Private ruling: The formation of a consolidated group and deductions available in relation to joining entity's trading stock
Date of advice: 21 January 2016
Published: March 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the head company of a consolidated group take the value of livestock, acquired by a member of the consolidated group prior to the formation of the group, held at the time of formation and disposed of after formation, into account in calculating a deduction or assessable income under section 70-35 of the Income Tax Assessment Act 1997 (Cth)? | A1: Yes

Relevant facts and circumstances: • HeadCo will buy all the shares in SubCo from an unrelated vendor. • SubCo, prior to being acquired, owns livestock. • HeadCo will form a consolidated group with SubCo. • SubCo will, while part of the HeadCo consolidated group, dispose of the livestock to an unrelated third party. • Steps 3-7 of section 705-60 (Entry ACA) are not applicable.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 70-35. | Income Tax Assessment Act 1997 Section 701-10. | Income Tax Assessment Act 1997 Section 701-55(3). | Income Tax Assessment Act 1997 Section 705-35. | Income Tax Assessment Act 1997 Section 705-40. | Income Tax Assessment Act 1997 Section 705-140.

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 (Cth) ('ITAA97') unless otherwise specified. HeadCo meets the requirements to be the head company of a consolidated group. SubCo will be a wholly-owned subsidiary of HeadCo and therefore eligible to be a member of HeadCo's consolidated group. When HeadCo elects to form a consolidated group, a consolidated group will be formed consisting of HeadCo and SubCo. The tax cost setting rules in Subdivision 705-B apply when a consolidated group is formed. These rules refer to the rules in Subdivision 705-A. The Entry Allocable Cost Amount ('Entry ACA') for the group is worked out by taking the cost of SubCo to HeadCo and adding the accounting liabilities of SubCo. The retained cost base assets of SubCo retain their cost bases in the hands of HeadCo. The excess of the Entry ACA over the total of the cost bases of the retained cost base assets must then be allocated to the reset cost base assets of SubCo. On the basis that the share of the Entry ACA allocated to the livestock does not exceed the greater of the livestock's market value or the terminating value for the livestock, the tax cost is that share. The tax cost is deemed to be the value of the livestock at the start of the year of income for the purposes of Division 70 (trading stock). When the livestock is disposed of, this will result in a reduction in the value of livestock held at the end of the year of income, contributing to a deduction (or reducing an amount of assessable income) under section 70-35.