ATO ID 2008/32: Consolidation: membership - eligibility to form a consolidated group where a subsidiary member holds shares in the head company
Date of decision: 7 February 2008
Year of income: Year ended 30 June 2008
Business line: Consolidation Centre of Expertise

Issue
Does a consolidatable group exist where a subsidiary member holds some membership interests in the head company?

Decision
Yes. A consolidatable group exists where a subsidiary member holds some membership interests in the head company, provided that the other conditions in subsection 703-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997) are also satisfied.

Facts
A Co is a private company that intends to be the head company of a consolidated group. B Co is a private company that holds approximately 40% of the shares in A Co. A Co enters into an arrangement whereby it issues shares in itself to the shareholder of B Co as consideration for the acquisition of all B Co's shares. Consequently, B Co becomes a wholly-owned subsidiary of A Co. However, B Co will still retain its shareholding in A Co until such time as this shareholding is redeemed by A Co. After B Co becomes a wholly-owned subsidiary of A Co, but prior to the share buy-back by A Co of the shares that B Co holds in A Co, A Co chooses to form a consolidated group pursuant to section 703-50 of the ITAA 1997.

Reasons for decision
Summary: A consolidated group comes into existence when a head company makes a choice to consolidate a consolidatable group. Under section 703-10 of the ITAA 1997, a consolidatable group consists of a single Australian resident head company and at least one wholly-owned resident subsidiary member (which may be a company, trust or partnership). Section 703-20 of the ITAA 1997 prevents certain types of entities from being a head company or subsidiary member of a consolidatable or consolidated group and section 703-25 of the ITAA 1997 provides specific Australian resident requirements for trusts. The criteria for eligibility to be a head company of a consolidated group are contained in item 1 of the table in subsection 703-15(2) of the ITAA 1997. To be a head company, the entity must: On the basis that A Co meets the criteria contained in item 1 of the table in subsection 703-15(2) of the ITAA 1997, it is eligible to be the head company. The criteria for eligibility to be a subsidiary member of a consolidated group are contained in item 2 of the table in subsection 703-15(2) of the ITAA 1997. To be a subsidiary member, the entity must: The definition of a 'wholly-owned subsidiary' is contained in section 703-30 of the ITAA 1997. A subsidiary entity is wholly-owned by the head company if all the membership interests in that subsidiary are beneficially owned by the head company or its wholly-owned subsidiaries, or a combination of the head company and its wholly-owned subsidiaries. The term membership interest refers to all the interests and rights that you have in a company, partnership or trust by virtue of which you are a member. B Co meets the above criteria. It is taxed at the company tax rate; it is not one of the excluded entities listed in section 703-20 of the ITAA 1997; it is an Australian resident and all of its membership interests will be owned by A Co. Since A Co is eligible to be the head company of a consolidatable group and B Co is eligible to be a subsidiary member, together they constitute a consolidatable group and are therefore eligible to form a consolidated group under section 703-50 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 703-10 section 703-15 section 703-20 section 703-25 section 703-30 section 703-50
Related ATO interpretative decisions: ATO ID 2004/619
Other references: Consolidation Reference manual (26 October 2005) at C1-1
Subject references: Consolidated group Consolidation Consolidation - membership Head company Membership interest in an entity Subsidiary member of a consolidated group Wholly owned subsidiary