ATO ID 2003/650: Consolidation: chosen transitional entity - CGT event L1
Date of decision: 18 July 2003
Year of income: Year ended 30 June 2003 Year ended 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Can a head company make a capital loss under section 104-500 (CGT event L1) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of an entity that joins a consolidated group and the head company chooses that the entity be a chosen transitional entity?

Decision
No. CGT event L1 can only happen to a head company of a consolidated group where a joining entity has the tax cost setting amount of its assets calculated under Division 705 of ITAA 1997.

Facts
A Company has a wholly owned subsidiary, B Company. A Company acquired the shares in B Company before 20 September 1985. A Company has had a change in majority underlying interests causing these shares to be treated as being acquired after 19 September 1985 by Division 149 of the ITAA 1997. A Company and B Company consolidate. A Company chooses for B Company to be a chosen transitional entity.

Reasons for decision
Summary: For CGT event L1 to occur, a reduction in the tax cost setting amount of assets of an entity that becomes a subsidiary member of a consolidated group under section 705-57 of the ITAA 1997 (or its application under Subdivisions 705-B to 705-E, of ITAA 1997) must have occurred. A reduction in the tax cost setting amount under section 705-57 of the ITAA 1997 occurs when Division 705 of the ITAA 1997 applies to reset the tax costs of the assets of the joining entity. A chosen transitional entity's assets maintain their original tax costs and are not reset. Division 705 of the ITAA 1997 does not apply to the assets of such an entity. In this case, B Company is a chosen transitional entity, and its assets will maintain their original tax costs. As Division 705 of the ITAA 1997 can not apply to a chosen transitional entity, it is not possible to have had a reduction under section 705-57 of the ITAA 1997 in respect of the assets of such an entity. Therefore CGT event L1 is not capable of applying to the head company in respect of a chosen transitional entity. Division 705 of the ITAA 1997 will not apply to Company B and there will be no reduction in the tax cost setting amount of its assets. As a consequence, CGT event L1 will not apply to A Company in respect of B Company, a chosen transitional entity.

Legislative references: Income Tax Assessment Act 1997 Division 149 Division 705 Subdivision 705-B Subdivision 705-C Subdivision 705-D Subdivision 705-E section 104-500 section 705-57
Subject references: Chosen transitional entity Consolidation Consolidation - capital gains tax Head company Tax cost setting amount