Issue
For a corporate limited partnership, is the modified market value determined under section 707-325 of the Income Tax Assessment Act 1997 (ITAA 1997) by deducting the assets or attributes from the market value?
Decision
No. Section 707-325 of the ITAA 1997 refers to the market value of the entity after certain attributes are ignored.
Facts
Corporate Limited Partnership (CLP) is included in the definition of a company by section 94J of the Income Tax Assessment Act 1936 (ITAA 1936).
CLP joins a consolidated group on 1 July 2003.
CLP has assets and liabilities at the joining time.
In addition to the above, CLP borrows $1000 from a bank to purchase Subsidiary.
CLP owns 100% of the membership interests in Subsidiary, which also joins the consolidated group on 1 July 2003.
CLP's franking account balance is nil on 1 July 2003.
Reasons for Decision
The formula for determining the modified market value of an entity is found in section 707-325 of the ITAA 1997. The basic rule is found in subsection 707-325(1) of the ITAA 1997. The modified market value of an entity that becomes a *member of a *consolidated group at a particular time is the amount that would be the market value of the entity at that time if:... * denotes a term defined in section 995-1 of the ITAA 1997.
Paragraphs (a) to (d) require you to ignore certain attributes, assets and relationships, including: - losses of any sort - the balance of its franking account - membership interests in other members of group
The market value is determined once those listed assets, liabilities and relationships are ignored. The resultant market valuation is the modified market value.
To determine the modified market value for CLP, we ignore the following attributes or assets: - membership interests held in subsidiary - losses generated by loan
As a result of this process, a balance sheet prepared for CLP (after the items listed above have been ignored) shows liabilities exceeding assets. Subsection 707-325(1) of the ITAA 1997 specifies that market value must be determined on this result. The market value so determined is the modified market value.
Subsection 707-325(1) of the ITAA 1997 does not specify that the amount by which the liabilities exceed the assets is the modified market value.
Note: the market value attributed to a company with these modifications is to be determined by an independent valuer and is a question of fact that cannot be ruled upon by the Taxation Office.