Income Tax Assessment Act 1997

Insert:

Object

(1)

The object of this section is to ensure that provisions that cause ^* membership interests in the joining entity to stop being ^* pre-CGT assets, with a resultant increase in their ^* cost base and ^* reduced cost base, do not increase ^* tax cost setting amounts for ^* trading stock, ^* depreciating assets or ^* revenue assets of the joining entity, where those amounts are above the joining entity's ^* terminating values for the assets.

When section applies

(2)

This section applies if:

(a)

a ^* membership interest that a ^* member of the joined group holds in the joining entity at the joining time had previously stopped being a ^* pre-CGT asset in the circumstances covered by any of subsections (3) to (5); and

(b)

the ^* cost base or ^* reduced cost base of the membership interest just after it stopped being a pre-CGT asset exceeded (the excess being the loss of pre-CGT status adjustment amount ) its cost base or reduced cost base just before it stopped being a pre-CGT asset; and

(c)

an asset (a revenue etc. asset ) that is ^* trading stock, a ^* depreciating asset or a ^* revenue asset becomes that of the ^* head company of the joined group because subsection 701-1(1) (the single entity rule) applies when the joining entity becomes a ^* subsidiary member of the group; and

(d)

the revenue etc. asset's ^* tax cost setting amount (after any application of section 705-40, 705-45 or 705-50) exceeds the joining entity's ^* terminating value for the asset.

Loss of pre-CGT status because Division 149 etc. applied while interest held by member

(3)

The first circumstance for the purpose of paragraph (2)(a) is where Division 149 of this Act, subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of Part IIIA of that Act applied to cause the ^* membership interest to stop being a ^* pre-CGT asset while the ^* member held the membership interest.

Loss of pre-CGT status because Division 149 etc. applied before current holding by member

(4)

The second circumstance for the purpose of paragraph (2)(a) is where:

(a)

either:

(i)

the ^* member ^* acquired the ^* membership interest directly from another entity; or

(ii)

the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions; and

(b)

Division 149 of this Act, subsection 160ZZS(1) of the Income Tax Assessment Act 1936 or Subdivision C of Division 20 of Part IIIA of that Act applied to cause the membership interest to stop being a ^* pre-CGT asset while the other entity held the membership interest or while the member held the membership interest on the previous occasion; and

(c)

if subparagraph (a)(i) applies—at the time of the acquisition, the member ^* controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and

(d)

if subparagraph (a)(ii) applies—the same entity:

(i)

was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other party; or

(ii)

was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or

(iii)

was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;

or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.

Loss of pre-CGT status because of acquisition from another entity

(5)

The third circumstance for the purpose of paragraph (2)(a) is where:

(a)

either:

(i)

the ^* member acquired the ^* membership interest after 16 May 2002 directly from another entity; or

(ii)

the member acquired the membership interest indirectly from another entity or from itself as a result of 2 or more acquisitions, all of which took place after 16 May 2002; and

(b)

the membership interest stopped being a ^* pre-CGT asset because of the acquisition from the other entity or from the member while the member held the membership interest on a previous occasion; and

(c)

if subparagraph (a)(i) applies—at the time of the acquisition, the member ^* controlled (for value shifting purposes) the other entity, or vice versa, or a third entity controlled (for value shifting purposes) the member and the other entity; and

(d)

if subparagraph (a)(ii) applies—the same entity:

(i)

was a party to each acquisition and at the time of the acquisition controlled (for value shifting purposes) the other parties; or

(ii)

was a party to each acquisition and at the time of the acquisition was controlled (for value shifting purposes) by the other party; or

(iii)

was not a party to each acquisition but, at the time of the acquisition, controlled (for value shifting purposes) the parties to the acquisition;

or any combination of subparagraphs (i) to (iii) occurred in relation to different acquisitions.

Reduction in revenue etc. asset's tax cost setting amount

(6)

The revenue etc. asset's ^* tax cost setting amount (after any application of section 705-40, 705-45 or 705-50) is instead the amount that would apply if, in working out the step 1 amount in the table in section 705-60, the ^* cost base and ^* reduced cost base of the ^* membership interest were reduced by the sum of the loss of pre-CGT status adjustment amounts for the membership interest and all other membership interests that have loss of pre-CGT status adjustment amounts.

Limit on reduction

(7)

However, the reduction only takes place to the extent that it does not result in the asset's ^* tax cost setting amount being less than the joining entity's ^* terminating value for the asset.

Note: The reduction under this section is converted into a capital loss available over a period of 5 income years starting with the income year in which the joining time occurs: see CGT event L1.

Insert:

Object

(1)

The object of this section is to ensure that, in working out ^* tax cost setting amounts for ^* trading stock, ^* depreciating assets or ^* revenue assets of entities that become ^* subsidiary members of the group at the formation time, section 705-57 (about loss of pre-CGT status of certain ^* membership interests) only applies if the ^* membership interests held directly by the ^* head company of the group are affected.

Modified application of section 705-57—basic modification

(2)

For the purposes of applying section 705-57 in accordance with this Subdivision, a reference in that section to a ^* membership interest that a ^* member of the joined group holds in the joining entity at the joining time is taken to be a reference to a ^* membership interest that the ^* head company of the ^* consolidated group holds directly in an entity becoming a ^* subsidiary member at the formation time.

Modified application of section 705-57—additional modifications where section 705-145 applies

(3)

Also, if an entity (the first entity ) that becomes a ^* subsidiary member holds a ^* membership interest (the subject membership interest ) in another entity (the second entity ) that becomes a subsidiary member, section 705-57 (as modified in accordance with subsection (2)) is to be applied in relation to the subject membership interest as follows.

(4)

First work out whether there would be a reduction under that section in the ^* tax cost setting amount for the subject membership interest that is used as mentioned in subsection 705-145(3) (the subsection 705-145(3) tax cost setting amount ) if:

(a)

the subject membership interest, if it is not a revenue etc. asset of the first entity, were taken to be such an asset; and

(b)

paragraphs 705-57(2)(c) and (d) and subsection 705-57(7) did not apply to the subject membership interest.

(5)

Next, if there would be such a reduction (whose amount is the notional section 705-57 reduction amount ):

(a)

apply section 705-57 to reduce the ^* tax cost setting amount for any revenue etc. asset of the second entity; and

(b)

if the second entity holds a ^* membership interest in another entity that becomes a ^* subsidiary member—apply section 705-57 in relation to that interest in accordance with subsection (3) of this section;

and for those purposes:

(c)

the subject membership interest is taken to be a membership interest that the ^* head company of the group holds directly in the second entity at the formation time; and

(d)

the requirements of paragraphs 705-57(2)(a) and (b) are taken to be satisfied in relation to the subject membership interest; and

(e)

the subject membership interest is taken to have a ^* cost base and ^* reduced cost base equal to the subsection 705-145(3) tax cost setting amount; and

(f)

the subject membership interest is taken to have a loss of pre-CGT status adjustment amount equal to the notional section 705-57 reduction amount.

Note: If the head company actually held any membership interests in the second entity, or if other entities becoming subsidiary members held membership interests in the second entity to which this subsection also applied, those membership interests would also be taken into account in working out the reduction under paragraph (a) and in applying paragraph (b).

Section 705-57 not to apply where membership interests effectively acquired on normal market basis

(6)

If:

(a)

apart from this subsection, subsection 705-57(6) would apply in accordance with this Subdivision to the revenue etc. assets of an entity (the subject entity ) that becomes a ^* subsidiary member of the group at the formation time; and

(b)

at the formation time, the ^* head company of the group holds all of the ^* membership interests in the subject entity; and

(c)

subsection 705-57(6) would apply because a circumstance covered by subsection 705-57(4) (about loss of pre-CGT status because Division 149 etc. applied) existed; and

(d)

the application of Division 149 of this Act, or the provision of the Income Tax Assessment Act 1936 , as mentioned in paragraph 705-57(4)(b) of this Act happened because the entity that became the ^* head company of the group (the potential head entity ) ^* acquired all of the ^* membership interests in the other entity mentioned in that paragraph directly or indirectly from another entity (the vendor ); and

(e)

at the time of the acquisition, the potential head entity did not control (for value shifting purposes) the vendor, and vice-versa, and another entity did not control (for value shifting purposes) the potential head entity and the vendor; and

(f)

the acquisition, or each of the acquisitions, mentioned in subsection 705-57(4) was a ^* same asset roll-over or was one to which any of sections 160ZZN to 160ZZOC, 160ZZPA and 160ZZPJ of the Income Tax Assessment Act 1936 applied;

then subsection 705-57(6) does not apply as mentioned in paragraph (a) of this subsection.