Issue
Does the tax cost setting amount for each asset subject to the cost base and reduced cost base modification in subsection 701-55(5) of the Income Tax Assessment Act 1997 (ITAA 1997) become the first element of the cost base and reduced cost base for the asset when it becomes an asset of the taxpayer, the head company of a consolidated group, because subsection 701-1(1) of the ITAA 1997 applies?
Decision
Yes. For each asset to which subsection 701-55(5) of the ITAA 1997 applies, the asset's tax cost setting amount becomes the first element of its cost base and reduced cost base for the taxpayer, the head company of a consolidated group, when it becomes the taxpayer's asset because subsection 701-1(1) of the ITAA 1997 applies.
Facts
Head Co capitalised Subsidiary Co for $300,000 in August 2001.
Sub Co immediately bought: land for $150,000, incurring $10,000 on non-deductible incidental costs and $20,000 on capital improvements; a depreciating asset for $20,000; and an option to purchase another piece of land for $100,000.
At the end of Subsidiary Co's first income year the depreciating asset gave rise to a deduction of $8,000. Subsidiary Co did not earn any income during this period resulting in a tax loss of $8,000 for the first income year.
Head Co and Subsidiary Co formed a consolidated group on 1 July 2002.
The market values of Sub Co's assets at that date were: land $170,000; depreciating asset $12,000; and option $100,000.
The allocable cost amount worked out for Sub Co is $292,000. The amount allocated to the depreciating asset is limited to $12,000. The amount allocated to the land is $176,296 and the amount allocated to the option $103,704. These amounts become the assets' respective tax cost setting amounts.
Reasons for Decision
When a company becomes a member of a consolidated group, subsection 701-55(5) of the ITAA 1997 causes the cost base and reduced cost base of the company's assets to be increased or reduced to equal the tax cost setting amount.
Subsection 701-55(5) of the ITAA 1997 does not set out how the cost base and reduced cost base are to be increased or reduced to equal the tax cost setting amount. For example, the subsection does not stipulate whether the tax cost setting amount should be treated as the first element of the asset's cost base and reduced cost base, or whether it should be allocated across their various elements in proportion to the expenditure included in each element just before the company became a member of the consolidated group.
In deciding how to apply the provision, guidance may be obtained from other existing provisions in the ITAA 1997.
In the context of indexation, subsection 114-15(3) of the ITAA 1997 provides that where a cost base modification reduces the total cost base of a CGT asset, the reduced amount forms a new first element of the cost base, and is later indexed as if expenditure equal to that amount had been incurred in the quarter in which the modification occurred.
Similarly, where: a replacement asset roll-over happens to an asset acquired after 19 September 1985 - the cost base or reduced cost base of the original asset becomes the first element of the cost base or reduced cost base (respectively) of the replacement asset (for example, subsection 124-10(3) of the ITAA 1997) a same asset roll-over happens to an asset acquired after 19 September 1985 - the cost base or reduced cost base of the asset becomes the first element of its cost base or reduced cost base (respectively) in the hands of the transferee (for example, subsection 126-5(5) of the ITAA 1997), and an asset acquired after 19 September 1985 passes to a deceased person's legal personal representative or a beneficiary in their estate, the cost base or reduced base of the asset on the day the deceased person died becomes the first element of the cost base or reduced cost base (respectively) of the asset in the hands of the legal personal representative or beneficiary (subsection 128-15(4) of the ITAA 1997).
An increase or reduction under subsection 701-55(5) of the ITAA 1997 should result in a similar outcome. That is, the tax cost setting amount for the asset replaces the total existing cost base and reduced cost base, and becomes the new first element of the asset's cost base and reduced cost base at the time the asset becomes that of the head company because subsection 701-1(1) of the ITAA 1997 applies. In instances where the tax cost setting amount for an asset equals its cost base or reduced cost base, the tax cost setting amount becomes the new first element of the cost base and reduced cost base of the asset for the head company.
The cost base of the land held by Subsidiary Co at the time of joining is $180,000, made up of $150,000 acquisition cost (first element), $10,000 on non-deductible incidental costs (second element) and $20,000 on capital improvements (fourth element).
The tax cost setting amount for the land is $176,296. Under subsection 701-55(5) of the ITAA 1997 this amount becomes the new first element of the cost base and reduced cost base of the land for Head Co.
The tax cost setting amount for the option is $103,704. Under subsection 701-55(5) of the ITAA 1997 this amount becomes the new first element of the cost base and reduced cost base of the option for Head Co.
Accordingly, for each asset to which subsection 701-55(5) applies, the asset's tax cost setting amount becomes the first element of its cost base and reduced cost base for the taxpayer, as head company of the consolidated group, when it becomes the taxpayer's asset because subsection 701-1(1) of the ITAA 1997 applies.