The Federal Court has dismissed a taxpayer’s appeal from an adverse private ruling concerning the issue of whether the conditions for the exception provided in s 705-47(5) of the ITAA 1997 (dealing with the consolidation tax cost setting amount for assets where entities become subsidiary members of consolidated groups) were satisfied for the period 1 July 2011 to 30 June 2012. In particular, the issue was whether GasNet Australia Trust (GNAT) was “not an associate” of the taxpayer “just before the joining time” – in which case the taxpayer, as head company of the consolidated group, could claim a deduction for certain depreciating assets (namely, a high-pressure gas transmission network and a liquid natural gas storage facility) in calculating its taxable income for the 2012 year.

However, the Court found that GNAT did not answer the description that it was “not an associate of the taxpayer” just before the joining time and that, as a result, s 705-47(2) applied “to reduce the tax cost setting amounts for the [depreciating] assets to the joining entity’s terminating values for the depreciating assets”. In arriving at this conclusion, the Court found there was no suggestion there was any ambiguity that GNAT became an associate of the taxpayer no later than 3 October 2006 when the taxpayer had acquired more than 50% of the units in GNAT. Nor was it disputed that this occurred before the “joining time”.

(Australian Pipeline Limited as Responsible Entity for the Australian Pipeline Trust v FCT [2013] FCA 1372, Federal Court, Robertson J, 18 December 2013.)

[LTN 247, 20/12/13]

Extract from Income Tax Assessment Act 1997

SECT 705-47 – Reduction in tax cost setting amount for some privatised assets

Object

(1)  The object of this section is to limit appropriately the amount the * head company of the joined group can deduct for a * depreciating asset it starts to * hold because the joining entity becomes a * subsidiary member of the group, by reference to the direct or indirect effect of the following provisions on the amount the joining entity could deduct for the asset:

(a)      former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for tax-exempt entities that become taxable);

(b)      former Subdivision 57-I, and Subdivision 57-J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and capital allowance deductions);

(c)      Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001).

Reduction of tax cost setting amount

(2)  The * tax cost setting amount for a * depreciating asset is reduced to the joining entity‘s * terminating value for the asset if:

(a)      at a time before the joining entity became a * subsidiary member of the joined group, the asset was * held by an entity (whether the joining entity or another entity) that, at that time, was:

(i)      an * exempt Australian government agency; or

(ii)     another entity whose * ordinary income and * statutory income were exempt from income tax; and

(b)      any of the following provisions directly or indirectly affected the amount the joining entity could deduct for the asset:

(i)      former section 61A of the Income Tax Assessment Act 1936 (about depreciation deductions for tax-exempt entities that become taxable);

(ii)     former Subdivision 57-I, and Subdivision 57-J, in Schedule 2D to the Income Tax Assessment Act 1936 (about depreciation and * capital allowance deductions);

(iii)    Division 58 of this Act (as that Division applies to a transition time or acquisition time mentioned in that Division before, on or after 1 July 2001); and

(c)      apart from this section, the tax cost setting amount for the asset would exceed the joining entity‘s terminating value for the asset.

Note 1:       Unlike the position with a reduction in tax cost setting amount under section 705-40, the amount of the reduction is not re-allocated among other assets.

Note 2:       Former section 61A of, or former Subdivision 57-I or Subdivision 57-J in Schedule 2D to, the Income Tax Assessment Act 1936 or Division 58 of this Act may, for example, have indirectly affected the amount the joining entity could deduct for the asset because:

(a)      that section, Subdivision or Division affected the amount that could be deducted by an entity that held the asset before the joining entity and that effect extended to the joining entity because of a previous application of this subsection, roll-over relief or section 701-40 (the exit history rule); or

(b)      this subsection affected the amount the joining entity could deduct for the asset (either directly or because of section 701-40).

Note 3:       Subsection (2) has effect even if, just before the joining time, the joining entity was:

(a)      an exempt Australian government agency; or

(b)      another entity whose ordinary income and statutory income were exempt from income tax.

This is because section 715-900 causes Division 58 to apply as if, just before the joining time, the joining entity‘s ordinary income or statutory income had become assessable income to some extent.

Exception to reduction of tax cost setting amount

(3)  Subsection (2) does not apply if:

(a)      just before the joining time, the joining entity was neither an * exempt Australian government agency nor another entity whose * ordinary income and * statutory income were exempt from income tax; and

(b)      a condition in subsection (4) or (5) is met in relation to the period (the pre-joining taxable period ) between the last time for which the condition in paragraph (2)(a) is met and the joining time.

(4)  One condition for subsection (2) not to apply is that an amount was included in an entity‘s assessable income, or an entity could deduct an amount, because of a * balancing adjustment event that occurred for the asset during the pre-joining taxable period.

(5)  Another condition for subsection (2) not to apply is that:

(a)      for at least some of the pre-joining taxable period, the asset was * held by the * head company of a * consolidated group (the earlier group ) for the period (the earlier group period ):

(i)      starting when (and because) an entity that had previously held the asset became a * subsidiary member of the earlier group or when the asset started to be held by that company because of an asset sale situation described in subsection 58-5(4) involving a * member of the earlier group as the purchaser mentioned in that subsection; and

(ii)     ending when (and because) an entity ceased to be a subsidiary member of the earlier group or when the earlier group ceased to exist; and

(b)  the company that was the head company of the earlier group just before the end of the earlier group period was not :

(i)      an * associate of the head company of the joined group just before the joining time; or

(ii)     the same company as the head company of the joined group; and

(c)      the earlier group period was at least 24 months.

 

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