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Chapter 27: Determining the cost base for disposal of equity

Policy objective

Within consolidation all intra-group transactions, claims (debt) and ownership interests (equity) are disregarded. This means there needs to be a workable and reliable means of providing a consolidated group with a capital gains tax cost base for disposals of equity (that is, shares in a group company or units in a group unit trust). The cost base is needed to determine any capital gains or losses on the sale of that equity.

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Policy options

Option 1

The entity-based model reconstructs a cost base for equity equal to the price the group paid for the entity plus the net increase of the aggregate cost base of the assets of the entity whilst in consolidation.

Option 2

The asset-based model dispenses entirely with tax recognition of separate entities within a consolidated group. Upon entry into consolidation, the sum of the cost bases for the assets of an entity is reset equal to the consolidated group’s cost base for the equity of the entity. When a consolidated group sells equity, a cost base for the equity of the entity is reconstructed equal to the sum of the cost bases of its assets.

Key policy issues Further policy issues
How do the two models deal with loss cascading, loss and gain duplication and value shifting? How do the two models deal with valuation of assets, goodwill, depreciable assets and tax preferences? How do the two models deal with transition of wholly owned groups from existing arrangements to consolidation? How do the two models deal with groups that defer consolidation, incremental acquisitions and
pre-capital gains tax status?
- Loss cascading is precluded by withdrawing tax system recognition of equity interests within consolidation.
- Duplication on the sale of equity of gains and losses realised within consolidated groups is prevented by:
     - Ignoring intra-group equity interests during consolidation; and
     - Taking account of net reinvested realised gains or realised losses when reconstructing the cost base for that equity.
- Value shifting in relation to assets acquired during consolidation is prevented by reconstructing the cost base for equity from the cost bases of the assets covered by that equity.

For further details on these issues see Table 27.1.

For a comparison, see Table 27.2. For a comparison, see Table 27.3. For a comparison, see Table 27.4.