Consolidation: capital gains - tax cost setting amount - cost base and reduced cost base - incidental costs

Can incidental costs within paragraph 110-35(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) be included in the cost base and reduced cost base of membership interests in a subsidiary member of a consolidated group that are worked out when the subsidiary leaves the group?

Yes. Incidental costs as defined in paragraph 110-35(1)(b) of the ITAA 1997, paid to an entity that is not a member of the consolidated group, can be included in the cost base and reduced cost base of membership interests in a leaving subsidiary, provided the costs have been incurred in relation to the CGT event that happens on the subsidiary's leaving the group.

HeadCo owns all the membership interests in SubCoX and SubCoY. All three entities form a consolidated group effective from 1 July 2002.

HeadCo disposed of the membership interests in SubCoX to an entity outside the group and, as a result, SubCoX leaves the group on 4 July 2004.

HeadCo engaged a legal adviser (who was not a member of the group) and incurred legal fees of $80,000 in relation to the disposal of the membership interests in SubCoX.

The second element of the cost base and reduced cost base of a CGT asset includes the incidental costs incurred that relate to a CGT event that happens in relation to the asset, (subsection 110-25(3); paragraph 110-35(1)(b) and subsection 110-55(2) of the ITAA 1997). Incidental costs are defined in section 110-35 and include legal fees, the cost of transfer and stamp duty.

On the leaving of a subsidiary member from a consolidated group, the tax cost setting amount of membership interests in the subsidiary (as determined under sections 711-15 or 711-55 of the ITAA 1997 for the purposes of section 701-60 and subsection 701-15(3) of the ITAA 1997) becomes the first element of the cost base and reduced cost base of those interests, (subsection 701-55(5) of the ITAA 1997).

The fact that the first element of cost base and reduced cost base of membership interests in a leaving entity is established under the tax cost setting process described in the previous paragraph does not preclude an amount being added to cost base and reduced cost base in respect of relevant second element expenditure.

The disposal of the membership interests in SubCoX causes CGT event A1 to happen in respect of those interests and the legal fees were incurred in relation to that event. Therefore, in addition to the tax cost setting amount for the membership interests in SubCoX which constitutes the first element of their cost base and reduced cost base, $80,000 can be included as an amount in the second element of their cost base and reduced cost base. It would not matter whether the legal fees were incurred before or after the subsidiary leaves the group, provided they related to the event.