- The consolidation regime will be amended to specifically address the situation where a tax exempt asset or entity (or a previously privatised asset or entity) becomes part of a consolidated group1.
- In the absence of any changes to the existing consolidation rules, Division 58 of the Income Tax Assessment Act 1997 (ITAA 1997) will be overridden and past (and prospective) privatised assets and entities will be treated in the same manner as taxable assets and entities.
- As tax exempt entities are not subject to balancing charge events, the absence of Division 58 would potentially enable values to be shifted into depreciating assets and higher tax benefits to be claimed by the newly privatised business.
- The two interrelated objectives of Division 58 are, therefore, to ensure
- there is no transfer of tax benefit to the tax exempt entity at the time of privatisation; and
- the purchasing company’s depreciation deductions are capped.
- Division 58 sets out special rules that apply in calculating deductions for the decline in value of depreciating assets, whether the asset has been acquired by way of an asset or entity sale.
- Division 58 also ensures that the depreciation deductions are capped until such time as the privatised asset is disposed of in an asset sale and a special balancing adjustment (SBA) occurs. Where the asset is disposed of in an entity sale, prior to the SBA occurring, the depreciation deductions remain capped.
- The following amendments are proposed to ensure the appropriate interaction of Division 58 of the ITAA 1997 with the consolidation regime.
- If a company holds a privatised asset at the time of consolidation (that
is, for past and prospective privatisation events), the cost allocated to
that asset is restricted, for depreciation purposes, by reference to the
Division 58 capped amount.
- The tax cost setting amount of an asset to which Division 58 applies, or has previously applied, will be limited to the terminating value for the asset (that is, its tax cost immediately prior to consolidation).
- Where a privatised asset is disposed of by an entity sale, where the purchasing entity is not an associate and the head company has held the asset for more than 24 months, the excess of the ‘unadjusted’ tax cost setting amount over the terminating value at the joining time (that is, the amount by which the cost would otherwise have been increased under the consolidation cost setting rules) can be added back to the terminating value at the leaving time for the purposes of calculating the cost base of the equity in the leaving entity.
- Where the purchasing entity is at arm's length and the head company has held the asset for more than 24 months, the asset would no longer be treated as an ‘asset to which Division 58 previously applied’ for the purposes of subsequent application of the cost setting rules. That is, subsequent acquisitions of the asset via equity will not attract the Division 58 cap.
- When the asset leaves the group in a leaving entity and the purchasing entity is an associate or the asset has not been held for more than 24 months, the excess of the ‘unadjusted’ tax cost setting amount over the terminating value at the joining time is added back to the terminating value at the leaving time for the purposes of calculating the cost base of the equity in the leaving entity. However, the asset would continue to be treated as an ‘asset to which Division 58 previously applied’ for the purposes of subsequent application of the cost setting rules (that is, where the entity containing the asset joined another consolidated group).
- The date of effect of any amendment would be 1 July 2002, consistent with the commencement date of the consolidation regime. This would provide maximum certainty and minimise the risk of arbitrary outcomes from a later commencement date.
1 For ease, the term ‘consolidated group’ includes a multiple entry consolidated group unless there is an intention to the contrary.
The principles outlined in this paper are supported by Government. However, they are not yet law. As a consequence, this paper is merely a guide as to how the principles might operate.