ATO ID 2006/206: Consolidation: Public trading trust - choice to form a consolidated group
Date of decision: 13 July 2006
Year of income: Year ending 30 June 2006
Business line: Consolidation Centre of Expertise

Issue
Can a public trading trust (PTT) choose to form a consolidated group under section 713-130 of the Income Tax Assessment Act 1997 (ITAA 1997) on the day it acquires its first wholly-owned subsidiaries during its income year, where that day is not the first day of that income year?

Decision
No. A PTT can only make an effective choice to form a consolidated group where the requirements of both paragraph 713-130(a) (the trust must wholly-own at least one subsidiary member) and paragraph 713-130(b) (the choice must be made on the first day of the PTT's income year) of the ITAA 1997 are satisfied.

Facts
PT Trust is a public trading trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to an income year. PT Trust acquired the membership interests in its first wholly-owned subsidiary partway through that income year.

Reasons for decision
Summary: Section 713-130 of the ITAA 1997 allows corporate unit trusts (CUT) and PTTs to form a consolidated group provided certain conditions are met. Specifically the provision states that: A trust may make a choice under section 703-50 (Choice to consolidate a consolidatable group), as if the trust were a company (the assumed company ), but only if: (a) the assumed company could make the choice, if it beneficially owned the *membership interests in other entities that are legally owned by the trustee; and (b) the day specified in the choice is the first day of an income year for which the trust is a *corporate unit trust or a *public trading trust. * denotes a term defined in section 995-1 of the ITAA 1997 Paragraph 713-130(a) of the ITAA 1997 requires that the PTT (or CUT) must be able to consolidate, that is, it must be a head company of a consolidatable group'. This requires the PTT to wholly-own the membership interests in at least one subsidiary entity. The definition of 'wholly-owned subsidiary' in subsection 703-30(1) of the ITAA 1997 requires the membership interests in the subsidiary entity to be beneficially owned by the PTT. As the unit holders have a proprietary interest in the underlying assets of the PTT, the trustee owns the assets legally, but not beneficially (see Charles v. Federal Commissioner of Taxation (1954) 90 CLR 598; (1954) 10 ATD 328. To overcome this, paragraph 713-130(a) makes the assumption that the PTT beneficially owns the membership interests in the subsidiary entity that are legally owned by the trustee. Paragraph 713-130(b) of the ITAA 1997 contains a further requirement, that only allows the choice to be made on the first day of the income year for which the trust is a PTT. The Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004 (the EM) clarifies the meaning of paragraph 713-130(b) at paragraph 2.30 which states: The amendment comes into effect from the commencement of the consolidation regime (i.e. 1 July 2002) [ Schedule 2, Part 1, item 1 ]. However, the date of effect of making this choice is the first day of a CUT or PTT's income year [ Schedule 2, Part 2, item 2, paragraph 713-130(b) ]. This does not mean it must be the first income year in which an entity becomes a CUT or a PTT. It means the election does not have effect unless the day specified in the choice is the first day of a CUT or a PTT's income year. [Emphasis added] Both the conditions provided in paragraph 713-130(a) and (b) must be satisfied on the day specified if PT Trust's choice to form a consolidated group is to be effective. PT Trust qualifies as a PTT at the beginning of the income year in which it acquired its first subsidiary entities. However, it did not hold the membership interests in those subsidiary entities on the first day of that income year. Consequently, PT Trust does not satisfy the requirements of paragraph 713-130(a) on the first day of that income year in which it becomes part of a consolidatable group. The first day where both paragraphs 713-130(a) and (b) are satisfied will be the first day of PT Trust's subsequent income year. Consequently, this must be the day specified in the choice to consolidate in order for PT Trust's choice to be effective.

Legislative references: Income Tax Assessment Act 1997 section 703-50 section 713-130 paragraph 713-130(a) paragraph 713-130(b)
Case references: Charles v. Federal Commissioner of Taxation (1954) 90 CLR 598 (1954) 10 ATD 328
Other references: Explanatory Memorandum to Tax Laws Amendment (2004 Measures No. 2) Bill 2004 - paragraph 2.30
Subject references: Consolidatable group Consolidated group Consolidation Consolidation - formation Formation time Public trading trusts