Private ruling: Retained cost base assets
Date of advice: 19 October 2023
Published: 27 November 2023
Ruling period: The year ending 30 June 2024
Date scheme commenced: The date that Company A joins the Company B income tax consolidated group.

Ruling: Q1: Are the "Commission Receivable" asset and the "Indemnity Asset" recognised in Company A's statement of financial position for the year ended 30 June 2023 retained cost base assets as defined in paragraph 705-25(5)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are the "Commission Receivable" asset and "Indemnity Asset" recognised in Company A's financial statement of position for the year ended 30 June 2023 retained cost base assets as defined in paragraph 705-25(5)(a), paragraph 705- 25(5)(ba), paragraph 705-25(5)(c) or paragraph 705-25(5)(e) of the ITAA 1997? | A2: No. | Q3: Does the "Commission Receivable" asset recognised in Company A's statement of financial position for the year ended 30 June 2023 satisfy the definition of a retained cost base asset in paragraph 705-25(5)(d) of the ITAA 1997? | A3: Yes. | Q4: Does the "Indemnity Asset" recognised in Company A's statement of financial position for the year ended 30 June 2023 satisfy the definition of a retained cost base asset in paragraph 705-25(5)(d) of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: All references are to the Income Tax Assessment Act 1997 (unless otherwise stated). Background 1. Company A operates a network of firms which provide financial advice and financial products to retail clients through businesses licensed by Company A to be authorised representatives under Company A's Australian Financial Services Licence (AFSL). 2. Company C entered into an agreement for the sale of all the shares in Company A to Company B (85%) and Company D (as trustee) (15%). Indemnity Asset 3. In connection with the sale of all the shares in Company A to Company B (85%) and Company D (as trustee) (15%), an Indemnity Deed was entered into between Company C and Company B (in respect of Company A) under which Company C agreed to provide an indemnity to cover specific ongoing remediation liabilities of Company A. 4. The estimated cost of remediating these issues and the amount recoverable in respect of these costs from Company C has been recorded as a Provision for remediation liability and a (corresponding) Indemnity Asset (respectively) by Company A in its stand-alone financial statements (and by Company B in its consolidated financial statements). 5. The notes to the Company B consolidated financial statements state that the Indemnity Asset that any change in the Provision for remediation liability results in a corresponding change in the Indemnity Asset to the effect that these balances offset each other. The notes also state that: a. amounts recoverable under the Indemnity Asset are expected to be assessable for tax purposes; and b. amounts payable under the Provision for remediation liability are expected to be deductible for tax purposes 6. For income tax purposes the Indemnity Asset represents a right to receive a future assessable amount that will be assessable at the time received or derived and the Provision for remediation liability represents a future deductible amount that will be deductible at the time paid or incurred. Commission Receivable 7. Company A operates a network of firms which provide advice and products to retail clients through businesses licensed by Company A to be authorised representatives under Company A's License. 8. Under contractual agreement an entity (firm) is appointed an Authorised Representative of Company A to provide the Authorised Services listed in the Certificate of Authorisation with; a. Company A authorised (as licensee) to receive all trail commissions payable on products sold to retail clients by its authorised representatives (with this recorded in the accounts as a Commission Receivable asset); b. Company A charges its authorised representatives fees for operating under its licence (and is authorised to deduct these fees from this commission if they are outstanding); c. Company A also receives a percentage of the commissions payable on products sold to retail clients by the authorised representative; d. Company A must pay the remaining amount (of commission) to the authorised representative (with this recorded in the accounts as a Commission Payable liability). 9. A Commission Receivable asset for the estimated (net present value) of future trail commission income to be received by Company A for products sold by its authorised representatives has been recorded by Company A in its stand-alone financial statements based on assumptions regarding the remaining life of the product and the likely run off of products over time. 10. A (corresponding) Commission Payable liability for the remaining amount of commission payable by Company A to its authorised representatives has been recorded by Company A in its stand-alone financial statements. 11. For income tax purposes the Commission Receivable asset represents a right to receive a future assessable amount that will be assessable on receipt (or at time derived) and the Commission Payable liability represents an obligation to pay a future deductible amount that will be deductible at the time it is paid or incurred. Company A is expected to join the Company B tax consolidated group 12. The (remaining) 15% shares in Company A are expected to be acquired by Company B from Company D in the 2024 income year at which time Company A will qualify as a wholly owned subsidiary of Company B and join the Company B tax consolidated group (TCG) under Division 705. 13. For income tax purposes the Provision for remediation liability and the Commission Payable liability recorded by Company A are deductible liabilities as defined in subparagraph 705-70(1AA)(b). This means subsection 705-70(1AB) will apply to prevent the amount of these liabilities (as recorded by Company A for accounting purposes at the time it joins the Company B TCG) from being included in Step 2 of the Division 705 allocable cost amount calculation. 14. Neither Company A nor Company B are subject to Division 230.


Reasons for decision: Summary: A paragraph 705-25(5)(b) retained cost base asset is a right to receive a specified amount of Australian currency, other than a right that is a marketable security within the meaning of section 70B of the Income Tax Assessment Act 1936 . Pursuant to Taxation Ruling 2005/10 Income tax: consolidation: retained cost base assets consisting of Australian currency or a right to receive a specified amount of such currency (TR 2005/10) a paragraph 702-25(5)(b) right to receive a specified amount of Australian currency retained cost base asset is an indefeasible, present right to the actual or constructive receipt of a fixed, nominal amount of Australian currency. The Commission Receivable asset being an estimate of the future trail commissions Company A is to receive in respect of financial products sold by its authorised representatives is not a present right to a fixed nominal amount of Australian currency. The indemnity asset being an estimate of the amount recoverable from Company D in respect of the cost of claims to be made against and payable by Company A is (likewise) not a present right to a fixed nominal amount of Australian currency. Therefore paragraph 705-25(5)(b) has no application. Paragraph 705-25(5)(a) applies to "Australian currency, other than trading stock or collectables of the joining entity". Paragraph 705-25(5)(ba) applies to a unit in a cash management trust, if: (i) the redemption value of the unit is expressed in Australian dollars; and (ii) the redemption value of the unit cannot increase; Paragraph 705-25(5)(c) applies to a right to have something done under an arrangement under which: (i) expenditure has been incurred in return for the doing of the thing; and (ii) the thing is required or permitted to be done, or to cease being done, after the expenditure is incurred; Paragraph 705-25(5)(e) applies to a depreciating asset that the joining entity holds as a result of a balancing adjustment event mentioned in paragraph 417-30(2)(b). None of the above definitions apply to the Commission Receivable asset or the Indemnity Asset. A paragraph 705-25(5)(d) retained cost base asset is a * right to future income (other than a " WIP amount asset ). A * right to future income is defined in subsection 701-63(5) and a * WIP amount asset in subsection 701-63(6) as follows: Section 701-63 Right to future income and WIP amount asset 701-63(5) A *right to future income is a valuable right (including a contingent right) to receive an amount if: (a) the valuable right forms part of a contract or agreement; and (b) the * market value of the valuable right (taking into account all the obligations and conditions relating to the right) is greater than nil; and (c) the valuable right is neither a * Division 230 financial arrangement nor a part of a Division 230 financial arrangement; and (d) it is reasonable to expect that an amount attributable to the right will be included in the assessable income of any entity at a later time. 701-63(6) WIP amount asset means an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in paragraph 25-95(3)(b) for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work. The Commission receivable asset is a right to future income as defined in subsection 701-63(5) as it is a valuable right to receive an amount that arises under or forms part of the agreement(s) between Company A and each of its Authorised Representatives, it has a market value of greater than nil, it is not a *Division 230 financial arrangement and (on receipt or derivation) it will give rise to section 6-5 assessable income in Company A's hands. The Commission receivable asset or the portion of this asset that Company A does not have to pay to its' authorised representatives (the portion it is entitled to retain) is not a WIP amount asset as defined in subsection 701-63(6) as it is not in respect of any identifiable work (labour) that has been performed by one or more natural persons (as employees etc of Company A) for a third entity or customer (Authorised Representative member firm) but not to a stage where a recoverable debt has arisen. The Commission Receivable asset is therefore a paragraph 705-25(5)(d) retained cost base asset and will (pursuant to subsection 705-25(4B)) receive a tax cost setting amount equal to its *terminating value (as defined in section 705-30) at the joining time (of nil). As discussed in Question 3 above, for paragraph 705-25(5)(d) to apply to the Indemnity Asset it must be a right to future income (as defined in subsection 701-63(5)) that is not a WIP amount asset (as defined in subsection 701-63(6)). It has been submitted by the applicant that as the Indemnity Asset is effectively a right to reimbursement of the remediation costs that must first be paid or incurred by Company A before the right arises as a (legally enforceable) debt or receivable, it is inseparable from the Provision for remediation liability and incapable of being dealt with as a standalone asset such that (as no reasonable person would pay an amount for an asset and (related) liability with a net value of nil) it has a market value of nil. On this basis paragraph 705-25(5)(d) is said (by the applicant) to not apply to the CBA Indemnity Asset as (due to it failing the paragraph 701-63(5)(b) the *market value of the valuable right (taking into account all the obligations and conditions relating to the right) is greater than nil criteria) it is not a right to future income as defined in subsection 701-63(5). As stated by Kitto J in National Trustees Executors and Agency Co of Australasia Ltd v Federal Commissioner of Taxation (1954) 91 CLR 540 at 583; "It may be said categorically that alienability is not an indispensable attribute of a right of property according to the general sense which the word 'property' bears in the law." There is also no valuation principle, literature or standard that says an intangible asset must be able to be sold separately from any other assets (must be capable of being sold as a standalone asset) to be able to be valued [1] , there being many such intangible assets for which a fair value is determined for accounting purposes. In this regard it should also be noted that fair value under the International Financial Reporting Standards (IFRS) is consistent with market value as defined in the International Valuation Standards (IVS) Framework such that the fair value of an (intangible) asset as determined in accordance with IFRS 13 Fair Value Measurement (AASB 13 Fair Value Measurement) will also be the market value of the (intangible) asset under IVS. Whilst the (precise) meaning of taking into account all the obligations and conditions relating to the right in paragraph 701-63(5)(b) has not been addressed by the Commissioner, where these obligations and conditions are said to take the form of an accounting liability recognised by the entity (that holds the valuable right) section 705-58 Assets and liabilities not set off against each other may (arguably) be relevant for asset identification purposes although regard needs to be had to developments in the law (since this provision enacted) such as (relevantly) the exclusion of deductible accounting liabilities (the Provision for remediation liability) and deferred tax liabilities from Step 2 of the Division 705 entry allocable cost amount calculation. On the basis the Provision for remediation liability is not an obligation or condition relating to the Indemnity Asset that must be taken into account in determining its market value, the Indemnity Asset meets the definition of a right to future income in subsection 701-63(5) as it is a valuable right to receive an amount that arises under or forms part of a contract or agreement (the Indemnity Deed), it has a market value of greater than nil ($XX million as at 30 June 2023 for AASB 132 and AASB 13 purposes), it is not a *Division 230 financial arrangement (noting the subsection 230-460(8) exception for guarantees and indemnities) and (on receipt or derivation) it will give rise to section 6-5 assessable income in Company A (or Company B (as head company)) hands. Subsection 701-63(6) WIP amount asset does not apply to the Indemnity Asset as it is not in respect of any identifiable work (labour) that has been performed by one or more natural persons (as employees etc of Company A) for a third entity (customer) but not to a stage where a recoverable debt has arisen. As such the Indemnity Asset is a paragraph 705-25(5)(d) retained cost base asset and will (pursuant to subsection 705-25(4B)) receive a tax cost setting amount equal to its *terminating value (as defined in section 705-30) at the joining time (of nil). Note : Even if the Indemnity Asset is treated (in accordance with the applicant's submissions) as having a market value of nil (such that the answer to this Question 4 is no) the same outcome of a NIL tax cost setting amount for the Indemnity Asset will still arise. This is because the Indemnity Asset as a section 705-35 reset cost base asset will have a market value of nil and (as a result) none of the allocable cost amount (ACA) of Company A (worked out excluding the (deductible) Provision for remediation liability from Step 2 of Division 705) will (pursuant to paragraph 705-35(1)(c)) be allocated to it resulting in it having a tax cost setting amount of nil. [1] Robert F. Reilly Identification and valuation of commercial intangible assets Journal of the Intellectual Property Society of Australia and New Zealand (78) September 2009 50 - 64 at 57.

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