Consolidation: chosen transitional entity - owned profits in transitional group and adjustment to allocable cost amount

Does an adjustment under section 705-160 of the Income Tax Assessment Act 1997 (ITAA 1997) occur in the first non-chosen subsidiary, where it is above a chosen transitional entity, for a step 3 amount in a non-chosen subsidiary below the chosen transitional entity?

No. Section 705-160 of the ITAA 1997 will not result in adjustments in the allocation of tax cost setting amounts in the first non-chosen subsidiary above a chosen transitional entity where the step 3 amount arises in a non-chosen subsidiary below the chosen transitional entity.

The group is a transitional group as defined by section 701-1 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997).

Head company has made the choice for C Co to be a chosen transitional entity in accordance with section 701-5 of the IT(TP)A 1997.

W Co has a step 3 amount for the purposes of the table in section 705-60 of the ITAA 1997 and in subsection 701-20(5) of the IT(TP)A 1997.

Section 701-20 of the (IT(TP)A 1997 provides that a transitional group's allocable cost amount (ACA) for each non-chosen subsidiary must be worked out in a special way when the group includes a chosen transitional entity. The ACA for each non-chosen subsidiary is the sum of the head company adjusted allocable amount for the non-chosen subsidiary and, for each sub-group that exists in relation to the non-chosen subsidiary, the sum of each sub-group's notional allocable cost amount for the non-chosen subsidiary (subsection 701-20(3) of the IT(TP)A 1997).

This group includes a chosen transitional entity so the ACA for all non-chosen subsidiaries must be calculated according to the rules in section 701-20 of the IT(TP)A 1997.

There are no sub-groups which exist in relation to A Co or B Co. The ACA of A Co and B Co will therefore be determined by the head company adjustable allocable amount for these entities.

In calculating the head company adjustable allocable amount for A Co and B Co, paragraph 701-20(4)(a) of the IT(TP)A 1997 requires the holding of all sub-group membership interests to be disregarded.

The sub-group membership interests in the existing transitional group are the membership interests C Co holds in D Co and the membership interests D Co holds in W Co (paragraph 701-20(6)(b) of the IT(TP)A 1997).

Because the sub-group membership interests are disregarded, the requirements of section 705-160 of the ITAA 1997 cannot be satisfied.

Although A Co (the entity in paragraph 705-160(4)(a) of the ITAA 1997) holds membership interests in B Co (the second entity in paragraph 705-160(4)(b) of the ITAA 1997), B Co does not hold membership interests directly or indirectly in a third entity with a step 3 amount because of paragraph 701-20(4)(a) of the IT(TP)A 1997.

The step 3 amount of W Co under the table in section 705-60 of the ITAA 1997 will not therefore result in any section 705-160 adjustments in the working out of the section 705-35 of the ITAA 1997 tax cost setting amounts in A Co which would affect the calculation of the ACA for B Co in this transitional group.