Issue
Does CGT event L5 in section 104-520 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the head company of a consolidated group when an entity ceases to be a subsidiary member of the group and the group's allocable cost amount (ACA) for the leaving entity is not negative?
Decision
No. CGT event L5 does not happen to the head company if the group's ACA for the leaving entity is not negative.
Facts
On 1 July 2005 Head Co sells all of A Co ordinary shares to a third party. A Co ceases to be a subsidiary member of Head Co's consolidated group from that time.
A Co's assets at the leaving time are: • cash $200, and • land $1,000.
A Co's liabilities are: • bank loan of $1,000, and • an intra-group loan from HC of $100 (the market value of the corresponding asset of HC is $100).
At the leaving time the bank loan and intra-group loan remain outstanding. Table 1: A Co - Statement of Financial Position of A Co at 1 July 2005 ($) Cash 200 Equity 100 Land 1,000 Loan liability to Head Co 100 _____ Bank Loan 1,000 1,200 1,200
Cash | 200 | Equity | 100
Land | 1,000 | Loan liability to Head Co | 100
_____ | Bank Loan | 1,000
1,200 | 1,200
Reasons for Decision
Subsection 104-520(1) of the ITAA 1997 provides that CGT event L5 happens if: (a) an entity ceases to be a *subsidiary member of a *consolidated group or a *MEC group; and (b) in working out the group's *allocable cost amount for the entity, the amount remaining after applying step 4 of the table in section 711-20 is negative. * denotes a term defined in subsection 995-1(1) of the ITAA 1997
If the ACA is negative after applying step 4 of the table in section 711-20 of the ITAA 1997, then the head company of the group makes a capital gain equal to the amount remaining.
When A Co leaves, Head Co's consolidated group, the cost of membership interests that the head company holds in A Co is set just before A Co ceases to be a subsidiary member of the group. The tax cost of the membership interests is set at the interests' tax cost setting amount. The tax cost setting amount of the membership interests is worked out by determining the old group's ACA for A Co in accordance with section 711-20 of the ITAA 1997, then allocating the result to each of the membership interests in A Co.
Table 2 (below) sets out the exit ACA calculation for Head Co's membership interests in A Co. Table 2: Exit ACA calculation for A Co ($) Step 1 Add terminating value of assets: 1,200 Cash 200 Land 1,000 Step 4 Less liabilities: (1,100) Bank Loan 1,000 Intra-group liability (Loan liability to Head Co) 100 _____ Exit ACA 100
Step 1 | Add terminating value of assets: | 1,200
Cash | 200
Land | 1,000
Step 4 | Less liabilities: | (1,100)
Bank Loan | 1,000
Intra-group liability (Loan liability to Head Co) | 100 | _____
Exit ACA | 100
The ACA of $100 is allocated to the membership interests. The tax cost setting amount of the membership interests in A Co is $100.
Therefore, CGT event L5 does not happen to Head Co, because the ACA, after applying step 4 of the table in section 711-20 of the ITAA 1997, is not negative.