Income tax: consolidation tax cost setting rules: step 3 of the allocable cost amount: is the 'retained profits' amount referred to in subsection 705-90(2) a cumulative retained profits balance?

Yes. Undistributed profits are the cumulative retained profits of the joining entity that could be recognised in the joining entity's statement of financial position if that statement were to be prepared as at the joining time. This amount may be limited by subsection 705-90(3) of the Income Tax Assessment Act 1997 (ITAA 1997) and paragraph 705-90(6)(a) and reduced by the operation of paragraph 705-90(6)(b).

Profits are determined in accordance with accounting standards as being the difference between revenue and expenses. Retained profits is the accumulation of those recorded profits which have not been distributed to owners, transferred to reserves, or retrospectively adjusted due to the introduction of new or revised accounting standards. That is, retained profits are increased by net profits and transfers from reserves, they are decreased by losses (if applicable), transfers to reserves and distributions to owners. The resulting cumulative amount is the balance of retained profits. See generally, Leo and Hoggett, 'Company Accounting in Australia', (5th ed.) John Wiley & Sons, Australia, Ltd. at page 114.

On 1 July 2001 BCo is incorporated as a wholly owned subsidiary of ACo for $200.00. For the year ended 30 June 2002 BCo made a profit of $200.00 before tax and paid tax of $60.00. Accordingly at 30 June 2002, BCo would have assets of $340.00 of which $140.00 represents retained profits. For the year ended 30 June 2003 BCo made an accounting loss of $70.00, after creation of a DTA of $30.00 in respect of a tax loss of $100.00. ACo elects to form a consolidated group effective from 1 July 2003.

In the above example, the retained profits balance under subsection 705-90(2) is $70.00 ($140.00 less $70.00).

When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

We invite you to comment on this draft Taxation Determination. Please forward your comments to the contact officer by the due date. Due date: 20 August 2004 Contact officer details have been removed following publication of the final ruling.