ATO ID 2010/141: Consolidation: MEC group - non eligible tier-1 company subsidiary member of a MEC group becoming an eligible tier-1 company member of that same MEC group
Date of decision: 26 July 2010
Year of income: Substituted accounting period year ended 31 March 2011
Business line: Consolidation Centre of Expertise

Issue
Does a 'non-eligible tier-1 company' subsidiary member of a MEC (multiple entry consolidated) group cease to be a member of the group, if, at a particular time, the membership interests in it are transferred to a foreign resident member of the same wholly-owned group, so that it becomes an eligible tier-1 company of the top company and a member of the MEC group at that time?

Decision
No. A 'non-eligible tier-1 company' subsidiary member of a MEC group will not cease to be a member of the group, if, at a particular time, membership interests in it are transferred to a foreign resident member of the same wholly-owned group, and at that time it becomes an eligible tier-1 company of the top company and a member of the MEC group.

Facts
TCo, FCo, ACo, BCo and SubCo are members of a wholly-owned group. ACo and BCo are eligible tier-1 companies of top company TCo. FCo is a foreign resident company and is a wholly-owned subsidiary of TCo. SubCo is a wholly-owned subsidiary of BCo. ACo and BCo have chosen to form a MEC group. ACo is the provisional head company (PHC) of the MEC group. SubCo is a 'non-eligible tier-1 company' subsidiary member of the MEC group. As part of a global restructure, BCo disposes of all its membership interests in SubCo to FCo, at a particular time. As a consequence of the disposal, SubCo becomes a wholly-owned subsidiary of FCo and qualifies as an eligible tier-1 company of TCo at the same time. ACo, as the PHC of the MEC group makes a written choice under paragraph 719-5(4)(c) of the Income Tax Assessment Act 1997 (ITAA 1997), for SubCo to become an eligible tier-1 company member of the MEC group with effect from the time SubCo became an eligible tier-1 company of TCo. ACo notifies the Commissioner in the approved form as required by section 719-77 of the ITAA 1997.

Reasons for decision
Summary: At any particular time the members of MEC group, formed by a choice under section 719-50 of the ITAA 1997, will consist of the potential MEC group derived from those eligible tier-1 companies that were a party to the choice under section 719-50 and which continue to be eligible tier-1 companies of the top company at that particular time (subsection 719-5(2) of the ITAA 1997). The members of the potential MEC group comprise of the eligible tier-1 companies from which that potential MEC group is derived, and any of their wholly owned subsidiaries, which would satisfy the membership requirements prescribed in subsection 719-10(1) of the ITAA 1997. An entity will be a 'non-eligible tier-1 company' subsidiary member of a potential MEC group at a particular time, if it satisfies the requirements in the table in subsection 719-10(1) of the ITAA 1997 or is an entity (transitional foreign-held subsidiary) that meets the requirements in sections 701C-10 and 701C-15 of the Income Tax (Transitional Provisions) Act 1997 . An entity, other than a transitional foreign-held subsidiary, that is a 'non-eligible tier-1 company' subsidiary member of a potential MEC group will cease to be a member of the potential MEC group at the time it fails to satisfy the requirements in the table in subsection 719-10(1) of the ITAA 1997. At that same time, the 'non-eligible tier-1 company' subsidiary member will also cease to be a member of the MEC group derived from that potential MEC group (subsection 719-5(2) of the ITAA 1997). Column 3 of the table in subsection 719-10(1) of the ITAA 1997 requires that the 'non-eligible tier-1 company' subsidiary member be a wholly-owned subsidiary of one or more eligible tier-1 companies. When the membership interests in SubCo stop being wholly owned by BCo, it stops being a wholly-owned subsidiary of an eligible tier-1 company and fails to satisfy the ownership requirements in Column 3 of the table in subsection 719-10(1) of the ITAA 1997. Therefore, at that time, SubCo will cease to be a member of the potential MEC group and the MEC group. At that same time, SubCo qualifies as an eligible tier-1 company of the top company, TCo. For a company to be an eligible tier-1 company at a particular time, it must satisfy the requirements in section 719-15 of the ITAA 1997 and paragraph 719-20(1)(b) of the ITAA 1997. When a company becomes an eligible tier-1 company of the top company of an existing MEC group, the PHC of the MEC group may make a written choice that the new eligible tier-1 company is to become a member of the group with effect from the time at which the company became an eligible tier-1 company of the top company (subsection 719-5(4) of the ITAA 1997). SubCo, by satisfying the requirements in section 719-15 of the ITAA 1997 and paragraph 719-20(1)(b) of the ITAA 1997, qualifies as an eligible tier-1 company of the top company, TCo, at the same time it stopped being a member of the potential MEC group and the MEC group. ACo, as the PHC of the MEC group, makes a written choice under subparagraph 719-5(4)(c)(ii) of the ITAA 1997, for SubCo to become a member of the MEC group from the time SubCo became an eligible tier-1 company. As SubCo becomes an eligible tier-1 company member of the MEC group at the same time it stopped being a 'non-eligible tier-1 company' subsidiary member of the same group, there was no moment in time that SubCo was not a member of the MEC group. The sequence of events around the transfer of the membership interests in SubCo to FCo, and ACo making the choice in subparagraph 719-5(4)(c)(ii) of the ITAA 1997 for SubCo to become a member as an eligible tier-1 company and notifying the Commissioner of this choice under section 719-77 of the ITAA 1997, prevent SubCo being regarded as ceasing to be a subsidiary member of the MEC group at any particular time.

Legislative references: Income Tax Assessment Act 1997 subsection 719-5(2) subsection 719-5(4) paragraph 719-5(4)(c) subparagraph 719-5(4)(c)(ii) subsection 719-10(1) section 719-15 section 719-25 section 719-77
Related ATO interpretative decisions: ATO ID 2006/170 | ATO ID 2006/171
Subject references: Choice to form Consolidation - multiple entry consolidated group Eligible tier-1 company Member of a group Potential MEC group Provisional head company Subsidiary member of a MEC group Top company Wholly owned subsidiary