Private ruling: Income Tax - Deductions - Capital vs revenue
Date of advice: 6 February 2017
Published: May 2017
Ruling period: January 20aa to December 20zz
Date scheme commenced: January 20aa

Ruling: A1: Yes. | Q1: Will the partial disposal of the Property be assessed on revenue account due to ABC TCG's underlying profit-making intention, such that: (a) any income/gain related to the disposal would be assessable under section 6-5 of the ITAA 1997; and (b) any outgoings/losses related to the disposal would be deductible under section 8-1 of the ITAA 1997? | A2: Yes. | Q2: If the partial disposal of the Property is assessed on revenue account, can ABC TCG deduct the losses from disposal on a net, rather than a gross, basis at the time of disposal? | A3: Yes. | Q3: If the partial disposal of the Property is assessed on revenue account, can a deduction also be claimed on revenue account for a reverse earnout payment, to the extent it is required to be made by the ABC TCG at the time the ABC TCG becomes definitively committed to that payment, being the income year immediately subsequent to the year for which the earnout payment is calculated? | A4: Yes.

Relevant facts and circumstances: This ruling considers the following information provided by the applicant: ● Private Ruling Application; ● Board Minutes of ABXX Pty Ltd (ABXX); ● Business Sale Agreement (BSA) in respect of the business; ● Land Sale Agreement (LSA) in respect of land; ● Deed of Variation in respect to the BSA and LSA; ● Letter outlining a joint proposal from consultants to ABC in relation to the disposal of the “Relevant Component”; and ● Information Memorandum produced by ABC to market the sale of the “Relevant Component” to potential buyers. ABC's parent company ABC's parent company, ABXX, was established overseas in 19bb and is a company listed on an overseas stock exchange. ABXX operates in the timeshare industry with an international portfolio in popular vacation destinations. ABXX first investigated timeshare opportunities in Australia in 20cc. ABC In 20cc, ABXX incorporated two Australian subsidiaries. These entities were ABC and XYZ Pty Ltd (XYZ). Due to the global financial crisis, ABXX abandoned establishing an Australian timeshare business in late 20dd. ABC and XYZ remained dormant during subsequent income years. With effect from January 20aa, ABC elected to form a tax consolidated group with itself as head company and XYZ as a subsidiary member (ABC TCG). EFG Pty Ltd (EFG) was incorporated as a wholly-owned subsidiary of ABC on in July 20aa and joined the ABC TCG from this date. ABC has a substituted accounting period. Purchase of the Property During the year ended December 20xx, ABXX became aware of an opportunity to acquire a property (the Property), which included a hotel, to establish an Australian based timeshare business (Timeshare Club). The Timeshare Club is a managed investment scheme. EFG is the responsible entity for the Timeshare Club. ABC provides marketing and sales services to XYZ. XYZ will undertake the following activities: a) Identification, acquisition, refurbishment and/or development of suitable properties for the Timeshare Club and contribution of such properties to the Timeshare Club for use in its operations; and b) Undertake services, including but not limited to, sales, marketing and administrative activities on behalf of the Timeshare Club. The property is operated by an international property management company under a management agreement with an initial term of xx years, expiring in December 20yy. It was determined by ABXX that the Timeshare Club would only require a percentage of all available rooms at the property as Timeshare Club rooms (Timeshare Portion). However, it was not possible to individually acquire the portions desired for the Timeshare business. A decision was made to acquire the entirety of the Property with a view to disposing the portion not required for timeshare operations (Relevant Portion) for a profit. Board Minutes of ABXX dated before the acquisition of the Property detail a specific plan to acquire the Property in 20aa that year and to sell the Downsized Property and Development Rights (as explained below) by early the following year. Under the plan detailed in the Board Minutes, ABC would subdivide (by specific title) the Property as follows: ● Timeshare Units: X guestroom floors comprising x rooms to be converted to x timeshare units; ● Downsized Property: A downsized property with x rooms, including ancillary commercial operations (food and beverage and retail outlets, parking, amenities); and ● Development Rights: An area on the Property premises which could accommodate a newly constructed building of approximately x (or possibly more) x bedroom units. XYZ entered into an agreement to acquire the Property in 20ww, with completion occurring a few months later. XYZ then commenced the activities required to subdivide the Timeshare Portion and the Relevant Portion, commenced refurbishments, and market the Relevant Portion as follows. ● Later that year, consultants were retained to find a suitable buyer for the Relevant Portion, with the objective of entering into a binding agreement prior to the end of the year and completion scheduled no later than early the following year. ● An information memorandum was also produced later that year to market the sale of the Relevant Portion to potential buyers by way of non-exclusive Expression of interest. ● Later that year, ABC had also filed for a specific registration to subdivide the Property. Disposal of Relevant Portion XYZ subsequently entered into negotiations with a third party for the disposal of the Relevant Portion. XYZ and a third party (the Buyer) executed the BSA and LSA in early 20ww. This transaction was completed a few months later. A loss will arise on the disposal of the Relevant Portion due to a large number of incidental costs. The acquisition of the Property and subsequent establishment of the Timeshare Club by ABC is the first time that ABXX has successfully entered the Australian market. It is also the first time that ABXX has purchased a property and subsequently disposed of a portion that was not required for its timeshare business. Reverse Earnout clause Under clauses in the BSA, XYZ has an obligation to make payments to the Buyer (Operating Profit Adjustment) during the x income years beginning on January 20uu to December 20vv (Operating Profit Adjustment Period) that are contingent on the financial performance of the property. Specifically, XYZ has an obligation to make the Operating Profit Adjustment in any year within the Operating Profit Adjustment Period if the property's operating profit is below a certain dollar amount. The total payments under the Operating Profit Adjustment is capped so that it does not exceed a certain dollar amount. There is also a clause requiring XYZ to provide to the Buyer after the end of a period reports, including profit and loss statements, verifying the calculations on which XYZ relies for the payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 70-10 | Income Tax Assessment Act 1997 Section 70-35 | Income Tax Assessment Act 1997 Section 701-1

Reasons for decision: Summary: Section 701-1 details the 'single entity rule' (SER) as follows: (1) If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period. Head company core purposes (2) The purposes covered by this subsection (the head company core purposes ) are: (a) working out the amount of the head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the head company's loss (if any) of a particular sort for any such income year. Note: The single entity rule would affect the head company's income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member. Entity core purposes (3) The purposes covered by this subsection (the entity core purposes ) are: (a) working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the entity's loss (if any) of a particular sort for any such income year. Note: An assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member. The principle underlying the SER is to treat a consolidated group as a single entity for income tax purposes. The SER operates for head company core purposes and entity core purposes. These purposes are to work out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period. Taxation Ruling TR 2004/11: income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 , explains a consequence flowing from the SER at paragraph 31 as follows: …while an entity is a subsidiary member of a consolidated group, actions and transactions of that member are treated as having been undertaken by the head company. In addition, the assets owned by subsidiary members of the group are taken to be owned by the head company. | Detailed Reasoning - (emphasis added): ABC contends that the SER should apply to attribute the intentions and business activities of XYZ to ABC as the head company of the ABC TCG. Since these intentions and activities of XYZ are relevant to ABC in determining the group's tax liability or loss on the partial disposal of the Property, accordingly, the SER will apply for head company core purposes and entity core purposes . The Commissioner agrees that the actions of XYZ in respect to its purchase of the Property, including subsequent actions culminating in the partial disposal, can be imputed to ABC as the head company of the ABC TCG. Therefore, any profit-making intention (to the extent this existed) and business activities of XYZ with respect to the Property can also be imputed as the profit-making intention and activities of ABC. | Detailed Reasoning - Question 2: Section 6-5 provides that your assessable income includes amounts that are income according to ordinary concepts, which is called ordinary income. Ordinary course of business It is well established that transactions which are in the ordinary course of a business are treated as ordinary income - FC of T v. The Myer Emporium Ltd ( 1987) 163 CLR 199; [1987] HCA 18; 87 ATC 4363; 18 ATR 693 ( Myer ). ABC was established by ABXX as its first foray into the Australian market for its worldwide timeshare business. For ABC, its ordinary business is offering timeshare at popular vacation destinations. While the income generated by its timeshare business would be ordinary income for ABC, the income or loss from the partial sale of the Property is outside the ordinary course of its business because it is not a transaction it usually engages or normally engages in, nor is it directly related to the normal day to day activities of the timeshare business. The Commissioner understands that for ABXX, it is the first time it has purchased a property and subsequently disposed of a portion that was not required for its timeshare business. Not a disposal of trading stock by property developer One consequence of this is that the disposal of the Relevant Portion for ABC is not a disposal of trading stock where the gross proceeds from the disposal would be included as ordinary income under section 6-5 by virtue of section 70-35. This is because for the Relevant Portion to be trading stock, ABC must hold the Property for the purpose of sale in the ordinary course of its business. Profits from isolated transactions As explained in Taxation Ruling TR 92/3: income tax: whether profits on isolated transactions are income , under certain circumstances, profits from an 'isolated transaction' can be ordinary income. An 'isolated transaction' is referred to in paragraph 1 of the ruling as those transactions outside the ordinary course of business of a taxpayer carrying on a business as well as those transactions entered into by non-business taxpayers. Paragraph 15 of TR 92/3 states that for a taxpayer carrying on a business, profit is ordinary income if the transaction is: (a) in the ordinary course of the taxpayer's business provided that any gross receipt from the transaction is not income; or (b) in the course of a taxpayer's business, although not within the ordinary course of that business, and the taxpayer entered the transaction with the intention to make a profit; or (c) is not in the course of the taxpayer's business but i. the intention of the taxpayer in entering the transaction was to make a profit or gain; and ii. the transaction was entered into, and the profit was made, in carrying out a business operation or commercial transaction. Paragraphs 15(b) and (c) of TR 92/3 therefore capture, as ordinary income, profits from 'isolated transactions' where certain conditions are met. | Detailed Reasoning - In the ordinary course of the taxpayer's business provided that any gross receipt from the transaction is not income - paragraph 15(a) of TR 92/3: As mentioned, ABC is in the business of offering timeshare; the part disposal of the property is outside the ordinary course of ABC's business. Therefore, paragraph 15(a) of the ruling is not applicable and the profits will not be ordinary income on this basis. In the course of a taxpayer's business, although not within the ordinary course of that business, and the taxpayer entered the transaction with the intention to make a profit - paragraph 15(b) of TR 92/3 Paragraph 45 of TR 92/3 clarifies that a transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer's business. As the Full High Court said in FC of T v. The Myer Emporium Ltd ( 1987) 163 CLR 215; HCA 18 at 28; 82 ATC 4370; 18 ATR 701: If the profits be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. The Commissioner considers that the partial disposal of the Property was in the course of carrying on ABC's timeshare business. Therefore, provided ABC entered into the transaction with the intention to make a profit, that profit is ordinary income. | Detailed Reasoning - Profit-making intention: In relation to the profit-making intention requirement, the Commissioner has the following views as outlined in TR 92/3: ● It is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case which is relevant, rather than the subjective intention of the taxpayer; ● It is not necessary that the purpose of profit-making be the sole or dominant purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose;and ● If the transaction involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. However, as the High Court decision in FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; [1982] HCA 8; 82 ATC 4031; 12 ATR 692 (Whitfords Beach) demonstrate, that is not always the case. ABC makes the following contentions: ● The purchase and partial sale of the Property is an isolated transaction for ABC; ● The partial disposal of the Property was specifically contemplated and evaluated by ABC prior to acquisition; ● ABC determined that acquiring the Property would likely enable a profit to be derived from the sale of the Relevant Portion. This was on the following basis: ● Historically, the Property had been underperforming, attributable in part to the size of the Property and the cost of running such large scale property operations; ● ABC considered that the planned subdivision of the rooms and separation of the Timeshare Portion would make the Relevant Portion a more attractive investment for third parties. It would reduce the available rooms which would allow the Property to derive higher revenue per available room; once downsized, the Property's performance is projected to improve; ● The co-location of the Timeshare Club and the Property allows overheads to be reduced due to shared overhead expenses and better leverage of labour costs through a shared services agreement for certain on site services; ● The Property would operate under an international brand which would ensure the Property is maintained to a high quality standard and a potential to charge an appropriate premium for accommodation; ● The planned refurbishments to the Property that would increase the appeal to prospective purchasers of the Property; and ● The Development Rights attached to the Property which represents a valuable commodity in the location; ● A potential profit from the disposal of the Relevant Portion was considered achievable based on a projected sale price. ● ABC commenced sales activities to dispose of the Relevant Portion almost immediately after its acquisition; ● ABC entered into the acquisition and disposal arrangements in the course of carrying out a business or commercial transaction; and ● Accordingly, the partial disposal of the Property is on revenue account | Detailed Reasoning - ABC's intention: The Commissioner accepts that ABC acquired the Property with an intention to dispose of the Relevant Portion soon after acquisition. ABC is a company so its intention is determined by the purpose of those who control it (Gibbs CJ in Whitfords Beach at 150 CLR 370; 82 ATC 4039; 12 ATR 701). The Minutes of the Board Meeting occurring prior to the acquisition of the Property, supports that an intention to dispose of the Relevant Portion not only existed at the time of entering into the transaction but was planned to be completed early in the following year. ABC also engaged a consultant to market the sale of the Relevant Portion to potential buyers soon after the acquisition. The Commissioner also accepts that ABC acquired the Property with an intention to profit from the disposal of the Relevant Portion. This is based on an objective assessment of the facts and circumstances of the case, including the Minutes of the Board Meeting. Further, although the facts reveal that the Property was purchased by ABC with another purpose which was to gain ownership of the Timeshare Portion, it is not necessary that the purpose of profit-making be the sole or dominant purpose for ABC entering into the transaction; it is sufficient if profit-making is a significant purpose. This is clear from specific statements of the Federal Court in the following cases as cited in paragraph 40 of TR 92/3: FC of T v. Cooling 90 ATC 4472 at 4484; 21 ATR 13 at 26; Moana Sand Pty Ltd v. FC of T 88 ATC 4897; 19 ATR 1853; AGC Investments Ltd v. FC of T 91 ATC 4180; 21 ATR 1379. The intention to profit by sale was a significant purpose for ABC in entering into the transaction to acquire the Property. The Commissioner also accepts that this profit-making intention was supported by a reasonable expectation of profit for the reasons highlighted by ABC in its contention, including the benefits that would flow from the subdivision of the Property and the opportunity to share in the costs of running the Property. Consequently, the profit or losses from the disposal of the Relevant Portion will be ordinary income given the requisite profit-making intention existed from the time of acquisition of the Property. This outcome is analogous to the Federal Court decision in Visy Packaging Holdings Pty Ltd and Ors v FC of T [2012] FCA 1195; 2012 ATC 20-357 ( Visy case). The Visy case involved the taxpayer group entering into a scheme to acquire the business assets of a competitor's business. From the outset, the taxpayer was only interested in acquiring certain businesses of the competitor (the “retention businesses”) to suit its strategic needs rather than the competitor's other businesses (the “divestment businesses”). However, the taxpayer ultimately decided that it would purchase all of the businesses believing it could make a profit from the subsequent sale of the “divestment businesses.” Middleton J in the Federal Court found that an intention to profit from the divestment of the “divestment businesses” existed from the time of the acquisition and that the losses ultimately generated was on revenue account. Middleton J held that the assets were either acquired with a single purpose - realisation at a profit- or they were acquired for a dual purpose of capturing profits on realisation and allowing the retained businesses to be acquired at a lower cost (with the funds from divestment used to retire debt). As Middleton J held in Visy Packaging at FCA 1195 at 197: From a practical and business point of view, the purchase of the business that were ultimately divested, whilst facilitating the purchase of all the Southcorp businesses, also enabled the opportunity for profit upon divestment. In essence, this decision reinforces the view in TR 92/3 that the profit-making intention need not be the sole or dominant purpose for entering into the transaction; it is sufficient if the profit-making purpose is a significant purpose. Applying the similar approach taken in Visy Packaging to ABC's situation with respect to its intention in acquiring the Property, the Commissioner accepts ABC acquired the Property with the dual purpose to acquire part of the Property for its Timeshare business and to profit from the sale of the Relevant Portion, comprising the Downsized Property and the Development Rights. The profit-making intention, although not the dominant purpose, was a significant purpose of ABC entering into the transaction to purchase the Property. The scheme that was devised and implemented involved the purchase of the Property and the divestment of the Relevant Portion. The evidence indicates a continuum of conduct, all directed towards the sale of the Relevant Portion. Is not in the course of the taxpayer's business but profit-making intention carrying out a business operation or commercial transaction - 15(c) of TR 92/3 In the alternative, if the transaction is not in the course of ABC's business, the Commissioner considers that the transaction was an isolated transaction entered into by ABC with a profit-making intention and carried out a business operation or commercial transaction . The factors relevant to determining whether an isolated transaction amounts to a business operation or commercial transaction are listed in paragraph 13 of TR 92/3 as follows: (a) the nature of the entity undertaking the operation or transaction; (b) the nature and scale of other activities undertaken by the taxpayer; (c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; (d) the nature, scale and complexity of the operation or transaction; (e) the manner in which the operation or transaction was entered into or carried out; (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; (g) if the transaction involves the acquisition and disposal of property, the nature of that property; and (h) the timing of the transaction or the various steps in the transaction. The Commissioner accepts that the acquisition and partial disposal of the Property is an isolated transaction that amounts to a business operation or commercial transaction, if it is not otherwise a transaction in the course of carrying out ABC's timeshare business. This takes into account the following factors: ● ABC is a corporate entity engaged in timeshare business activities; ● The scale of transaction and the monetary value involved is significant with the total transaction value being $x for the original acquisition of the Property; ● ABC has engaged professional agents and advisors in carrying out the transaction; ● The complexity of the transaction with ABC purchasing the Property and subdividing the Property into the portions; and ● The nature of the Property being a sizeable commercial property that holds x rooms. | Summary: In summary, the Commissioner regards the disposal of the Relevant Portion to be on revenue account, on the basis that ABC had entered into the transaction to acquire the Property with a purpose to profit from its imminent sale and the profit/loss was made in the course of ABC carrying on its business. It is therefore a profit from an isolated transaction that is captured under TR 92/3. As such any income or profits related to the disposal would be assessable as ordinary income under section 6-5 of the ITAA 1997 and any losses would be deductible under section 8-1 of the ITAA 1997. Alternatively, the profits/loss from the disposal would be from an isolated transaction entered into with a profit-making purpose that carried out a business operation or commercial transaction. Under this alternative, the profits/loss would also be included in assessable income under section 6-5 or section 8-1 of the ITAA 1997 as the case may be. Loss is deductible Here, ABC anticipates that a loss will be made on the disposal. Taxation Ruling TR 92/4: income tax: whether losses on isolated transactions are deductible, states at paragraph 4 that a loss from an 'isolated transaction' (which has the same meaning as used in TR 92/3) is deductible under section 8-1 of the ITAA 1997 if the taxpayer entered into the transaction with an intention or expectation to derive a profit which would have been assessable income and the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. As discussed above, had ABC made a profit from the partial disposal of the Property, the profits would have been assessable on the basis ABC had the requisite profit making intention from this isolated transaction. Therefore, under paragraph 4 of TR 92/4, the loss is deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 3: As explained in TR 92/3, the “profits” on isolated transactions can be included in assessable income. The usage of the term “profits” therefore contemplates the return of income on a net basis rather than a gross basis. A loss would arise if the price realised on disposal is less than the cost of acquisition and other incidental costs associated with the disposal. Several cases have concluded that a net amount can be ordinary income. Most relevantly, in Whitfords Beach , it is clear from the judgement of Gibbs CJ that the profits from the sale of the development was ordinary income rather than the proceeds of sale. Another case that supports the return of profits as assessable income in certain circumstances is Commercial and General Acceptance Limited v. Federal Commissioner of Taxation (1977) 137 CLR 373; [1977] HCA 47; 7 ATR 716; 77 ATC 4375 ( Commercial and General Acceptance ). In Commercial and General Acceptance , Mason J at 77 ATC 4380 said: … No doubt in the context of the Act that income is to be ascertained in the first instance by reference to the gross income receipts of the taxpayer, but in my view it also includes a net amount which is income according to the ordinary concepts and usages of mankind , when the net amount alone has that character, not being derived from gross receipts that are revenue receipts . | Detailed Reasoning - (emphasis added): Therefore, at least in cases involving the disposal of property in an isolated transaction that has been entered into with a profit-making intent, the profit alone is ordinary income in accordance with the principles of TR 92/3 and can be included in assessable income on a net-basis. The same principle would also apply to net losses made from isolated transactions such that the net loss would be deductible under section 8-1 of the ITAA 1997. The Commissioner therefore agrees that net basis of taxation is an appropriate means to recognise the expected loss on the disposal of the Relevant Portion. The loss should therefore be deducted by ABC at the time of the completion of the disposal. | Detailed Reasoning - Question 4: Under the BSA, XYZ has an obligation to make the Operating Profit Adjustment (OPA) in any year within the Operating Profit Adjustment Period (OPAP) if the property's operating profit is below a certain dollar amount. The Property Operating Profit will not be known until after the end of each relevant income year during the OPAP. XYZ is also required to provide audited profit and loss statements to the Buyer promptly after the end of the period so that the amount can be verified to determine the calculation of the payment. ABC contends that: ● ABC is not 'definitively committed' to paying the OPA until the performance conditions are failed; ● A presently existing obligation to pay only arises upon determination of the numerical variables of the OPA as this is when a payment obligation becomes non-contingent and ascertainable; and ● This should occur during the income year immediately following the relevant year to which the calculation relates; at this point in time the OPA would be deductible to ABC. Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions , sets out the Commissioner's view of the meaning of the term 'incurred'. The Commissioner's views can be summarised as follows: ● You broadly incur an outgoing at the time you owe a present money debt that you cannot escape; ● A taxpayer may have a present existing liability even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities); ● The taxpayer must be 'definitively committed' to the liability or has 'completely subjected' itself to the liability. It is not sufficient if the liability is merely contingent or no 'more than pending, threatened or expected', no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future; ● It is not a presently existing liability if it is contingent - refer to FC of T v. James Flood (1953) 88 CLR 492 at 506; Here, the liability to pay the OPA arises from the BSA entered into between ABC and the Buyer of the business. The Commissioner considers that the OPA is a payment that is contingent on the financial performance of the Property each year during the relevant OPAP such that a present existing liability does not arise unless the performance is below a certain level. As stated in TR 97/7, there is no present existing liability if it the liability is contingent. The Commissioner agrees with ABC's contentions and considers that a liability for the OPA arises when it is no longer contingent and this can only be ascertained after the examination of the performance of the Property after the end of each financial year. The liability is therefore deductible in the year following the relevant year to which the calculation relates.

Subject: Income Tax - Deductions - Capital vs revenue: Will the single entity rule (SER) in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to deem the profit-making intention of a subsidiary member of the ABC Pty Ltd tax consolidated group (ABC TCG) to be the intention of ABC Pty Ltd (ABC), as head company of the income tax consolidated group (TCG)? | Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.