ATO ID 2006/145: Consolidation: Special conversion event - cessation of consolidated group
Date of decision: 17 May 2006
Year of income: Year ended 30 June 2005
Business line: Consolidation Centre of Expertise

Issue
Does a consolidated group cease to exist when a special conversion event happens under section 719-40 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to it?

Decision
Yes. A consolidated group will cease to exist when a special conversion event happens under section 719-40 of the ITAA 1997 in relation to it, because paragraph 703-5(2)(b) of the ITAA 1997 applies in relation to the head company of the consolidated group when it becomes a member of a multiple entry consolidated (MEC) group.

Facts
H Co, an Australian resident, is the head company of a consolidated group and is an eligible tier-1 company of the top company, X Co. On 1 January 2004, X Co acquires all of the membership interests in two other Australian resident companies, A Co and B Co, in a way that they both become eligible tier-1 companies of X Co at the same time. A Co and B Co are not members of a MEC group just before being acquired by X Co. Immediately after the acquisition, neither A Co nor B Co beneficially owns any membership interests in H Co, nor does any other member of the potential MEC group. H Co makes the choice in writing under paragraph 719-40(1)(e) of the ITAA 1997 specifying A Co and B Co have become eligible tier-1 companies and stating that a MEC group is to come into existence as a result of A Co and B Co becoming eligible tier-1 companies of X Co. H Co, when lodging its income tax return for the 2003-2004 income year in October 2004, informs the Commissioner the details of the choice, in the approved form, as required by section 719-78 of the ITAA 1997. The MEC group comes into existence on 1 January 2004 and comprises the potential MEC group derived from H Co and its wholly-owned subsidiaries, and the other eligible tier-1 companies, A Co and B Co. H Co is the provisional head company of the MEC group.

Reasons for decision
Summary: When a MEC group comes into existence under paragraph 719-5(1)(b) of the ITAA 1997 due to a special conversion event happening under section 719-40 of the ITAA 1997, the company that was the head company of the consolidated group becomes a member of the MEC group. Paragraph 703-5(2)(b) of the ITAA 1997 provides that the consolidated group ceases to exist when the head company of the consolidated group becomes a member of a MEC group. The members of the MEC group comprise the head company and the wholly-owned subsidiary members of the former consolidated group - generally, the eligible tier-1 companies and their subsidiaries. Paragraph 703-5(2)(b) of the ITAA 1997 is not restricted in its application to cases where the head company becomes a member of an existing MEC group.

Legislative references: Income Tax Assessment Act 1997 paragraph 703-5(2)(b) paragraph 719-5(1)(b) section 719-40 paragraph 719-40(1)(e) section 719-78 Subdivision 719-BA
Related ATO interpretative decisions: ATO ID 2006/146 | ATO ID 2006/147 | ATO ID 2006/148
Subject references: Cessation Cessation event Consolidation Consolidation - multiple entry consolidated group Eligible tier-1 company New eligible tier-1 members of a MEC group Notifiable event Potential MEC group Provisional head company Special conversion event Subsidiary member of a MEC group Choice to form