ATO ID 2006/201: Consolidation: effect on head company of a consolidated group of an election made by a subsidiary member under section 775-150
Date of decision: 29 March 2006
Year of income: Period from 1 January 2004 to 31 December 2004
Business line: Consolidation Centre of Expertise

Issue
Where an entity makes an election under section 775-150 of the Income Tax Assessment Act 1997 (ITAA 1997) and at the time of making the election the entity is a subsidiary member of a consolidated group, will the election be taken to have been validly made by the head company of the consolidated group?

Decision
No. The election will not be taken to have been validly made by the head company of the consolidated group.

Facts
On 15 June 2005 Head Co, as head company of a consolidatable group, lodges its return for the year ended 31 December 2004 and makes a choice under section 703-50 of the ITAA 1997 to form a consolidated group commencing from 1 January 2004. The consolidated group formed comprises Head Co as the head company, and Sub Co as the subsidiary member. On 6 February 2004, Sub Co made an election under section 775-150 of Division 775 of the ITAA 1997 to apply rules about disregarding certain foreign exchange (forex) realisation gains and forex realisation losses. Sub Co made the election under section 775-150 of the ITAA 1997 in its own name and on its own behalf. It did this at a time when it was not known that it was to become a subsidiary member of a consolidated group. Head Co did not make any election under section 775-150 of the ITAA 1997.

Reasons for decision
Summary: An election made under section 775-150 of the ITAA 1997 will affect the working out of an entity's liability to income tax, and is therefore within the head company or entity core purposes contained in subsections 701-1(2) and 701-1(3) of the ITAA 1997 respectively. The retrospective nature of the choice to form a consolidated group under section 703-50 of the ITAA 1997 and the operation of the single entity rule (SER), contained in subsection 701-1(1) of the ITAA 1997, means that Sub Co is treated as a part of the Head Co at the time Sub Co made the election under section 775-150 of the ITAA 1997. As outlined at subparagraph 8(a) of Taxation Ruling TR 2004/11, the effect of the SER is to treat the actions and transactions of a subsidiary member as having been undertaken by the head company of the group. However, at the time that Sub Co made the election under section 775-150 of the ITAA 1997, it was unaware of its status as a subsidiary member of the consolidated group. Sub Co made the election in its own right, only intending the election to affect its own relevant transactions. Even if the SER applies to attribute the election to the Head Co as head company of the consolidated group, it is clear from the wording of section 775-150 and related provisions of the ITAA 1997 that the election can only be made on a whole of entity basis. There is no legislative opportunity to elect under section 775-150 that only the relevant transactions of Sub Co are to be affected by the election. In relation to elections made under section 775-150 of the ITAA 1997 and in relation to the particular facts detailed above, an election made by a subsidiary member will be viewed as an attempt to make a partial election and as such will not be taken to have been validly made by the head company of a consolidated group. Accordingly, the election made by Sub Co under section 775-150 of the ITAA 1997 is not a valid election made by Head Co as head company of the consolidated group.

Legislative references: Income Tax Assessment Act 1997 section 701-1 section 703-50 section 775-150 Division 775
Related public rulings and determinations: Taxation Ruling TR 2004/11
Subject references: Choice to form Consolidation Consolidation - multiple entry consolidated group Foreign exchange gains and losses Single entity rule Taxpayer elections Transitional election