ATO ID 2004/727: Consolidation: entry history rule and the tax costs of assets belonging to a chosen transitional entity
Date of decision: 28 July 2004
Year of income: Year ended 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Does the entry history rule in section 701-5 of the Income Tax Assessment Act 1997 (ITAA 1997) have the effect that, if a head company elects that an entity is a 'chosen transitional entity' under section 701-5 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), the tax costs of the assets of that entity are the existing tax costs on the date the head company forms a consolidated group, even though the tax costs of the assets of that 'chosen transitional entity' may have previously been set in accordance with subsection 701-10(4) of the ITAA 1997 when held by another head company of a consolidated group?

Decision
Yes. If the tax costs of an entity's assets were set in accordance with subsection 701-10(4) of the ITAA 1997 when an entity became a member of a consolidated group, the setting of the tax costs form part of the assets' tax history. Under the exit history rule in section 701-40 of the ITAA 1997, the assets' tax histories are inherited by the entity that takes the assets out of the consolidated group. If that entity subsequently becomes a subsidiary member of a new consolidated group and is treated as a 'chosen transitional entity' under section 701-5 of the IT(TP)A 1997 by the new head company, the entity's tax history will include the history of the assets' tax cost setting and subsequent tax cost adjustments while they were the assets of a subsidiary member of the first consolidated group. This history is inherited by the head company of the new consolidated group under the entry history rule in section 701-5 of the ITAA 1997. If the entity was not eligible to be treated as a 'chosen transitional entity' by the new head company, the entry history rule, as it relates to the tax cost of an entity's assets, is overridden by the requirement to have tax costs of the entity's assets set in accordance with subsection 701-10(4) of the ITAA 1997.

Facts
Company A was a wholly-owned subsidiary of HeadCo X. HeadCo X formed a consolidated group on 1 July 2002. HeadCo X did not elect to treat Company A as a 'chosen transitional entity' so the tax costs of Company A's assets were set under the tax cost setting rules. Some months later during the 2002-03 income year, Company A ceased to be a member of HeadCo X's consolidated group when it became a wholly-owned subsidiary of HeadCo Y. Company A left HeadCo X's consolidated group with the same assets as it had when it entered. On 1 July 2003, HeadCo Y formed a consolidated group of which Company A was subsidiary member. HeadCo Y elected to treat Company A as a 'chosen transitional entity'.

Reasons for decision
Summary: HeadCo X formed a consolidated group on 1 July 2002. Its subsidiary, Company A is a 'transitional entity' according to the definition in paragraph 701-1(1)(b) of the IT(TP)A 1997. Consequently, HeadCo X could make the choice to treat Company A as a 'chosen transitional entity', as defined in section 701-5 of the IT(TP)A 1997. HeadCo X did not make the choice to treat Company A as a chosen transitional entity. The tax costs of Company A's assets were set in accordance with the cost setting rules in Division 705 of the ITAA 1997. The setting of the tax costs of Company A's assets becomes part of the tax history of those assets. When Company A ceases to be a member of HeadCo X's consolidated group, it inherits the tax histories of the assets it takes with it under the exit history rule in section 701-40 of the ITAA 1997. On 1 July 2003, HeadCo Y formed a consolidated group, in which Company A became a subsidiary member. Its subsidiary, Company A is a 'transitional entity' according to the definition in paragraph 701-1(1)(b) of the IT(TP)A 1997. HeadCo Y chooses to treat Company A as a 'chosen transitional entity'. Subsection 701-10(4) of the ITAA 1997 will not apply to Company A's assets because of the operation of section 701-15 of the IT(TP)A 1997. HeadCo Y will inherit Company A's tax history under the entry history rule in section 701-5 of the ITAA 1997. This will include the tax costs set for Company A's assets when it had been a subsidiary member of HeadCo X's consolidated group.

Legislative references: Income Tax Assessment Act 1997 section 701-5 subsection 701-10(4) section 701-40 Division 705 section 705-30
Subject references: Chosen transitional entity Consolidation Consolidation - formation Head company Inherited history rules Non-chosen transitional entity Transitional entity