Income Tax: Consolidation - depreciating assets

Can section 701A-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) apply to a head company in respect of an internally created asset that is a depreciating asset in the hands of a joining entity, though it was not a depreciating asset for income tax purposes in the hands of the entity that created the asset?

Yes, but the section can only apply to internally created assets which meet the income tax definition of a depreciating asset applying at the joining time during the whole of their existence.

On 1 July 2002, Head Company X forms a consolidated group with its wholly owned subsidiaries, Company B and Company C.

Company B created an asset which has not always met the definition of a depreciating asset in accordance with the income tax definition of a depreciating asset applicable at the joining time.

The asset was transferred to Company C before the group consolidated.

Company C holds it as a depreciating asset.

Subsection 701A-10(1) of the IT(TP)A 1997 only applies to depreciating assets. This is because paragraph 701A-10(1)(a) of the IT(TP)A 1997 refers to 'a depreciating asset'. Subsequent references within the section to 'the asset' obtain their meaning from the first use of the term 'asset' in paragraph 701A-10(1)(a) of the IT(TP)A 1997 being a 'depreciating asset'.

The internally created asset must have had the characteristics of a depreciating asset as defined under section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997) during the whole of its existence. The internally created asset must also be an asset within the meaning of that term under subsection 705-35(1) of the ITAA 1997.

In this instance, Company B's internally created asset was an identifiable source of value to C and was therefore an asset for the purposes of subsection 705-35(1) of the ITAA 1997. However, it did not meet the definition of a depreciating asset under section 40-30 of the ITAA 1997 continuously from the time of its creation. It may not have met the definition of a depreciating asset under section 40-30 because it was held as trading stock or for some other reason that excluded it from the definition. Therefore, section 701A-10 of the IT(TP)A 1997 will not apply to Head Company X even though Company C holds the asset as a depreciating asset at the joining time.