ATO ID 2007/50: Consolidation - retained cost base assets - identification of
Date of decision: 8 March 2007
Year of income: Year ended 30 June 2005
Business line: Consolidation Centre of Expertise

Issue
Where a right to have something done under a contract qualifies as a retained cost base asset of the joining entity at the joining time under paragraph 705-25(5)(c) of the Income Tax Assessment Act 1997 (ITAA 1997), should the entirety of the contract be treated as a single retained cost base asset under that provision?

Decision
No. Where a right to have something done under a contract qualifies as a retained cost base asset of the joining entity at the joining time under paragraph 705-25(5)(c) of the ITAA 1997, the entirety of the contract should not be treated as a single retained cost base asset under that provision.

Facts
SubCo (the joining entity) entered into a contract with XCo (an unrelated party), the term of the contract being 20 years. Under the contract: SubCo chose to pay the prepayment upon entering into the contract. Later, SubCo became a subsidiary member of a consolidated group headed by HCo.

Reasons for decision
Summary: In order for the contract to qualify as a single retained cost base asset, it would be necessary for the contract to constitute a single, separately identifiable asset of SubCo at the joining time. This is consistent with the discussion in Taxation Ruling TR 2005/10, which explains (in the context of paragraphs 705-25(5)(a) and 705-25(5)(b) of the ITAA 1997) that a retained cost base asset must be an asset of a joining entity at the joining time and one that is separately identifiable (paragraphs 4 and 12 of TR 2005/10). The meaning of an asset is undefined for the purposes of Part 3-90 of the ITAA 1997. However, guidance on the meaning of an asset for Part 3-90 purposes is provided in Taxation Ruling TR 2004/13. TR 2004/13 explains that: 4. Assets are recognised for the purpose of the consolidation cost setting rules on the basis that a head company of a consolidated group is acquiring a joining entity. All the assets of the joining entity therefore need to be identified. The total costs (both direct and indirect) of acquiring the joining entity are allocated to the underlying assets of the joining entity. 5. Accordingly, an asset for the purpose of the tax cost setting rules is anything recognised in commerce and business as having economic value to the joining entity at the joining time for which a purchaser of its membership interests would be willing to pay. This is consistent with the discussion in Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No.1) 2002, at paragraph 5.19 as to what constitutes an asset for Part 3-90 of the ITAA 1997 purposes: An asset, for the purpose of the cost setting rules, is anything of economic value which is brought into a consolidated group by an entity that becomes a subsidiary member of the group. In the present case, the contract would be something that a purchaser of SubCo's membership interests would be willing to pay for. Accordingly, the contract qualifies as an asset of SubCo at the joining time. The remaining issue is whether the contract is a single, separately identifiable asset. Paragraph 26 of TR 2004/13 states that 'the extent to which the assets of the entity should be separately identified or treated as composite assets would depend on the nature of the asset and the business being carried on by the entity and the circumstances of the particular case.' Taxation Ruling TR 2004/13 implies that where an asset is recognised for income tax purposes then that may also be indicative of the extent to which the assets of a joining entity should be separately identified (paragraph 33 of TR 2004/13). For example, the capital gains tax (CGT) treatment of assets may be instructive (see for example, paragraphs 26 and 33 of TR 2004/13). Taxation Determination TD 93/86 states that for CGT purposes, the totality of rights under a contract are generally considered to be the one asset. However, 'whether all of the rights comprise one single asset, or each right is a separate asset, will depend on the facts of each case' (paragraph 1 of TD 93/86). Paragraph 705-25(5)(c) of the ITAA 1997 implicitly identifies 'a right to have something done under an arrangement' as a separately identifiable asset in certain circumstances. In the present case, the contract consists of a set of rights and obligations. All rights to the provision of entitlements which arise under the contract by reason of the prepayment qualify as a retained cost base asset under paragraph 705-25(5)(c) of the ITAA 1997. Paragraph 705-25(5)(c) provides that a retained cost base asset includes: The requirements in paragraph 705-25(5)(c) of the ITAA 1997 are satisfied in the present case because: SubCo's rights that qualify as a retained cost base asset under paragraph 705-25(5)(c) of the ITAA 1997 do not constitute the full set of rights under the contract. Thus, the entirety of the contract cannot qualify as a single, separately identifiable asset for the purposes of Part 3-90 of the ITAA 1997 and hence it is not a single retained cost base asset under paragraph 705-25(5)(c). Subsection 705-35 of the ITAA 1997 explains that a reset cost base asset is an asset that is neither a retained cost base asset nor an excluded asset (defined under subsection 705-35(2) of the ITAA 1997 to mean an asset in respect of which the joined group's allocable cost amount (ACA) for the joining entity is required to be reduced). The remaining bundle of rights under the contract do not qualify as a retained cost base asset under paragraphs 705-25(5)(a) to 705-25(5)(c) of the ITAA 1997; nor is it an excluded asset under subsection 705-35(2) of the ITAA 1997 (since the joined group's ACA for SubCo is not required to be reduced in respect of the remaining bundle of rights). Accordingly, the remaining bundle of rights under the contract qualify as a reset cost base asset.

Legislative references: Income Tax Assessment Act 1997 Part 3-90 paragraph 705-25(5)(a) paragraph 705-25(5)(b) paragraph 705-25(5)(c) section 705-35 subsection 705-35(2)
Related public rulings and determinations: Taxation Determination TD 93/86 | Taxation Ruling TR 2004/13 | Taxation Ruling TR 2005/10
Other references: Explanatory Memorandum to New Business Tax System (Consolidation) Bill (No.1) 2002
Subject references: Consolidation - assets Cost setting rules Joining entity Joining time Retained cost base asset Tax cost setting rules