ATO ID 2007/37: Consolidation: entry history rule - head company's entitlement to deductions for capital expenditure previously incurred by a subsidiary member
Date of decision: 21 December 2006
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007
Business line: Consolidation Centre of Expertise

Issue
Under the entry history rule, is the head company of a consolidated group entitled to deductions under Subdivision 40-F of the Income Tax Assessment Act 1997 (ITAA 1997) where:

Decision
Yes. The effect of the entry history rule in section 701-5 of the ITAA 1997 is that the head company is entitled to claim deductions under Subdivision 40-F of the ITAA 1997 in respect of this capital expenditure, incurred prior to the joining time, by the entity.

Facts
In the year ended 30 June 2005, ACo incurred capital expenditure on the construction and maintenance of a dam that was used to conserve and convey water for the use of other entities that were conducting primary production businesses. At the time that the expenditure was incurred, ACo was an irrigation water provider (as defined in subsection 40-515(6) of the ITAA 1997) and the dam was a water facility (as defined in subsection 40-520(1) of the ITAA 1997). On 1 July 2005, ACo became a subsidiary member of a consolidated group (the 'BCo group'). BCo is the head company of the BCo group.

Reasons for decision
Summary: Section 701-5 of the ITAA 1997, which contains the entry history rule, states: For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company. * Denotes a term defined in section 995-1 of the ITAA 1997. The head company core purposes set out in subsection 701-1(2) of the ITAA 1997 are working out the head company's liability to income tax or a loss of the head company for an income year. Paragraph 2.32 of the Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No.1) 2002 (the EM) states that: As a consequence of the entry history rule a head company may be entitled to certain deductions for expenditure incurred by a joining entity prior to it joining the group. Examples are entitlements to deductions for expenditure on borrowing expenses, gift deductions (where the entitlement to the deduction is spread), water facilities, connecting power or telephone lines, certain business related costs and expenditure allocated to a project pool. The EM confirms that it is intended that the entry history rule encompasses entitlements for deductions (including deductions in respect of water facilities) in respect of expenditure incurred by an entity before it becomes a subsidiary member of a consolidated group. BCo is therefore entitled to deductions under Subdivision 40-F of the ITAA 1997 in respect of the capital expenditure incurred prior to the joining time by ACo.

Legislative references: Income Tax Assessment Act 1997 subsection 701-1(2) section 701-5 Subdivision 40-F
Related ATO interpretative decisions: ATO ID 2007/35 | ATO ID 2007/36
Other references: Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No.1) 2002 Paragraph 2.32. Consolidation reference manual (26 October 2005 edition) at C9-5-150 .
Subject references: Consolidation - joining Decline in value Deductions for depreciating assets Inherited history rules Joining entity Water conservation & conveying expenses