Commonwealth Consolidated Acts

NEW BUSINESS TAX SYSTEM (CONSOLIDATION AND OTHER MEASURES) ACT (NO. 1) 2002 - SCHEDULE 3

Part   1 -- Basic amendments

Income Tax Assessment Act 1997

1   After section   705 - 55

Insert:

705 - 57   Adjustment to tax cost setting amount where loss of pre - CGT status of membership interests in joining entity

Object

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

When section applies

  (2)   This section applies if:

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

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

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

  (d)   the revenue etc. asset's * tax cost setting amount (after any application of section   705 - 40, 705 - 45 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.

2   After section   705 - 160

Insert:

705 - 163   Modified application of section   705 - 57

Object

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

Modified application of section   705 - 57--basic modification

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

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

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

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

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

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

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

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

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

and for those purposes:

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

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

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

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

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

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

  (6)   If:

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

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

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

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

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

  (f)   the acquisition, or each of the acquisitions, mentioned in subsection 705 - 57(4) was a * same asset roll - over or was one to which any of 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.

Part   2 -- Consequential CGT amendments

Income Tax Assessment Act 1997

3   Section   100 - 15 (at the end of the note)

Add "or CGT event L1".

4   Section   102 - 30 (after table item   7)

Insert:

5   Section   104 - 5 (after table row relating to event number K8)

Insert:

6   At the end of Division   104

Add:

Subdivision   104 - L -- Consolidated groups

Table of sections

104 - 500   Loss of pre - CGT status of membership interests in entity becoming subsidiary member: CGT event L1

104 - 500   Loss of pre - CGT status of membership interests in entity becoming subsidiary member: CGT event L1

  (1)   CGT event L1 happens if, under section   705 - 57 (including in its application in accordance with Subdivisions   705 - B to 705 - E), there is a reduction in the * tax cost setting amount of assets of an entity that becomes a * subsidiary member of a * consolidated group.

  (2)   The time of the event is just after the entity becomes a * subsidiary member of the group.

  (3)   For the head company core purposes mentioned in subsection 701 - 1(2), the * head company makes a capital loss equal to the reduction .

  (4)   The amount of the capital loss that can be applied to reduce the head company's * capital gains for the first income year ending after the entity becomes a * subsidiary member of the group (the first income year ) cannot exceed 1 / 5 of the * capital loss .

  (5)   The amount of the * net capital loss from the first income year, to the extent the amount is attributable to the * capital loss (the extent being the event L1 attributable loss ), that can be applied to reduce the head company's * capital gains for a later income year cannot exceed the amount worked out for the year using the following table:

7   Section   110 - 10 (after table row relating to event number K7)

Insert:

Part   3 -- Transitional provisions

Income Tax (Transitional Provisions) Act 1997

8   After Division   701A

Insert:

Division   701B -- Other modifications of provisions of Income Tax Assessment Act 1997

Table of sections

701B - 1   Modified application of CGT Consolidation provisions to allow immediate availability of capital loss for CGT event L1

701B - 1   Modified application of CGT Consolidation provisions to allow immediate availability of capital loss for CGT event L1

  (1)   This section applies if:

  (a)   CGT event L1 happens; and

  (b)   members of the consolidated group mentioned in subsection 104 - 500(1) of the Income Tax Assessment Act 1997 held all of the membership interests in the entity mentioned in that subsection from the end of 30   June 2002 until the entity became a subsidiary member of the group; and

  (c)   before the end of the fourth income year of the head company of the group ending after the entity became a subsidiary member of the group, the entity ceases to be a subsidiary member; and

  (d)   all of the assets, other than those excepted under subsection   ( 2), that the head company held when the entity became a subsidiary member, because the entity was taken by subsection 701 - 1(1) (the single entity principle) of the Income Tax Assessment Act 1997 to be a part of the head company, continued to be held by the head company until the entity ceased to be a subsidiary member.

Excepted assets

  (2)   For the purposes of paragraph   ( 1)(d), excepted assets are assets that:

  (a)   the head company disposed of in the ordinary course of a business that the head company carried on by virtue of the entity being taken by subsection 701 - 1(1) of the Income Tax Assessment Act 1997 to be a part of the head company; and

  (b)   were minor assets, having regard to the nature and size of that business.

Immediate availability of capital loss or net capital loss

  (3)   If this section applies, neither subsection 104 - 500(4) nor subsection 104 - 500(5) of the Income Tax Assessment Act 1997 applies in relation to the head company for the income year in which the entity ceases to be a subsidiary member of any later income year.