Consolidation: retained cost base assets - purchased receivables of a joining entity

Are the rights over discrete debts contained within purchased debt ledgers of the joining entity at the joining time prevented from being retained cost base assets under paragraph 705-25(5)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) because the vendor may 'buy back' those rights in certain circumstances?

No. The rights over discrete debts contained within purchased debt ledgers of the joining entity at the joining time are not prevented from being retained cost base assets under paragraph 705-25(5)(b) of the ITAA 1997 because the vendor may 'buy back' those rights in certain circumstances .

At the joining time, Sub Co's (the joining entity's) assets include rights over discrete debts that had been legally assigned to it prior to the joining time.

The agreement, which effected the assignment of the rights over the debts, set out a number of circumstances in which a 'buy back' of the rights could occur.

Paragraph 705-25(5)(b) of the ITAA 1997 provides that a retained cost base asset includes: (b) a right to receive a specified amount of....Australian currency, other than a right that is a marketable security within the meaning of section 70B of the Income Tax Assessment Act 1936 ....

Taxation Ruling TR 2005/10 explains that the expression 'a right to receive a specified amount of Australian currency' in paragraph 705-25(5)(b) of the ITAA 1997 is a reference to 'an indefeasible, present right to the actual or constructive receipt of a fixed, nominal amount of Australian currency' (paragraphs 9 and 20 of TR 2005/10).

Paragraph 25 of TR 2005/10 states that an indefeasible, present right does not exist where the 'actual right....is liable to be defeated or terminated by the operation of a condition subsequent or conditional limitation'.

Taxation Ruling TR 2005/10 does not explain what the expression 'condition subsequent' means. However, the meaning of that expression is defined in The CCH Macquarie Concise Dictionary of Modern Law (Sydney: CCH Australia Limited, 1988) as 'an event the occurrence of which deprives a previous act of its effect'. The expression is similarly defined in Osborn's Concise Law Dictionary (London: Sweet & Maxwell, 1983) as 'one which destroys or divests the right upon the happening of the event'. Butterworths Concise Australian Legal Dictionary (Sydney: LexisNexis Butterworths, 3 rd ed, 2004) describes a condition subsequent as 'a condition, being a future event upon the occurrence of which the parties agree to terminate their obligations and the relations created by the contract (or either or both of the parties obtain the right to terminate the further performance of the contract) ( National Australia Bank Ltd v. KDS Construction Services Pty Ltd (in liq) (1987) 163 CLR 668; (1987) 76 ALR 27).

The agreement effecting the assignment of the rights over the debts to Sub Co sets out circumstances within which a 'buy back' of those rights may occur. The expression 'buy back' suggests that those circumstances do not deprive the original assignment of its effect (since a 'buy back', or re-assignment, cannot occur unless the original assignment was effective); or terminate the obligations and relations created under the agreement. Therefore, the terms which allow a 'buy back' to occur do not qualify as 'conditions subsequent'.

Accordingly, the fact that the vendor may 'buy back' the rights over the discrete debts in certain circumstances does not in itself prevent those rights from qualifying as retained cost base assets under paragraph 705-25(5)(b) of the ITAA 1997.