Private ruling: CGT and Single Entity Rule
Date of advice: 3 August 2015
Published: August 2015
Date scheme commenced: The scheme has commenced.

Ruling: Q1: If the head company has consolidated and transfers a property that it owns to its wholly owned subsidiary are there any CGT implications? | A1: No | Q2: If the subsidiary transfers the property back to the head company, while consolidated are there any CGT implications? | A2: No | Q3: If the subsidiary transfers the property back to the head company, while consolidated and then is wound up are there any CGT implications? | A3: No

Relevant facts and circumstances: • The Head Company owns a property which it acquired in 20XX. • The property is a CGT asset. • The head company and subsidiary company have formed a consolidated group. • After consolidation, the head company wishes to transfer the property to the subsidiary company. • During consolidation, the subsidiary may transfer the property back to the head company. The subsidiary may then be wound up.

Relevant legislative provisions: Section 701-1 of the Income Tax Assessment Act 1997 | ATO View | 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 (ITAA 1997) | TD 2004/39 Income tax: consolidation: capital gains: does CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 happen to the head company of a consolidated group if an asset is sold by a subsidiary member to an entity outside the group?

Reasons for decision: Summary: There will be no CGT implications if the property is transferred within the consolidated group due to the single entity rule. If the property is transferred prior to consolidation it will trigger a CGT A1 event (as if dealing with a third party). | Detailed Reasoning - Detailed reasoning: Where a head company and subsidiary/subsidiaries are consolidated under Division 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997), it falls within the Single Entity Rule (SER). The intended operation of the Single Entity Rule (SER) in section 701-1 of the ITAA 1997 is to apply the income tax laws to consolidated group as if it were a single entity with the head company being the entity for income tax purposes. Therefore the SER deems that the subsidiary members of the consolidated group to be parts of the head company rather than separate entities. The SER in section 701-1 of the ITAA 1997 provides that: (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 part of the head company of the group, rather than separate entities, during that period. The Commissioner's view on the consequences of the SER are provided in paragraphs 7, 8 and 9 of 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 : | Detailed Reasoning - Consequences of the SER: 7. For income tax purposes the SER deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group. 8. As a consequence, the SER has the effect that: … (d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company. 9. An example of an intra-group dealing is the transfer of a capital gains tax (CGT) asset from one group member to another. This transfer is not treated for income tax purposes as a disposal or acquisition in the hands of the head company. … After the tax consolidated group has been formed the SER will operate to disregard a capital gain, as an intra-group dealing between these two private companies. If the subsidiary transfers the property back to the head company while consolidated and then is wound up after the transfer, the property previously held by the subsidiary is considered to be owned by the head company under the SER. As a consequence of the transfer of the property by the subsidiary to the head company CGT event 1 is not triggered (as would normally happen) because the head company is taken to be the owner of the asset for income tax purposes both before and after the transfer. A CGT event can happen to the head company if a subsidiary member of the consolidated group transacts or deals with an entity outside the group. This is because the single entity rule applies. This only applies if the subsidiary that sold the asset is still a member of the consolidated group at the time of the disposal of the asset. If the subsidiary is wound up, a consolidated group can continue to exist with the head company as the sole member. | Detailed Reasoning - Conclusion: As a result of the single entity rule in section 701-1 of the ITAA 1997 the head company of a consolidated group is the only entity recognised for the group's income tax purposes and will make any capital gain from the asset (except for intragroup dealings).