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INCOME TAX ASSESSMENT ACT 1997 - SECT 716.340 Depreciating assets arising from expenditure in joining entity's software development pool

INCOME TAX ASSESSMENT ACT 1997 - SECT 716.340

Depreciating assets arising from expenditure in joining entity's software development pool

  (1)   This section modifies the basis on which Subdivision   40 - B and sections   40 - 455, 701 - 10, 701 - 55 and 701 - 60 and Division   705 operate if:

  (a)   an entity (the joining entity ) becomes a * subsidiary member of a * consolidated group at a time (the joining time ); and

  (b)   the joining entity had incurred before the joining time expenditure that it allocated to a software development pool; and

  (c)   some or all of the expenditure is reasonably related to * in - house software that:

  (i)   is a * depreciating asset; and

  (ii)   became an asset of the * head company of the consolidated group at the joining time because section   701 - 1 (Single entity rule) applied to the joining entity.

Note 1:   Subdivision   40 - B allows deductions for the decline in value of a depreciating asset, but only if expenditure on the asset has not been allocated to a software development pool. Section   40 - 455 provides for deduction of expenditure allocated to such a pool. Section   701 - 5 (Entry history rule) treats the head company as having incurred the expenditure that was allocated to the pool.

Note 2:   Section   701 - 10 provides that, for each asset the joining entity has at the joining time, the asset's tax cost is set at the joining time at the asset's tax cost setting amount, which is defined by section   701 - 60 as the amount worked out under Division   705, which in turn depends on the adjustable value of the asset worked out under section   40 - 85.

Note 3:   Section   701 - 55 affects matters relevant to working out the head company's deductions for the decline in value of depreciating assets that became assets of the head company at the joining time because section   701 - 1 (Single entity rule) applied to the joining entity.

Note 4:   This section operates whether or not the joining entity's deductions under section   40 - 455 for the period before the joining time for expenditure allocated to the pool total 100% of the expenditure allocated to the pool.

Object

  (2)   The main object of this section is to ensure that:

  (a)   the * head company's deductions for the * in - house software:

  (i)   are not worked out under section   40 - 455 on the basis of section   701 - 5 (Entry history rule) treating the expenditure relating to the software as being the head company's expenditure; and

  (ii)   are instead worked out under Subdivision   40 - B, using the * prime cost method with the * effective life given by subsection   40 - 95(7) and taking account of the * tax cost setting amount for the software; and

  (b)   the tax cost setting amount is worked out in a way that takes account of deductions for the period before the joining time for the expenditure reasonably related to the in - house software.

Joining entity taken not to have incurred certain expenditure

  (3)   Subdivision   40 - B and section   40 - 455 operate for the head company core purposes mentioned in section   701 - 1 (Single entity rule) as if the expenditure reasonably related to the * in - house software had not been incurred by the joining entity.

Note 1:   This has the effects that:

(a)   subsection   40 - 50(2) does not apply because of section   701 - 5 (Entry history rule) to deny the head company deductions under Subdivision   40 - B for the decline in value of the software; and

(b)   the head company cannot deduct the expenditure under section   40 - 455 as it operates because of section   701 - 5.

Note 2:   This does not prevent the head company from deducting under section   40 - 455 expenditure that is not reasonably related to the in - house software and that the head company is treated by section   701 - 5 as having incurred and allocated to a software development pool because the joining entity did.

Prime cost method of working out decline in value of software

  (4)   Subsection   701 - 55(2) operates as if the * prime cost method of working out the decline in value of the * in - house software applied just before the joining time.

Note:   This affects the method of working out the decline in value of the software for the head company of the consolidated group.

Effective life of software

  (5)   Subdivision   40 - B operates as if the * effective life of the * in - house software were the period specified for in - house software in subsection   40 - 95(7). Subsection   701 - 55(2) is subject to this subsection.

Cost of in - house software

  (6)   Sections   701 - 10 and 701 - 60 and Division   705 (and section   40 - 85, so far as it affects that Division) operate as if the * cost of the * in - house software were the total amount of the joining entity's expenditure that reasonably related to the software and was allocated to a software development pool.

Earlier decline in value of the in - house software

  (7)   Sections   701 - 10 and 701 - 60 and Division   705 (and section   40 - 85, so far as it affects that Division) operate as if the decline in value, and deductions for the decline in value, of the * in - house software for a period before the joining time were the amount worked out under subsection   (8).

  (8)   Work out the amount by:

  (a)   working out, for each software development pool to which expenditure relating to the * in - house software was allocated, the amount of the joining entity's deductions under section   40 - 455 that reasonably relates to the software; and

  (b)   adding up each of those amounts if there are 2 or more such pools.

Note:   Subsections   (6), (7) and (8) can affect the working out of the tax cost setting amount for the in - house software, by affecting the joining entity's terminating value for the software, which section   705 - 30 defines as being the adjustable value of the software just before the joining time, and which is relevant to sections   705 - 40 and 705 - 57 (which may reduce the tax cost setting amount for the software).

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