Consolidation: the exit history rule and time of acquisition of an asset

A unit trust ceases to be a subsidiary member of a consolidated group taking with it capital gains tax (CGT) assets previously held by the head company for income tax purposes under the single entity rule (SER) in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997). For the purpose of applying section 115-25 of the ITAA 1997 to gains made on the disposal of the assets by the unit trust after leaving the consolidated group will the exit history rule in section 701-40 of the ITAA 1997 deem the trustee of the unit trust to have acquired the assets at the time they were acquired by the head company.

Yes, for the purpose of applying section 115-25 of the ITAA 1997 to any gains made on disposal of the assets by the trustee of the unit trust, the exit history rule in section 701-40 of the ITAA 1997 will deem the trustee to have acquired the assets at the time acquired by the head company.

A unit trust ceases to be a subsidiary member of a consolidated group and leaves the group taking with it CGT assets previously held by the head company for income tax purposes under the SER in section 701-1 of the ITAA 1997.

The trustee of the unit trust disposes of one (or more) of these assets after leaving the group and wishes to apply section 115-25 of the ITAA 1997 to the gain that results from the CGT event.

Under section 115-25 of the ITAA 1997 a gain that results from a CGT event will be a discount capital gain if the CGT asset was acquired by the entity making the gain at least 12 months before the CGT event.

The head company had acquired, or was deemed to have acquired (under the SER or the entry history rule in section 701-5 of the ITAA 1997) the CGT asset more than 12 months before the CGT event that arises as a result of the disposal of the asset by the trustee.

When the trustee of the unit trust disposes of a CGT asset after leaving the consolidated group the trustee may need to know the time of acquisition of the asset for the purpose of applying section 115-25 of the ITAA 1997.

Section 115-25 of the ITAA 1997 states that to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the gain at least 12 months before the CGT event. The time of acquisition of a CGT asset is determined under Division 109 of the ITAA 1997.

Under subsection 701-40(1) of the ITAA 1997 the exit history rule applies to assets, liabilities or any business (eligible asset) that becomes that of an entity when it ceases to be a subsidiary member of a group. Subsection 701-40(3) of the ITAA 1997 states that everything that happened in relation to any eligible asset while it was that of the head company, including because of any application of section 701-5 of the ITAA 1997 (the entry history rule), is taken to have happened to the eligible asset as if it had been an eligible asset of the leaving entity.

In relation to any eligible asset that becomes that of the trust on leaving the consolidated group, the exit history rule in section 701-40 of the ITAA 1997 will deem the trustee to have acquired the asset at the time the head company was recognised as having acquired the asset for the purpose of Division 109 of the ITAA 1997.

Where the trustee disposes of a CGT asset after leaving the consolidated group and the asset was recognised as having been acquired by the head company under Division 109 of the ITAA 1997 at least 12 months before the time of the CGT event that arises as a result of the disposal of the asset by the trustee, then for the purpose of section 115-25 of the ITAA 1997 the trustee will be deemed to have acquired the asset at least 12 months before the time of the CGT event.