Issue
Can a deduction be claimed under section 73BA of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to an asset that becomes an asset of the head company under subsection 701-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) upon consolidation?
Decision
Yes. A deduction can be claimed under section 73BA of the ITAA 1936 in relation to an asset that becomes an asset of the head company under subsection 701-1(1) of the ITAA 1997 upon consolidation.
Facts
The company is an 'eligible company', as defined in subsection 73B(1) of the ITAA 1936.
The company undertook 'research and development activities' within the meaning of subsection 73B(1) of the ITAA 1936 from the 1999-2000 income year to the 2003-04 income year.
The company acquired an asset on 1 July 1999 (prior to 29 January 2001) for use in its 'research and development activities'. Deductions were allowed under subsection 73B(15) of the ITAA 1936 in respect of this expenditure, and the expenditure has been claimed in full over the 1999-2000, 2000-01 and 2001-02 income years.
On 1 July 2002, the company became a subsidiary member of a consolidated group and the tax cost of the asset was reset in accordance with subsection 701-10(4) of the ITAA 1997.
Reasons for Decision
Under subsection 701-10(4) of the ITAA 1997, each asset's tax cost is set at the time the entity becomes a subsidiary member of the group at the asset's tax cost setting amount. The expression 'tax cost is set' has the meaning given by section 701-55 of the ITAA 1997, which provides, where • Subdivisions 40-A to 40-D, sections 40-425 to 40-445 and Subdivision 328-D of the ITAA 1997, or • sections 73BA or 73BF of the ITAA 1936
apply in relation to the asset, the expression means, inter alia, that the provisions apply as if the asset were acquired at the particular time for a payment equal to its tax cost setting amount. Here 'particular time' refers to the time of the consolidating event or entry into a consolidated group.
Generally, where the assets tax cost is set by section 701-10 of the ITAA 1997 (cost to head company of assets that entity brings into the group), the asset's 'tax cost setting amount' is worked out in accordance with Division 705 of the ITAA 1997. The tax cost of each asset of a joining entity is based on a share of the allocable cost amount (ACA) of that subsidiary. The ACA consists of the cost of the membership interests in the entity together with its liabilities, which become liabilities of the group. Adjustments are made to reflect certain undistributed profits, distributions and losses of the joining entity and certain deductions to which the head company becomes entitled. Generally, the cost setting process requires market valuing of a joining subsidiary's assets at the joining time.
Once the tax cost of the asset is set, then the head company may be allowed a deduction under Division 40 of the ITAA 1997 and/or section 73BA of the ITAA 1936, in relation to the asset if the requirements for claiming a deduction under those sections have been met. Note: Where expenditure in relation to an asset is being claimed under subsection 73B(15) of the ITAA 1936, and, before the end of the third year, the company becomes a subsidiary member of a consolidated group, the deemed acquisition at the time of the consolidating event will not preclude a deduction being claimed under section 73B(15) of the ITAA 1936 in relation to the asset, so long as the requirements for claiming a deduction under that section continue to be met. However, once the tax cost of the asset has been set, section 73BAF of the ITAA 1936 will operate to prevent a (double) deduction in relation to the asset under Division 40 of the ITAA 1997.