Income Tax: Consolidation: single entity rule and tax cost setting amount of intra-group debt asset

Does the single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) prevent the use of the tax cost setting amount that has been set under section 701-10 of the ITAA 1997 for an intra-group debt asset when the debt is extinguished or otherwise comes to an end in the group?

Yes. The single entity rule in section 701-1 of the ITAA 1997 will prevent the use of the tax cost setting amount of an intra-group asset, including a debt asset.

Finance Co and Borrower Co are wholly owned by Head Co.

Prior to Head Co's election to form a consolidated group, Finance Co lent $100 to Borrower Co.

Head Co and its subsidiaries, including Finance Co and Borrower Co, formed a consolidated group. An ACA (allocable cost amount) was calculated for Finance Co and $100 was allocated to the debt asset, which is a retained cost base asset under section 705-25 of the ITAA 1997.

The debt is subsequently forgiven.

Due to the operation of the single entity rule contained in section 701-1 of the ITAA 1997, the intra group debt asset does not become an asset of the head company. This is because the single entity rule deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group (an entity cannot transact with itself).

Section 701-55 of the ITAA 1997 sets the tax cost of each asset of a joining entity at the asset's tax cost setting amount. This includes assets that do not become assets of the head company because they are not recognised as a consequence of the single entity rule (subsection 701-10(2) of the ITAA 1997).

As a consequence of the non-recognition of these intra-group assets, their tax cost setting amounts cannot be taken into account for the purposes of other provisions of the income tax law. This is expressly reinforced by subsection 701-58(2) of the ITAA 1997, for the avoidance of doubt.