ATO ID 2004/961: Consolidation: meaning of the term 'the company' in Item 4 in the table in subsection 707-320(2) of the Income Assessment Act 1997 (ITAA 1997) in the context of a multiple entry consolidated (MEC) group
Date of decision: 1 December 2004
Year of income: Year ended 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Where a MEC group is in existence, does 'the company' in Item 4 in the table in subsection 707-320(2) of the ITAA 1997 refer to the entire MEC group rather than an individual member of the MEC group?

Decision
Yes, 'the company' in Item 4 in the table in subsection 707-320(2) of the ITAA 1997 refers to the MEC group rather than an individual member of the MEC group.

Facts
Aus Co 1, Aus Co 2 and Aus Co 3 are eligible tier-1 companies of a MEC group with Aus Co 1 as the head company. Aus Co 1 had carried forward tax losses which were transferred to itself (under Subdivision 707-A of the ITAA 1997) as the head company of the MEC group. Some of the tax losses in this bundle of losses will be utilised under the available fraction method. Subsequent to the date of consolidation, Aus Co 1 issued additional shares to a foreign company within the wholly-owned group for cash consideration.

Reasons for decision
Summary: Item 4 in the table in subsection 707-320(2) of the ITAA 1997 is one of the adjusting events whereby existing available fractions are reduced or maintained by multiplying them by the factor identified in the relevant item. Item 4 involves an increase in the market value of the company to which the losses in the bundle were most recently transferred as a result of a post-consolidation injection of capital or non-arm's length transaction. The reference to 'the company' in Item 4 in the table in subsection 707-320(2) of the ITAA 1997 is interpreted as a reference to the MEC group as a single entity. The single entity rule in section 701-1 of the ITAA 1997 states that subsidiary members of a consolidated group are taken for head company core purposes and entity core purposes to be parts of the head company of the group, rather than separate income tax entities. Therefore, 'the company' is Aus Co 1 in its capacity as the head company of the MEC group and, by virtue of the single entity rule, the subsidiary members are parts of Aus Co 1. The 'market value of the company' in Item 4 in the table in subsection 707-320(2) is a reference to the market value of the entire MEC group. The single entity rule applies in the context of a MEC group through the operation of section 719-2 of the ITAA 1997. This section provides that the provisions relating to consolidated groups (other than Divisions 703 and 719 of the ITAA 1997) have the same effect in relation to MEC groups. Therefore, references made to a consolidated group in Division 707 of the ITAA 1997 are to be read as a reference to a MEC group. Section 719-25 of the ITAA 1997 ensures that the single entity rule can apply appropriately to a MEC group by providing that the remaining members of a MEC group, other than the head company, are the subsidiary members of the group. The single entity rule applies in the context of subsection 707-320(2) of the ITAA 1997 as this provision is within the meaning of the head company core purposes. In particular, the subsection operates to reduce or maintain the available fraction for a bundle of losses. Available fractions are used to determine the limits for utilisation of transferred losses by the head company of a consolidated group. As this affects the working out of the head company's liability for income tax for income years post-consolidation, it falls within the meaning of head company core purposes. There is no legislative intention to override the single entity rule in respect of Item 4 in the table in subsection 707-320(2) of the ITAA 1997. This is supported by the Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, which states at paragraph 8.61: A group's available fractions are adjusted if the group's market value is increased as a result of capital injected into the group or a non-arm's length transaction involving the group. and at paragraph 8.96: Post-consolidation, the events are only relevant if they trigger an increase in the market value of the whole group. This can only occur in this context as a result of an injection of capital or non-arm's length transaction involving entities external to the group. Further, there is a note after subsection 707-320(1) of the ITAA 1997 which states that: The value for the transferee will be worked out on the basis that subsidiary members of the consolidated group headed by the transferee are part of the transferee, because of section 701-1 (the single entity rule). Although this note is in respect of the market value of the transferee as part of the calculation of the available fraction for a bundle of losses, it signals the intention that the single entity rule applies throughout section 707-320 of the ITAA 1997. Thus, 'the company' in Item 4 in the table in subsection 707-320(2) is Aus Co 1 in its capacity as the head company of the MEC group, rather than on a stand-alone basis.

Legislative references: Income Tax Assessment Act 1997 Division 703 Division 707 Subdivision 707-A section 701-1 section 707-320 subsection 707-320(1) subsection 707-320(2) Division 719 section 719-2 section 719-25
Other references: Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002
Subject references: Available fraction Bundle of losses Consolidation Consolidation - event Consolidation - losses Consolidation - market value Consolidation - multiple entry consolidated group Consolidation - non-arm's length transaction Consolidation - tax liabilities Eligible tier-1 company Injection of capital Head company of a MEC group Single entity rule Subsidiary member of a MEC group Transferred losses