Income tax: consolidation: can the head company of a transitional group make a capital loss under section 104-500 (CGT event L1) of the Income Tax Assessment Act 1997 in respect of a chosen transitional entity?

No. CGT event L1 can only happen where the tax cost setting amounts of assets of the entity are set under Division 705 of Income Tax Assessment Act 1997 (ITAA 1997).

Where a head company makes the choice under section 701-5 of Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) that a transitional entity is a chosen transitional entity, section 701-15 of the IT(TP)A 1997 provides that section 701-10 and subsection 701-35(4) of the ITAA 1997 do not apply to the assets of the chosen transitional entity.

Section 701-10 of the ITAA 1997 provides for the setting of an asset's tax cost for head company core purposes at the asset's tax cost setting amount. This recognises the cost to the head company of such assets as an amount reflecting the group's cost of acquiring the entity. The tax cost setting amounts are worked out in accordance with Division 705 of the ITAA 1997. A reduction in the tax cost setting amount of assets under section 705-57 of the ITAA 1997 (including its application in accordance with Subdivisions 705-B to 705-E), can only occur where section 701-10 of the ITAA 1997 has application to those assets. As the choice to treat an entity as a chosen transitional entity precludes the operation of sections 701-10 and 705-57 of the ITAA 1997, section 104-500 of the ITAA 1997 (CGT event L1) cannot apply.

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: 1 October 2004 Contact officer details have been removed following publication of the final ruling.