ATO ID 2006/38: Consolidation: CGT event L5 where ACA is not negative after step 4
Date of decision: 25 January 2006
Year of income: Year ended 30 June 2006
Business line: Consolidation Centre of Expertise

Issue
Does CGT event L5 in section 104-520 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the head company of a consolidated group when an entity ceases to be a subsidiary member of the group and the group's allocable cost amount (ACA) for the leaving entity is not negative?

Decision
No. CGT event L5 does not happen to the head company if the group's ACA for the leaving entity is not negative.

Facts
On 1 July 2005 Head Co sells all of A Co ordinary shares to a third party. A Co ceases to be a subsidiary member of Head Co's consolidated group from that time. A Co's assets at the leaving time are: A Co's liabilities are: At the leaving time the bank loan and intra-group loan remain outstanding.

Reasons for decision
Summary: Subsection 104-520(1) of the ITAA 1997 provides that CGT event L5 happens if: If the ACA is negative after applying step 4 of the table in section 711-20 of the ITAA 1997, then the head company of the group makes a capital gain equal to the amount remaining. When A Co leaves, Head Co's consolidated group, the cost of membership interests that the head company holds in A Co is set just before A Co ceases to be a subsidiary member of the group. The tax cost of the membership interests is set at the interests' tax cost setting amount. The tax cost setting amount of the membership interests is worked out by determining the old group's ACA for A Co in accordance with section 711-20 of the ITAA 1997, then allocating the result to each of the membership interests in A Co. Table 2 (below) sets out the exit ACA calculation for Head Co's membership interests in A Co. The ACA of $100 is allocated to the membership interests. The tax cost setting amount of the membership interests in A Co is $100. Therefore, CGT event L5 does not happen to Head Co, because the ACA, after applying step 4 of the table in section 711-20 of the ITAA 1997, is not negative.

Legislative references: Income Tax Assessment Act 1997 section 711-20 section 104-520 subsection 104-520(1)
Subject references: Allocable cost amount Consolidation Consolidation - assets Consolidation - exiting Cost setting rules Joining entity Leaving entity Retained cost base asset Tax cost setting amount Tax cost setting rules