Income tax: consolidation: capital gains: can section 104-530 (CGT event L7) of the Income Tax Assessment Act 1997 only apply if an allocable cost amount is worked out for an entity?

Yes.

Under section 104-530 (CGT event L7) of the Income Tax Assessment Act 1997 (ITAA 1997), if the amount of a liability taken into account in working out the allocable cost amount (ACA) for an entity that becomes a subsidiary member of a consolidated group is later discharged for a different amount (the realised amount), the head company may make a capital loss. A capital loss will arise if the liability is discharged by the head company on or after 1 July 2002 and before 10 February 2010 and the ACA would have been greater had the realised amount been taken into account in working out the ACA.

One of the conditions for CGT event L7 to apply is that a liability of an entity that becomes a subsidiary member of a consolidated group must have been taken into account in working out the ACA for the subsidiary member under Division 705 of the ITAA 1997 (see paragraph 104-530(3)(a) of the ITAA 1997). If an ACA is not worked out for an entity that becomes a subsidiary member of a consolidated group (for example, because it is a chosen transitional entity), CGT event L7 cannot apply to the later discharge of a liability that the entity had when it became a subsidiary member of the group.

This Determination applies to a capital loss under CGT event L7 that arises on or after 1 July 2002 and before 10 February 2010. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).