Income tax: consolidation: can a head company make a capital gain under CGT event L5 (section 104-520 of the Income Tax Assessment Act 1997) when a subsidiary member of the group is deregistered after liquidation?

Yes. The head company of a consolidated group will make a capital gain under section 104-520 (CGT event L5) of the Income Tax Assessment Act 1997 [1] where a subsidiary member of that group: (i) ceases to be a subsidiary member as a result of deregistration; and (ii) has unsatisfied debts at the time of deregistration that would result in a negative allocable cost amount (ACA) as calculated under subsection 711-20(1).

This Determination applies 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 75 and 76 of Taxation Ruling TR 2006/10).

Deregistration of a company will result in the company ceasing to be a subsidiary member of a consolidated group. The company is therefore regarded as a 'leaving entity' in terms of Division 711 (refer to Taxation Determination TD 2006/58 [2] ). As a consequence, Division 711 will operate to recognise the head company's cost for membership interests in the company just before deregistration as an amount equal to the cost of the company's assets at that time reduced by the amount of its liabilities. This involves working out the ACA for the company under subsection 711-20(1).

The first three steps in working out the ACA under subsection 711 20(1) concern the calculation of the terminating values of the leaving entity's assets just before the leaving time, the value of deductions inherited by the leaving entity (not reflected in the terminating value of the assets), and the liabilities owed by members of the group to the leaving entity at the leaving time.

Step 4 of the calculation under subsection 711-20(1) requires the subtraction of an amount worked out under section 711-45 from the result of the first three steps. [2A] Subsection 711-45(1) provides that: For the purposes of step 4 in the table in subsection 711 20(1), the step 4 amount is worked out by adding up the amounts of each thing (an accounting liability ) that, in accordance with the leaving entity's *accounting principles for tax cost setting, is a liability of the leaving entity just before the leaving time.

The unsatisfied debts of a liquidated subsidiary at the time of deregistration would be recognised as accounting liabilities under subsection 711-45(1) (refer to Taxation Determination TD 2006/59 [3] ). Therefore, the step 4 amount can exceed the result of the first three steps to produce a negative amount for a liquidated subsidiary.

A negative amount calculated after completing all of the steps in subsection 711-20(1) is an outcome that is contemplated by the note to subsection 711-20(1) which refers to CGT event L5 and states that the head company is taken to have made a capital gain equal to that amount.

Subsection 104-520(1) provides that CGT event L5 happens if: (a) an entity ceases to be a subsidiary member of a consolidated group; and (b) in working out the group's ACA for the leaving entity, the amount remaining after the application of step 4 of the table in subsection 711-20(1) of the ITAA 1997 is negative.

Subsection 104-520(3) provides that the head company will make a capital gain under CGT event L5 equal to the negative amount remaining after the application of step 4 of subsection 711-20(1).