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18 Mar 08 No liability recognised for consolidation ACA rules - Envestra

The Federal Court (Mansfield J) has dismissed the taxpayer's appeal against an objection decision of the Commissioner concerning a request for a private ruling. The Commissioner had ruled that, in determining the allocable cost amount of 2 subsidiaries of a consolidated group, the taxpayer (as head company) was not entitled to take into account deferred tax liabilities of the 2 subsidiaries. The Commissioner did so on the basis that the liabilities were not recognised in the statement of financial position of the 2 subsidiaries at the joining time because the 1999 version of AASB 1020 had not been adopted by the subsidiaries at the joining time.

The taxpayer argued that the words "can or must be recognised" in s 705-70 ITAA 1997 and, specifically the word "can", permitted the recognition of the liabilities, notwithstanding the fact that the subsidiaries had not adopted the relevant accounting standard. The Court disagreed, stating at para 33:

"Accounting standards of the AASB are not totally prescriptive. They may contain provisions which require or permit matters of judgment, and matters of choice. The use of the words "can or must" can therefore readily function as alternatives in relation to the AASB accounting standards which in fact apply in the determination of the accounting liabilities of a joining entity at the joining date. Some standards will direct the recognition of a particular accounting liability, and some will permit of a judgment or discretion as to whether a particular accounting liability is recognised."

Envestra Limited (ACN 078 551 685) v FCT [2008] FCA 249 (Federal Court, Mansfield J, 7 March 2008).

For a copy of the decision, go here

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