ATO ID 2008/33: Consolidation: membership - transitional foreign-held subsidiary acquires a wholly-owned subsidiary after formation
Date of decision: 11 February 2008
Year of income: Year ended 30 June 2008
Business line: Consolidation Centre of Expertise

Issue
Does subsection 701C-10(8) of the Income Tax Transitional Provisions Act 1997 (IT(TP)A 1997) prevent a company from becoming a subsidiary member of a consolidated or multiple entry consolidated (MEC) group when it is directly acquired by members of the group including one or more transitional foreign-held subsidiary (TFHS) members?

Decision
No. Subsection 701C-10(8) of the IT(TP)A 1997 only applies where the acquired entity is a company in which a foreign resident entity, of the type described in paragraph 701C-10(8)(c) of the IT(TP)A 1997 (or a nominee of such an entity), holds a direct interest. It cannot apply where all of the membership interests in a company are directly acquired by members of the consolidated or MEC group including TFHS members of the group, because the members of the group are all Australian residents.

Facts
HC is the head company of a consolidated group formed prior to 1 July 2004. F Co is a company that is a foreign resident and is a wholly-owned subsidiary of HC. X Co is a wholly-owned subsidiary of F Co and has been a member of the consolidated group as a transitional foreign-held subsidiary since the group formed. After formation of the group, X Co acquires beneficial ownership of all of the membership interests in N Co, and N Co becomes a wholly-owned subsidiary of X Co. N Co meets all of the income tax treatment and Australian residence requirements to be a subsidiary member of the consolidated group.

Reasons for decision
Summary: For an entity to be a subsidiary member of a consolidated group at any particular time the requirements set out in item 2 of the table in subsection 703-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997) must be met. For MEC groups the requirements are set out in section 719-5 of the ITAA 1997 and section 719-10 of the ITAA 1997. Where there are one or more foreign resident entities interposed between the entity and the head company the requirements in section 701C-10 of the IT(TP)A 1997 (for companies), or section 701C-15 of the IT(TP)A 1997 (for trusts and partnerships), must be met. Subsection 701C-10(8) of the IT(TP)A 1997 is a timing requirement for existing consolidated groups and MEC groups, and provides that where the entity is a company that is directly held, all or in part, by a foreign resident entity of a kind described in paragraph 701C-10(8)(c) of the IT(TP)A 1997 (or a nominee of such an entity) it must have been a subsidiary member continuously since the group formed, and it must have been at least partly held by a foreign resident entity of that kind (or a nominee of such an entity) at the formation time. As subsection 701C-10(8) of the IT(TP)A 1997 can only apply to a company in which a foreign resident entity of the type described in paragraph 701C-10(8)(c) of the IT(TP)A 1997 (or a nominee of such an entity) holds an interest, it cannot apply to a company in which all of the membership interests become directly held by members of the consolidated or MEC group, including TFHS members of the group, because the members of the group are all Australian residents. Because no foreign resident entity holds a membership interest in N Co, subsection 701C-10(8) of the IT(TP)A 1997 does not apply to prevent N Co becoming a subsidiary member. N Co is a wholly-owned subsidiary of the head company, satisfies all of the income tax treatment and Australian residence requirements, and meets all of the other requirements of section 701C-10 of the IT(TP)A 1997. N Co therefore becomes a subsidiary member of the consolidated group, as a transitional foreign-held indirect subsidiary, when X Co acquires it.

Legislative references: Income Tax Assessment Act 1997 item 2 of the table in subsection 703-15(2) section 719-5 section 719-10
Related public rulings and determinations: Taxation Determination TD 2005/40 | Taxation Determination TD 2005/44
Subject references: Consolidated group Consolidation Consolidation - membership Consolidation - multiple entry consolidated group Member of a group Subsidiary member of a consolidated group Subsidiary member of a MEC group Transitional foreign-held indirect subsidiaries Transitional foreign-held subsidiaries Wholly owned subsidiary