ATO ID 2012/43: Consolidation: allocable cost amount and the TOFA transitional balancing adjustment
Date of decision: 8 May 2012
Year of income: Income Year Ended 30 June 2011
Business line: Consolidation Centre of Expertise

Issue
Where: in calculating the entry allocable cost amount (ACA) under section 705-60 of the ITAA 1997, does the step 7 calculation in section 705-115 of the ITAA 1997 include an amount in respect of the inherited TBA deductions?

Decision
Yes. The step 7 calculation in section 705-115 of the ITAA 1997 includes an amount in respect of the inherited TBA deductions in calculating the ACA under section 705-60 of the ITAA 1997.

Facts
A Co (who is not a member of a consolidated group) acquired financial arrangements before 1 July 2010. The taxation of financial arrangements (TOFA) rules in Division 230 of the ITAA 1997 applied to A Co from 1 July 2010. A Co made an election, under sub-item 104(2) of Schedule 1 to the TOFA Act, to apply Division 230 of the ITAA 1997, from 1 July 2010, to its existing financial arrangements. As a result, A Co had amounts it could deduct in respect of the TBA. H Co, a head company of a consolidated group, acquired 100% of the membership interests in A Co on 1 July 2011. At that time, A Co became a subsidiary member of the consolidated group. Under the entry history rule in section 701-5 of the ITAA 1997, H Co inherited the amounts to be deducted after the joining time in respect of the TBA.

Reasons for decision
Summary: All legislative references are to the ITAA 1997. Section 705-115 contains the rules for working out the amount (the step 7 amount) that is subtracted at step 7 in calculating the ACA for a joining entity under section 705-60. The step 7 amount concerns certain deductions that the head company becomes entitled to. The purpose of step 7 is to prevent the joined group from getting benefits from both higher tax cost setting amounts for the joining entity's assets and the deductions inherited by the head company. Step 7 includes deductions covered by subsection 705-115(2) which are any deductions to which the head company becomes entitled to under the entry history rule in section 701-5, other than deductions for expenditure: The inherited TBA deductions in question come within the deductions covered by subsection 705-115(2) and none of the exclusions contained in the subsection apply. Subsection 705-115(1) makes a distinction between 'owned deductions' and 'acquired deductions'. In essence, owned deductions are deductions covered by subsection 705-115(2) that accrued to the joined group and acquired deductions are deductions covered by subsection 705-115(2) other than owned deductions. As H Co did not own any membership interests in A Co before the joining time on 1 July 2011, the inherited TBA deductions are acquired deductions. Consequently, under the formula in subsection 705-115(1), the step 7 amount is calculated by multiplying the inherited TBA deductions by the corporate tax rate.

Legislative references: Income Tax Assessment Act 1997 section 110-40 Division 230 subsection 701-1(1) section 701-5 Subdivision 705-A section 705-60 section 705-115 subsection 705-115(1) subsection 705-115(2)
Subject references: Consolidation Consolidated group Consolidation - joining Head company Joining entity Joining time Allocable cost amount Inherited history rules Acquired deductions Inherited deductions Tax cost setting amount Division 230 Taxation of financial arrangement Financial arrangement Transitional election Balancing adjustment