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Australia Issues Law Companion Ruling for New Churning Measure that Switches off the Entry Tax Cost Setting Rules — Orbitax Tax News & Alerts

On 17 July 2019, the Australian Taxation Office (ATO) issued Law Companion Ruling (LCR) 2019/2 - Consolidation: churning of joining entities. The ruling concerns the application of the churning measure introduced by the Treasury Laws Amendment (Income Tax Consolidation Integrity) Act 2018.

Under prior law, when an entity is acquired by a consolidated group from a foreign resident, the entry tax cost setting rules apply to reset the tax costs of the joining entity’s assets even where a capital gain or capital loss made by a foreign resident owner (as a consequence of the disposal of its membership interests in the joining entity) is disregarded. With the new churning measure, the entry tax cost setting rules are switched off when a joining entity becomes a subsidiary member of a consolidated group where:

  • within the period starting 12 months before the joining time and ending immediately after the joining time (test period), a foreign resident entity ceased to hold membership interests in:
    • the joining entity; or
    • a higher-level entity which holds membership interests in the joining entity directly or through one or more interposed entities and which becomes a member of the consolidated group at the same time;
  • a capital gain or capital loss (if any) made by the foreign resident entity would be disregarded because of the operation of Division 855; and
  • there has been no change in the majority economic ownership of the joining entity throughout the test period.

LCR 2019/2 generally applies in relation to an income year in respect of an entity that becomes a subsidiary member of a consolidated group or multiple entry consolidated (MEC) group under an arrangement that commences on or after 7.30pm, by legal time in the Australian Capital Territory, on 14 May 2013.