ATO ID 2004/238: Income Tax: Consolidation - tax cost setting amounts and elements of cost base and reduced cost base for capital gains tax purposes
Date of decision: 8 March 2004
Year of income: Year ended 30 June 2003
Business line: Consolidation Centre of Expertise

Issue
Does the tax cost setting amount for each asset subject to the cost base and reduced cost base modification in subsection 701-55(5) of the Income Tax Assessment Act 1997 (ITAA 1997) become the first element of the cost base and reduced cost base for the asset when it becomes an asset of the taxpayer, the head company of a consolidated group, because subsection 701-1(1) of the ITAA 1997 applies?

Decision
Yes. For each asset to which subsection 701-55(5) of the ITAA 1997 applies, the asset's tax cost setting amount becomes the first element of its cost base and reduced cost base for the taxpayer, the head company of a consolidated group, when it becomes the taxpayer's asset because subsection 701-1(1) of the ITAA 1997 applies.

Facts
Head Co capitalised Subsidiary Co for $300,000 in August 2001. Sub Co immediately bought: At the end of Subsidiary Co's first income year the depreciating asset gave rise to a deduction of $8,000. Subsidiary Co did not earn any income during this period resulting in a tax loss of $8,000 for the first income year. Head Co and Subsidiary Co formed a consolidated group on 1 July 2002. The market values of Sub Co's assets at that date were: The allocable cost amount worked out for Sub Co is $292,000. The amount allocated to the depreciating asset is limited to $12,000. The amount allocated to the land is $176,296 and the amount allocated to the option $103,704. These amounts become the assets' respective tax cost setting amounts.

Reasons for decision
Summary: When a company becomes a member of a consolidated group, subsection 701-55(5) of the ITAA 1997 causes the cost base and reduced cost base of the company's assets to be increased or reduced to equal the tax cost setting amount. Subsection 701-55(5) of the ITAA 1997 does not set out how the cost base and reduced cost base are to be increased or reduced to equal the tax cost setting amount. For example, the subsection does not stipulate whether the tax cost setting amount should be treated as the first element of the asset's cost base and reduced cost base, or whether it should be allocated across their various elements in proportion to the expenditure included in each element just before the company became a member of the consolidated group. In deciding how to apply the provision, guidance may be obtained from other existing provisions in the ITAA 1997. In the context of indexation, subsection 114-15(3) of the ITAA 1997 provides that where a cost base modification reduces the total cost base of a CGT asset, the reduced amount forms a new first element of the cost base, and is later indexed as if expenditure equal to that amount had been incurred in the quarter in which the modification occurred. Similarly, where: An increase or reduction under subsection 701-55(5) of the ITAA 1997 should result in a similar outcome. That is, the tax cost setting amount for the asset replaces the total existing cost base and reduced cost base, and becomes the new first element of the asset's cost base and reduced cost base at the time the asset becomes that of the head company because subsection 701-1(1) of the ITAA 1997 applies. In instances where the tax cost setting amount for an asset equals its cost base or reduced cost base, the tax cost setting amount becomes the new first element of the cost base and reduced cost base of the asset for the head company. The cost base of the land held by Subsidiary Co at the time of joining is $180,000, made up of $150,000 acquisition cost (first element), $10,000 on non-deductible incidental costs (second element) and $20,000 on capital improvements (fourth element). The tax cost setting amount for the land is $176,296. Under subsection 701-55(5) of the ITAA 1997 this amount becomes the new first element of the cost base and reduced cost base of the land for Head Co. The tax cost setting amount for the option is $103,704. Under subsection 701-55(5) of the ITAA 1997 this amount becomes the new first element of the cost base and reduced cost base of the option for Head Co. Accordingly, for each asset to which subsection 701-55(5) applies, the asset's tax cost setting amount becomes the first element of its cost base and reduced cost base for the taxpayer, as head company of the consolidated group, when it becomes the taxpayer's asset because subsection 701-1(1) of the ITAA 1997 applies.

Legislative references: Income Tax Assessment Act 1997 subsection 114-15(3) subsection 124-10(3) subsection 126-5(5) subsection 128-15(4) subsection 701-1(1) subsection 701-55(5)
Subject references: Capital gains tax CGT assets CGT cost base CGT cost base modification rules CGT reduced cost base Consolidation Consolidation - assets Consolidation - capital gains tax Cost setting rules Tax cost setting amount Tax cost setting rules