When an entity joins a tax consolidated group (the joining member), the assets of the joining member become those of the head company under the single entity rule. This means the cost of asset of the joining member is required to be reset at the time when it joins the consolidated group. This involves calculating the entry allocable cost amount (ACA) as detailed in the ATO consolidation reference manual (‘manual’) here. The manual also contains a discussion and worked examples of the ACA process. The purpose of the ACA on entry is not to revalue the assets to market value. Rather, it is an attempt to 'push down' the cost of purchasing the entity to work out the tax cost of the asset that the acquired entity owns.
Similarly, when an entity ceases to be a subsidiary member of a tax consolidated group, we have to calculate the exit ACA. This is because the assets can be moved within the tax consolidated group free of income tax consequences. What that means is that when a subsidiary member leaves, the assets it takes with it may not necessarily be the assets that it brought into the group. Accordingly, the 'tax values' of the assets are then pulled up to work the tax cost of the shares. The wholly owned subsidiary that was disposed of was stated as investment in the parent entity, which means the investment is required to be written off and it needs adding back when calculating the group taxable income. However, this will not affect the exit ACA calculation.
Exit ACA is the cost base when you sell a member of an entity. It is the cost of membership interest in the entity that is being sold. For example: Company A buys Company B for $100 because Company B has $100 cash. When company B is part of the consolidated group, it could simply transfer $99 to Company A free of any tax consequences. Company A then sells company B for $1. If we merely adopted the purchase price of $100, Company A would make a capital loss when it has not done so economically. The real cost for Company A is $1.
Bear in mind that when a group forms a tax consolidated group, the legislation no longer treats the subsidiary member as a standalone entity. Rather, it sees is a fiction of the subsidiaries being part of a division of the head company. Legally, it is the subsidiary that have purchased the assets. However, for tax purposes, we need to work out how much the head entity paid for those assets. The way we work it out is to look at the cost of legally purchasing the subsidiary.
These costs loosely equate to the purchase price (cost of membership interest) plus liabilities that it has assumed (remembering for tax purpose that the subsidiary is part of the head entity). There are other adjustments in the remaining ACA steps. Once we know the total cost of purchasing all the assets of the subsidiary member (this is known as the allocable cost amount), we then allocate that cost to the assets that the subsidiary member brings into the group, i.e. we are pushing down the cost of purchasing the entity into the assets of the entity as it is the assets that are recognised for income tax purposes rather than the entity.
ACA is technically complex and therefore it is important for you to be able to conduct all the basic consolidation technical tasks correctly, including cost setting at consolidation and when an entity leaves a consolidated group.
We have in house expertise in this area, please reach out to us if you require any assistance in calculating the entry and exit ACA.