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  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
(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:
Reduction of tax cost setting amount
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
Note 3: Subsection (2) has effect even if, just before the joining time, the joining entity was:
(a) an exempt Australian government agency; or
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:
(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
(c) the earlier group period was at least 24 months.