(djembe music)
-: On consolidation,
membership interests,
such as shares in a subsidiary
are ignored for income tax purposes.
Instead,
the tax costs of the assets brought to the group
are set according to cost setting rules.
However,
when a subsidiary exits a consolidated group,
the head company needs to calculate the capital gain or loss
on the sale of membership interests.
To facilitate this,
the cost base of the membership interest
in the subsidiary is reconstituted
by calculating the value of the leaving subsidiary's
net assets on exit.
This allocable cost amount on exit
derives from the exit history rule,
where by the income tax history of eligible assets,
liabilities,
and businesses,
transfers to the leaving entity.
Baxter Limited is the head company in a consolidated group.
On the 30th of June,
Baxter sold all the issued shares
in it's wholly owned subsidiary,
Moonsun Limited,
to a third party for $300.
Moonsun subsequently exits the consolidated group.
To calculate the allocable cost amount
of membership interests on exit,
we start with step one,
which sums the terminating values of all assets
that are exiting the group with Moonsun.
In this case,
the terminating values of all leaving assets sums to $400.
For step two,
we add the tax-affected values of certain deductions
that are inherited by Moonsun.
These are amounts that are not reflected
in the terminating values of assets calculated in step one.
They include any unclaimed deductions sitting in the group
that Moonsun will benefit from in the future,
such as borrowing costs,
which are deductible over five years.
In this case,
the tax-affected value of deductions
inherited by Moonsun is $110.
In step three,
we need to add the market value of all liabilities
owed by members of the group to Moonsun.
In this case,
there are no liabilities owing to Moonsun.
For step four,
we need to deduct all liabilities owed by Moonsun
subject to certain reductions.
For example,
with employee leave entitlements,
no deduction for tax purposes is available
until the liability is paid.
So at the time of Moonsun's exit,
no future income tax adjustments arise for Baxter,
and the cost base is not affected.
In this case,
the total liabilities reducing the cost allocation is $310.
Finally,
we aggregate the preceding steps to calculate the exit ACA.
This positive amount is the ACA
of Baxter's total membership interests in Moonsun.
As Baxter held 100 shares in Moonsun,
the tax cost setting amount
for each membership interest is $2.
Comparing the capital proceeds of $300
to the reconstituted cost base of $200,
Baxter's capital gain is $100.
If the calculated exit ACA had been negative,
the ACA for the membership interest would have been nil.
However,
CGT Event L5 would then occur for Baxter,
leading to a capital gain equal to the negative amount.
To recap,
when a wholly owned subsidiary exits the consolidated group,
the head company needs to calculate the capital gain or loss
on the relevant membership interests in the subsidiary.
The exit allocable cost amount rules
determine the value of the leaving subsidiary's
net assets on exit.
This value reflects the reconstituted cost base
of the head company's membership interest in the subsidiary,
which is then compared to the capital proceeds
to determine the resulting capital gain or loss.