ATO ID 2001/316: Application of Division 58 of the Income Tax Assessment Act 1997 - tracing back to a PABV in the accounts of a predecessor exempt entity
Date of decision: 22 May 2001
Business line: Public Groups and International

Issue
If a transition entity ("TE") chooses under paragraph 58-20(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to calculate depreciation deductions and balancing adjustments under the pre-existing audited book value ("PABV") method, can the TE use the plant values specified in the balance sheet as at 30 June 1996 of a predecessor exempt entity ("HoldCL") as the latest PABVs of that transitional plant?

Decision
Yes. If TE makes this choice, the latest PABV of a transitional unit of plant under section 58-10 of the ITAA 1997 will be an amount equal to the specified value of the unit in HoldCL's balance sheet as at 30 June 1996.

Facts
The arrangement may be summarised as follows:

Reasons for decision
Detailed Reasoning - The tax law:: Under subsection 58-20(1) of the ITAA 1997 a transition entity must, in relation to every unit of transitional plant, choose whether depreciation deductions for periods after the transition time are to be calculated by reference to either (a) the notional written down value of the unit; or (b) the undeducted PABV of the unit. If the transition entity chooses (b), the provisions in sections 58-90 to 58-145 have effect in relation to the unit. The calculation rules in those provisions are based on the PABV of the unit at the test time: see paragraph 58-105(a). The meaning of the PABV of a unit is set out in section 58-10. Under subsection 58-10(1) of the ITAA 1997 a unit of plant is taken to have a PABV equal to its value specified in the balance sheet of an exempt entity as at the balance date where: The provisions of subsection 58-10(1) of the ITAA 1997 do not require the audited balance sheet to be a balance sheet of the transition entity. They only require it to be a balance sheet of an exempt entity. It is the unit of plant - not the exempt entity - that is taken to have the PABV. As a result, a transition entity can rely upon the annual accounts of a predecessor exempt entity to obtain a PABV for a transitional unit if none of the transition entity's own balance sheets satisfies the requirements of section 58-10 of the ITAA 1997. The example at paragraph 3.27 of the explanatory memorandum relating to Division 58 of the ITAA 1997 illustrates this point. It states: A State Government Department owns a number of power stations. The annual accounts of the Department included an audited book value of the depreciable plant in those power stations. The audited book value would satisfy the conditions set out in new subsection 58-10(1). In order to privatise the power stations, the Government Department transfers those power stations to 3 corporatised State Government GBEs. The GBEs are sold to the private sector one month later, before audited accounts are prepared. In this case, the privatised entity may adopt the latest PABV (providing it is before 4 August 1997) of the State Government Department. In this way the provisions of subsection 58-10(1) of the ITAA 1997 give effect to one of the further details announced in Treasurer's Press Release No. 2 of 1998 dated 14 January 1998. In announcing that "a PABV contained in a predecessor exempt entity's accounts may be 'traced through' to successor exempt entities" the Treasurer said: Predecessor entities Privatisations often involve the break-up of an exempt entity ("predecessor exempt entity") through the allocation of its assets to smaller exempt entities ("successor exempt entity"). The ATO has advised that a strict reading of the 4 August announcement would suggest that the vast majority of successor exempt entities would not have a PABV if they were allocated assets from a predecessor exempt entity at any time after 30 June 1996. The Government does not consider that such an outcome would be appropriate. I therefore announce that where there is no PABV of an asset in a successor entity, the purchaser will be entitled to trace back the ownership of the asset through any relevant predecessor exempt entities in order to identify the relevant PABV. | Detailed Reasoning - Applying the tax law to this arrangement:: TE is a transition entity and must make the choice under subsection 58-20(1) of the ITAA 1997 referred to above in relation to every unit of plant that was owned by it at the transition time. If TE makes a choice under paragraph 58-20(1)(b) of the ITAA 1997 in relation to a particular transitional unit, the value specified for that unit in TE's first annual accounts (i.e., balance sheet as at 30 June 1997) will not satisfy the requirements of subsection 58-10(1) because the final audit report on those accounts was not signed by the auditor before 4 August 1997. HoldCL is a predecessor exempt entity of TE in relation to the transitional units. The value specified for a transitional unit in HoldCL's balance sheet as at 30 June 1996 satisfies the requirements of subsection 58-10(1) of the ITAA 1997. Therefore, if TE makes a choice under paragraph 58-20(1)(b) in relation to a transitional unit, the latest PABV of that transitional unit will be an amount equal to the specified value of the unit in HoldCL's balance sheet as at 30 June 1996.

Legislative references: Income Tax Assessment Act 1997 section 58-10 section 58-20 section 58-90 section 58-145
Other references: Explanatory Memorandum relating to Division 58 of ITAA 1997 Treasurer's Press Release No.2 of 1998, dated 14 January 1988.
Subject references: Exempt use of plant