Consolidation: CGT event A1 - subsidiary member sells asset

Does CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the taxpayer, the head company of a consolidated group, if an asset owned by a subsidiary member is sold?

Yes. The single entity rule in section 701-1 of the ITAA 1997 ensures that, in these circumstances, CGT event A1 happens to the group's head company, because under the consolidation regime, they are the only recognised taxpayer in respect of the group.

Sub Co, a subsidiary member of a consolidated group headed by the taxpayer, owned a building used in the group's business activities.

Subsequently, the group's businesses outgrew the building, and it was sold by Sub Co to an unrelated party.

CGT event A1 in section 104-10 of the ITAA 1997 happens if 'you' dispose of a CGT asset. You dispose of an asset 'if a change of ownership occurs from you to another entity': subsection 104-10(2) of the ITAA 1997. In this case, the actual disposal is from Sub Co, as the asset's legal owner, to the purchaser. Therefore, if Sub Co was not a member of a consolidated group, CGT event A1 would happen to Sub Co.

However, Sub Co is a member of a consolidated group which is taxed as a single entity. Under the single entity rule in section 701-1 of the ITAA 1997, subsidiary members of a consolidated group are taken to be parts of the group's head company (and not separate entities) for the purpose of working out the group's income tax liability. That is, the head company is treated as a divisional company, with each subsidiary member being a division of the head company. Essentially, this means that the subsidiaries are not recognised for income tax purposes while they are group members.

While this does not disturb the true legal position (which in this case is that Sub Co is the owner of the asset), it ensures that, for the purpose of working out the head company's income tax liability, assets of a subsidiary are taken to be assets of the head company and actions of a subsidiary are treated as actions of the head company.

Therefore, the disposal is taken to be a disposal by the head company and, as a result, CGT event A1 happens to the taxpayer.