift 444 General 445 725-205 Consequences depend on character of down interests and up interests 445 725-210 Consequences for down interests depend on pre-shift gains and losses 445 Special cases 446 725-220 Neutral direct value shifts 446 725-225 Issue of bonus shares or units 446 725-230 Off-market buy-backs 448 Subdivision 725-D-Consequences for down interest or up interest as CGT asset 448 725-240 CGT consequences; meaning of adjustable value 449 725-245 Table of taxing events generating a gain for interests as CGT assets 450 725-250 Table of consequences for adjustable values of interests as CGT assets 451 725-255 Multiple CGT consequences for the same down interest or up interest 453 Subdivision 725-E-Consequences for down interest or up interest as trading stock or a revenue asset 454 725-310 Consequences for down interest or up interest as trading stock 454 725-315 Adjustable value of trading stock 456 725-320 Consequences for down interest or up interest as a revenue asset 456 725-325 Adjustable value of revenue asset 457 725-335 How to work out those consequences 458 725-340 Multiple trading stock or revenue asset consequences for the same down interest or up interest 461 Subdivision 725-F-Value adjustments and taxed gains 461 725-365 Decreases in adjustable values of down interests (with pre-shift gains), and taxing events generating a gain 461 725-370 Uplifts in adjustable values of up interests under certain table items 463 725-375 Uplifts in adjustable values of up interests under other table items 465 725-380 Decreases in adjustable value of down interests (with pre-shift losses) 467 Division 727-Indirect value shifting affecting interests in companies and trusts, and arising from non-arm's length dealings 469 Guide to Division 727 469 727-1 What this Division is about 469 727-5 What is an indirect value shift? 470 727-10 How does this Division deal with indirect value shifts? 472 727-15 When does an indirect value shift have consequences under this Division? 472 727-25 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 473 Subdivision 727-A-Scope of the indirect value shifting rules 473 727-95 Main object 473 727-100 When an indirect value shift has consequences under this Division 474 727-105 Ultimate controller test 475 727-110 Common-ownership nexus test (if both losing and gaining entities are closely held) 475 727-125 No consequences if losing entity is a superannuation entity 476 Subdivision 727-B-What is an indirect value shift 476 727-150 How to determine whether a scheme results in an indirect value shift 476 727-155 Providing economic benefits 478 727-160 When an economic benefit is provided in connection with a scheme 479 727-165 Preventing double-counting of economic benefits 479 Subdivision 727-C-Exclusions 480 Guide to Subdivision 727-C 480 727-200 What this Subdivision is about 480 General 481 727-215 Amount does not exceed $50,000 481 727-220 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 481 Indirect value shifts involving services 482 727-230 Services provided by losing entity to gaining entity for at least their direct cost 482 727-235 Services provided by gaining entity to losing entity for no more than a commercially realistic price 483 727-240 What services certain provisions apply to 484 727-245 How to work out certain amounts for the purposes of sections 727-230 and 727-235 485 Anti-overlap provisions 486 727-250 Distribution by an entity to a member or beneficiary 486 Miscellaneous 487 727-260 Shift down a wholly-owned chain of entities 487 Subdivision 727-D-Working out the market value of economic benefits 488 727-300 What the rules in this Subdivision are for 488 727-315 Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000 488 Subdivision 727-E-Key concepts 489 Ultimate controller 490 727-350 Ultimate controller 490 727-355 Control (for value shifting purposes) of a company 490 727-360 Control (for value shifting purposes) of a fixed trust 491 727-365 Control (for value shifting purposes) of a non-fixed trust 492 727-370 Preventing double counting for percentage stake tests 493 727-375 Tests in this Subdivision are exhaustive 493 Common-ownership nexus and ultimate stake of a particular percentage 493 727-400 When 2 entities have a common-ownership nexus within a period 493 727-405 Ultimate stake of a particular percentage in a company 495 727-410 Ultimate stake of a particular percentage in a fixed trust 496 727-415 Rules for tracing 497 Subdivision 727-F-Consequences of an indirect value shift 498 Guide to Subdivision 727-F 498 727-450 What this Subdivision is about 498 Operative provisions 499 727-455 Consequences of the indirect value shift 499 Affected interests 499 727-460 Affected interests in the losing entity 499 727-465 Affected interests in the gaining entity 500 727-470 Exceptions 500 727-520 Equity or loan interest and related terms 501 727-525 Indirect equity or loan interest 502 Affected owners 502 727-530 Who are the affected owners 502 Choices about method to be used 504 727-550 Choosing the adjustable value method 504 727-555 Giving other affected owners information about the choice 506 Subdivision 727-G-The realisation time method 507 727-600 What this Subdivision is about 507 Operative provisions 508 727-610 Consequences of indirect value shift 508 727-615 Reduction of loss on realisation event for affected interest in losing entity 509 727-620 Reduction of gain on realisation event for affected interest in gaining entity 510 727-625 Total gain reductions not to exceed total loss reductions 510 727-630 How cap in section 727-625 applies if affected interest is also trading stock or a revenue asset 511 727-635 Splitting an equity or loan interest 513 727-640 Merging equity or loan interests 513 727-645 Effect of CGT roll-over 514 Further exclusion for certain 95% services indirect value shifts if realisation time method must be used 515 727-700 When 95% services indirect value shift is excluded 515 95% services indirect value shifts that are not excluded 516 727-705 Another provision of the income tax law affects amount related to services by at least $100,000 516 727-710 Ongoing or recent service arrangement reduces value of losing entity by at least $100,000 516 727-715 Service arrangements reduce value of losing entity that is a group service provider by at least $500,000 518 727-720 Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000 520 727-725 Meaning of predominantly-services indirect value shift 521 Subdivision 727-H-The adjustable value method 521 Guide to Subdivision 727-H 521 727-750 What this Subdivision is about 521 727-755 Consequences of indirect value shift 522 Reductions of adjustable value 523 727-770 Reduction under the adjustable value method 523 727-775 Has there been a disaggregated attributable decrease? 524 727-780 Working out the reduction on a loss-focussed basis 525 Uplifts of adjustable value 526 727-800 Uplift under the attributable increase method 526 727-805 Has there been a disaggregated attributable increase? 528 727-810 Scaling-down formula 529 Consequences of the method for various kinds of assets 530 727-830 CGT assets 530 727-835 Trading stock 531 727-840 Revenue assets 532 Subdivision 727-K-Reduction of loss on equity or loan interests realised before the IVS time 533 727-850 Consequences of scheme under this Subdivision 534 727-855 Presumed indirect value shift 535 727-860 Conditions about the prospective gaining entity 536 727-865 How other provisions of this Division apply to support this Subdivision 538 727-870 Effect of CGT roll-over 540 727-875 Application to CGT asset that is also trading stock or revenue asset 540 Subdivision 727-L-Indirect value shift resulting from a direct value shift 540 727-905 How this Subdivision affects the rest of this Division 541 727-910 Treatment of value shifted under the direct value shift 542 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 701-65 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. 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) 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. 701-65 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 *general | |subsidiary | | |company tax | |member of a | | |rate | |*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 | | |*general | |section 701C-1| | |company tax | |5 of that Act | | |rate; and | |must be met | | |(c) the entity| | | | |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 inco