Commonwealth: New Business Tax System (Consolidation) Act (No. 1) 2002 (Cth)

New Business Tax System (Consolidation) Act (No. 1) 2002 Act No. 68 of 2002 as amended This compilation was prepared on 24 September 2010 taking into account amendments up to Act No. 75 of 2010 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 Prepared by the Office of Legislative Drafting and Publishing, Attorney‑General's Department, Canberra Contents 1 Short title [see Note 1] 2 Commencement [see Note 1] 3 Schedule(s) Schedule 1—Main consolidation provisions Income Tax Assessment Act 1997 Schedule 2—Transitional provisions relating to main consolidation provisions Income Tax (Transitional Provisions) Act 1997 Schedule 3—Consequential amendments relating to main consolidation provisions Part 1—General Income Tax Assessment Act 1997 Part 2—Head company terminology Income Tax Assessment Act 1997 Part 3—Limiting access to group concessions Division 1—CGT roll‑overs Income Tax Assessment Act 1997 Division 2—Loss transfers Income Tax Assessment Act 1997 Part 4—Anti‑avoidance provision for franking credit trading Income Tax Assessment Act 1936 Schedule 4—Amendments about Pay as you go (PAYG) instalments Part 1—The amendments Taxation Administration Act 1953 Part 2—Consequential amendments Taxation Administration Act 1953 Schedule 5—Amendments of Dictionary Income Tax Assessment Act 1997 Notes An Act about income tax to implement a New Business Tax System, and for related purposes 1 Short title [see Note 1] This Act may be cited as the New Business Tax System (Consolidation) Act (No. 1) 2002. 2 Commencement [see Note 1] This Act commences on the day on which the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 receives the Royal Assent. 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—Main consolidation provisions Income Tax Assessment Act 1997 1 Section 405‑50 (link note) Repeal the link note, substitute: [The next Division is Division 700.] 2 After Part 3‑45 Insert: 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. [This is the end of the Guide] 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 that entity brings into group 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 701‑60 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; (d) overall foreign loss in respect of interest income (within the meaning of section 160AFD of the Income Tax Assessment Act 1936); (e) overall foreign loss in respect of modified passive income (within the meaning of that section); (f) overall foreign loss in respect of offshore banking income (within the meaning of that section); (g) overall foreign loss in respect of other assessable foreign income (within the meaning of that section). 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: 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). 701‑10 Cost to head company of assets that entity brings into group (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 becomes an asset of the *head company because subsection 701‑1(1) (the single entity rule) applies. 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 subsection 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. However, this section does not have effect if the entity ceases to be a subsidiary member where Subdivision 705‑C (about the group joining another consolidated group) has effect. 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: 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. 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. 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 cost 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. 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). 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). 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. 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 cost of trading stock at tax‑neutral amount (4) The *value of the *trading stock at the end of the income year that ends 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. 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. 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; 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 *head company 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: 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. 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. 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 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 section 40‑95 (other than subsections (2) and (5)) 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, the expression means that the provision applies as if the asset's cost at that time were equal to its *tax cost setting amount. 701‑60 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 is set by: The asset's tax cost setting amount is: 1 section 701‑10 (Cost to head company of assets that entity brings into group) the amount worked out in accordance with Division 705 2 section 701‑15 (Cost to head company of membership interests in entity that leaves group) the amount worked out in accordance with section 711‑15 or 711‑55 3 section 701‑20 (Cost to head company of assets 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) the *market value of the asset 4 section 701‑50 (Cost of certain membership interests of which entity becomes holder on leaving group) the amount worked out in accordance with section 711‑55 701‑65 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 income year): (i) if the combining entity is the *head company—the income year in which the joining time occurs; (ii) in any other case—the income year that ends 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 income year; and (d) if it is more—the entity's assessable income for the joining income year includes the difference. Pre‑joining time proportion of total arrangement deductions (4) The amount is worked out using the formula: 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 income 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 income year includes the difference; and (b) if it is more—the entity is entitled to deduct the difference for the joining income year. Pre‑joining time proportion of total arrangement assessable income (6) The amount is worked out using the formula: 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 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 income 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 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: 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 income 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: 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) the entity *acquired a *depreciating asset at or before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and held the asset continuously until the entity became a *subsidiary member of the group; and (b) 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 because subsection 701‑1(1) (the single entity rule) applies 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. [The next Division is Division 703.] 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? 703‑35 Treating entities as wholly‑owned subsidiaries by disregarding employee shares 703‑40 Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries 703‑45 Entities interposed between the head company and a subsidiary member of a consolidated 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 [This is the end of the Guide.] 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. (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 role in relation to group Income tax treatment requirements Australian residence requirements Ownership requirements 1 Head company The entity must be a company (but not one covered by section 703‑20) that has all or some of its taxable income (if any) taxed at a rate that is or equals the *general company tax rate The entity must be an Australian resident (but not a *prescribed dual resident) The entity must not be a *wholly‑owned subsidiary of another entity that meets the requirements in columns 2 and 3 of this item or, if it is, it must not be a subsidiary member of a *consolidatable group or *consolidated group 2 Subsidiary member The requirements are that: The entity must: The entity must be a *wholly‑owned subsidiary of the head company of the group and, if there are interposed between them any entities, the requirement in subsection 703‑45(1) must be met (a) the entity must be a company, trust or partnership (but not one covered by section 703‑20); and (a) be an Australian resident (but not a *prescribed dual resident), if it is a company; or (b) if the entity is a company—all or some of its taxable income (if any) must be taxable apart from this Part at a rate that is or equals the *general company tax rate; and (b) comply with section 703‑25, if it is a trust; or (c) the entity must not be a non‑profit company (as defined in the Income Tax Rates Act 1986) (c) be a partnership 703‑20 Certain entities that cannot be members of a consolidated group or consolidatable group (1) The object of this section is to specify certain entities that cannot be *members of a *consolidated group because of the way their income is treated for income tax purposes. (2) An entity of a kind specified in an item of the table cannot be a *member of a *consolidated group or a *consolidatable group at a time in an income year if the conditions specified in the item exist: Certain entities that cannot be members of a consolidated or consolidatable group Item An entity of this kind: Cannot be a member of a consolidated group or consolidatable group if: 1 An entity of any kind At the time, the total *ordinary income and *statutory income of the entity is exempt from income tax under Division 50 2 A company The company is a recognised medium credit union (as defined in section 6H of the Income Tax Assessment Act 1936) for the income year 3 A company The company: (a) is an approved credit union for the income year for the purposes of section 23G of the Income Tax Assessment Act 1936; and (b) is not a recognised medium credit union (as defined in section 6H of that Act) or a recognised large credit union (as defined in that section) for the income year 4 A company Assuming the company applied at the time an amount of its assessable income as described in paragraph 120(1)(c) of the Income Tax Assessment Act 1936, the company could deduct that amount because of that paragraph 5 A company The company is a *PDF at the end of the income year 6 A company The company is a *film licensed investment company at the time 7 A trust The trust is: (a) a *complying superannuation entity for the income year; or (b) a non‑complying ADF or non‑complying superannuation fund (as those terms are defined in section 267 of the Income Tax Assessment Act 1936) for the income year 703‑25 Australian residence requirements for trusts A trust described in an item of the table must meet the requirements specified in the item to be able to be a *subsidiary member of a *consolidated group or a *consolidatable group at a time in an income year: Australian residence requirements for trusts Item A trust of this kind: Can be a member of a consolidated group or consolidatable group only if these requirements are met: 1 A trust (except a unit trust) The trust must be a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 2 A unit trust (except a *corporate unit trust or a *public trading trust for the income year) The trust must be: (a) a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936; and (b) a *resident trust for CGT purposes for the income year 3 A *corporate unit trust or a *public trading trust for the income year The trust must be a resident unit trust (as defined in whichever one of sections 102H and 102Q of the Income Tax Assessment Act 1936 is relevant) for the income year 703‑30 When is one entity a wholly‑owned subsidiary of another? (1) One entity (the subsidiary entity) is a wholly‑owned subsidiary of another entity (the holding entity) if all the *membership interests in the subsidiary entity are beneficially owned by: (a) the holding entity; or (b) one or more wholly‑owned subsidiaries of the holding entity; or (c) the holding entity and one or more wholly‑owned subsidiaries of the holding entity. (2) An entity (other than the subsidiary entity) is a wholly‑owned subsidiary of the holding entity if, and only if: (a) it is a wholly‑owned subsidiary of the holding entity; or (b) it is a wholly‑owned subsidiary of a wholly‑owned subsidiary of the holding entity; because of any other application or applications of this section. Note: This Part also operates in some cases as if an entity were a wholly‑owned subsidiary of another entity, even though the entity is not covered by the definition in this section because of: (a) ownership of shares under certain arrangements for employee shareholding (see section 703‑35); or (b) interposed trusts that are not fixed trusts (see section 703‑40). 703‑35 Treating entities as wholly‑owned subsidiaries by disregarding employee shares (1) The object of this section is to ensure that an entity is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because there are minor holdings of *shares in a company issued under *arrangements for employee shareholdings. (It does not matter whether the company is the entity or is interposed between the entity and a *member of the group.) Note: A company that is prevented from being a subsidiary member of a consolidated group may be a head company (so there could be 2 consolidated or consolidatable groups, instead of the one that this section ensures exists). (2) This Part (except Division 719) operates as if a company that meets the requirement of subsection (3) at a particular time were a *wholly‑owned subsidiary of an entity (the holding entity) at the time. (3) The company must be one that would be a *wholly‑owned subsidiary of the holding entity at the time if the *shares in the company that are to be disregarded under subsection (4) did not exist. (4) Disregard each of the *shares described in subsection (5) if the total number of those shares is not more than 1% of the number of ordinary shares in the company. (5) A *share in the company that is beneficially owned by an entity may be disregarded under subsection (4) if: (a) the entity acquired (as defined in section 139G of the Income Tax Assessment Act 1936) the share either: (i) in the circumstances described in subsection 139C(1) or (2) of that Act; or (ii) by exercising a right the entity acquired (as so defined) in those circumstances; and (b) all the shares in the company available for acquisition in those circumstances are ordinary shares and all the rights available for acquisition in those circumstances are rights to acquire ordinary shares; and (c) if the entity acquired the share in those circumstances—at the time of the acquisition, at least 75% of the permanent employees (as defined in section 139GB of that Act) of the employer (as defined in section 139GA of that Act) were or had earlier been entitled to acquire in those circumstances: (i) shares in the company or rights to acquire shares in the company; or (ii) shares in a holding company (as defined in section 139GC of that Act) of the company or rights to acquire such shares; and (d) the conditions in subsections 139CD(6) and (7) of that Act are met in relation to the acquisition of the share by the entity; and (e) the company is not covered by section 139DF of that Act. Note: Section 139CD of the Income Tax Assessment Act 1936 sets out certain preconditions for shares and rights acquired under employee share schemes to be qualifying shares and qualifying rights. Section 139C of that Act explains when a share or right is acquired under an employee share scheme. Section 139DF prevents shares and rights relating to certain companies from being qualifying shares and rights. (6) The *share may be disregarded under subsection (4) even though the condition in paragraph (5)(c) is not met, if: (a) the conditions in paragraphs (5)(a), (b), (d) and (e) are met; and (b) the Commissioner has made a determination under subsection 139CD(8) of the Income Tax Assessment Act 1936 in relation to the share. 703‑40 Treating entities held through non‑fixed trusts as wholly‑owned subsidiaries (1) This section operates to ensure that an entity (the test entity) is not prevented from being a *subsidiary member of a *consolidated group or *consolidatable group just because there is a trust that is not a *fixed trust interposed between the test entity and the *head company of the group. (2) This Part (except Division 719) operates as if the test entity were a *wholly‑owned subsidiary of the *head company if the test entity would have been a wholly‑owned subsidiary of the head company had the interposed trust been a *fixed trust and all its objects been beneficiaries. 703‑45 Entities interposed between the head company and a subsidiary member of a consolidated group (1) For an entity (the test entity) to be a *subsidiary member of a *consolidated group or *consolidatable group if there are one or more other entities interposed between the test entity and the *head company of the group, one of the sets of circumstances described in subsection (2), (3) or (4) must exist. Subsidiary members or nominees interposed (2) One set of circumstances is that each of the interposed entities either: (a) is a *subsidiary member of the group; or (b) holds *membership interests in: (i) the test entity; or (ii) a subsidiary member of the group interposed between the *head company of the group and the test entity; only as a nominee of one or more entities each of which is a *member of the group. Non‑resident interposed—test entity is a company (3) Another set of circumstances is that: (a) the test entity is a company; and (b) at least one of the interposed entities is: (i) a company (a non‑resident company) that is a foreign resident; or (ii) a trust (a non‑resident trust) that does not meet the requirements in any item of the table in section 703‑25; and (c) each of the interposed entities is: (i) a *subsidiary member of the group; or (ii) a non‑resident company; or (iii) a non‑resident trust; or (iv) an entity that holds *membership interests in an entity interposed between it and the test entity, or in the test entity, only as a nominee of one or more entities each of which is a *member of the group, a non‑resident company or a non‑resident trust; or (v) a partnership, each of the partners in which is a non‑resident company or a non‑resident trust; and (d) the test entity would be a subsidiary member of the group if each interposed entity that is a non‑resident company or non‑resident trust were a subsidiary member of the group. Non‑resident interposed—test entity is a trust or partnership (4) Another set of circumstances is that: (a) the test entity is a trust or partnership; and (b) one or more of the interposed entities are companies that are *subsidiary members of the group because the circumstances in subsection (3) exist; and (c) the test entity would be a subsidiary member of the group if the *head company beneficially owned all the *membership interests beneficially owned by each company described in paragraph (b). Choice to consolidate a consolidatable group 703‑50 Choice to consolidate a consolidatable group (1) A company may make a choice in the *approved form given to the Commissioner within the period described in subsection (3) that a *consolidatable group is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the *head company of the group on the day specified. Choice is irrevocable (2) The choice cannot be revoked, and the specification of the day cannot be amended, after the choice is made under subsection (1). Period for giving choice to Commissioner (3) The period for giving the choice to the Commissioner: (a) starts at the start of the day specified in the choice; and (b) ends at the end of: (i) the day on which the company gives the Commissioner its *income tax return for the first income year ending after the day specified in the choice; or (ii) the last day in the period within which the company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return. Choice has no effect after consolidated group ceases to exist (4) The choice does not have effect after the *consolidated group that came into existence because of the choice ceases to exist. To avoid doubt, this subsection does not prevent the choice from: (a) being made by the company at a time when it is not a head company; or (b) having effect in relation to a time before the consolidated group ceased to exist, even if that time is before the choice is made. Choice does not have effect if it contains wrong information (5) The choice does not have effect (and is taken not to have had effect) if the Commissioner is satisfied that the choice contains information that is incorrect in a material particular. Commissioner may give effect to choice despite wrong information (6) Subsection (5) does not prevent the choice from having effect (and being taken to have had effect) if the Commissioner gives the company written notice that the choice has effect despite the incorrect information. Note: Subsection (6) does not let the Commissioner make the choice effective if it did not have effect because it was not made in accordance with subsection (1). This could have happened if: (a) the choice was not in the approved form (for example because it did not include information the Commissioner required (whether in the form or otherwise)); or (b) the choice was not given to the Commissioner within the period described in subsection (3); or (c) the company was not the head company of a consolidatable group on the day specified in the choice. Choice does not have effect if company is a member of a MEC group (7) The choice does not have effect (and is taken not to have had effect) if, on the day specified, the company was a member of a *MEC group. Consolidated group created when MEC group ceases to exist 703‑55 Creating consolidated groups from certain MEC groups (1) A *consolidated group comes into existence at the time a *MEC group ceases to exist if: (a) the MEC group included only one *eligible tier‑1 company just before the time; and (b) the MEC group ceases to exist only because the company ceases to be an eligible tier‑1 company; and (c) the company is a *head company as defined in section 703‑15 at the time. (2) To avoid doubt, the *consolidated group consists at the time of: (a) the company (as the *head company of the consolidated group); and (b) every entity (if any) that was a *subsidiary member of the *MEC group just before that time (as a subsidiary member of the consolidated group). Notice of events affecting consolidated group 703‑60 Notice of events affecting consolidated group (1) Within 28 days of an event described in an item of the table, the entity described in column 3 of the item must give the Commissioner notice in the *approved form of the event. Notice of events Column 1 Column 2 Column 3 Item If this event happens: Notice must be given by: 1