Private ruling: Application of section 70-95 of the Income Tax Assessment Act 1997 (ITAA 1997)
Published: June 2012
Ruling period: Income tax year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Where business assets are purchased by Entity A for a single amount of consideration, will the requirement imposed on Entity A pursuant to the provisions of the ITAA 1997 to apportion the consideration amongst the business assets occur before section 70-95 of the ITAA 1997 is applied? | A1: Yes.

Relevant facts and circumstances: Entity A signed an Asset Sale Agreement with Entity B, parent company of Entity C, to acquire businesses in Australia and foreign country. Entity A has determined that the Australian assets were acquired for $X. Entity A has, by virtue of the Australian consideration constituting a lump sum representing the acquisition of multiple assets, apportioned the Australian consideration for Australian income tax purposes across the Australian assets acquired from Entity B and Entity C.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-195, | Income Tax Assessment Act 1997 section 70-90, | Income Tax Assessment Act 1997 section 70-95, | Income Tax Assessment Act 1997 section 108-5 and | Income Tax Assessment Act 1997 section 112-30.

Reasons for decision: Detailed Reasoning - Introduction: Entity A is required to apportion the single amount of consideration paid for the acquisition of the assets amongst the individual assets so acquired according to what is reasonably attributable to those individual assets. The individual assets are comprised of both depreciating assets and CGT assets (trading stock is also considered to constitute a CGT asset pursuant to the definition of that term in section 108-5 of the ITAA 1997). Section 40-195 of the ITAA 1997 states that: If you pay an amount for 2 or more things that include at least one depreciating asset, or that include a contribution to bringing a depreciating asset to its present condition and location, you take into account as part of its cost only that part of what you paid that is reasonably attributable to the asset. Section 112-30 of the ITAA 1997 states that: If you acquire a CGT asset because of a transaction and only part of the expenditure you incurred under the transaction relates to the acquisition of the asset, the first element of your cost base and reduced cost base of the asset is that part of the expenditure that is reasonably attributable to the acquisition of the asset. | Detailed Reasoning - Trading stock- adjusted to market value after reasonable attribution: Entity A is also required to substitute the cost of acquiring trading stock with the market value of the trading stock in accordance with sections 70-90 and 70-95 of the ITAA 1997. This was confirmed in an earlier private binding ruling (Authorisation No. 1011957148287). Section 70-90 of the ITAA 1997 states that: If you dispose of an item of your trading stock outside the ordinary course of a business: · that you are carrying on; and · of which the item is an asset; · your assessable income includes the market value of the item on the day of the disposal. Section 70-95 of the ITAA 1997 states that: If an entity disposes of an item of the entity's trading stock outside the ordinary course of business, the entity acquiring the item is treated as having bought it for the amount included in the disposing entity's assessable income under section 70-90. Sections 40-195 and 112-30 of the ITAA 1997 will be applied before section 70-95 of the ITAA 1997 can be applied. The single amount of consideration must first be apportioned across the depreciating assets and CGT assets (including trading stock) according to what is reasonably attributable to those assets. The reason for apportioning the consideration is to attribute to each asset a fair and reasonable amount of the total amount incurred. The purpose of apportioning the consideration is to set the amount to which the relevant income tax cost or cost base provisions can apply. Section 70-95 of the ITAA 1997 is a deeming rule which then substitutes any amount actually paid for (that is, reasonably attributed to) the acquisition of trading stock, for its market value. As a matter of practical application section 70-95 of the ITAA 1997 can only operate to substitute an amount after an initial amount has been established. | Detailed Reasoning - Disclaimer: You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf. The Register of private binding rulings is a public record of private rulings issued by the ATO. The register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies. The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

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