ATO ID 2005/63: Consolidation: meaning of a day for purposes of Part 3-90 of the ITAA 1997
Date of decision: 16 February 2005
Year of income: Year ended 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Must an eligible subsidiary member of a consolidatable group close its current financial year at midnight on the day prior to the day from which the head company's choice to consolidate becomes effective?

Decision
Yes. The word 'day' takes its ordinary meaning as it is not defined in the Income Tax Assessment Act 1997 (ITAA 1997) or in the Acts Interpretation Act 1901(Cth) . In this instance, the eligible subsidiary's day cannot be said to have ended if trading and other transactions are being carried on. Accordingly, the eligible subsidiary member's income tax return for the year preceding consolidation must include all transactions up until midnight on the day before consolidation occurs. The administrative convenience, in which an earlier closing of a company's financial year, is not acceptable in this instance.

Facts
Prior to 1 July Company B has been a 100% wholly-owned subsidiary of Company A. Company A chooses to consolidate with effect from 1 July of the income year. Company B becomes a subsidiary member of the consolidated group for income tax purposes from the date the choice takes effect. Company B trades 24 hours per day, 7 days per week. For income tax purposes, Company B regularly closed its books at 4:00pm on 30 June each year. It commenced its new financial year immediately after the closure of its books for each preceding financial year. Between 4:00pm and 12:00am on the 30th June prior to the consolidation group forming, Company B earned a significant amount of assessable income, and incurred no deductions. Company A closes its books at midnight on 30 June each financial year. It commences its new financial year from midnight, immediately after the closure of its books for the preceding financial year.

Reasons for decision
Summary: The word 'day' is not defined in: Consequently, the word day must be given its ordinary meaning. In a business and commercial context, the word 'day' is generally regarded as meaning a civil day, which is the 24 hour period from midnight to midnight. In some situations, a civil day may be regarded as a different 24 hour period, for example, where businesses or individuals cease trading, employment or their income earning activities prior to midnight on an ongoing basis. For the purposes of making a choice to consolidate under section 703-50 of the ITAA 1997, the day referred to in the choice reflects the civil day of the head company (normally regarded as the 24 hour period from midnight to midnight). Thus, company A's choice to consolidate takes effect from midnight in the morning of 1 July. Prior to the choice becoming effective, each subsidiary member of a consolidatable group is responsible for managing its own income tax affairs, and lodging its own income tax returns. Company B is therefore responsible for lodging its own income tax return for the income year immediately prior to the choice taking effect. Section 995-1 of the ITAA 1997 defines an income year as: income year: the basic meaning is given by subsections 4-10(2) and 9-5(2). Some provisions refer to a particular income year. (They may describe it in different ways: for example, as the income year ending on 30 June 1998, or the 1997-98 income year.) For an entity that adopts an accounting period in place of the particular income year, the reference includes: (a) the adopted accounting period; or (b) if the adopted accounting period ends under section 18A of the Income Tax Assessment Act 1936: (i) in relation to the commencing of the income year - the adopted accounting period (as ending under that section); or (ii) in relation to the ending of the income year - the accounting period ending under that section on the day on which the adopted accounting period would (but for that section) have ended. Subsection 4-10(2) of the ITAA 1997 states: Your income tax is worked out by reference to your taxable income for the income year. The income year is the same as the *financial year, except in these cases: for a company, the income year is the previous financial year; if you have an accounting period that is not the same as the financial year, each such accounting period or, for a company, each previous accounting period is an income year. Subsection 9-5(2) of the ITAA 1997 provides a similar definition of an income year. Section 995-1 of the ITAA 1997 defines 'financial year' as follows: financial year means a period of 12 months beginning on 1 July. Paragraph 22(1)(e) of the Acts Interpretation Act 1901 provides a similar definition: financial year means a period of 12 months commencing on 1 July. For the purposes of these definitions, the day of '1 July' is the civil day. That is, the 24 hour period from midnight to midnight on 1 July. Company B's commercial practice was to treat its civil day for income tax purposes as the 24 hour period from 4:00pm to 4:00pm, and thus its income year as ending at 4:00pm on 30 June, with a new income year commencing from 4:00pm on the same day. However, the use of the administrative convenience on the last day of company B's income year prior to consolidation is unacceptable as it conflicts with the requirement for company B to lodge a return disclosing all of the income it has earned during the income year - which includes the time from 4:00pm to midnight on 30 June.

Legislative references: Income Tax Assessment Act 1936 section 18 section 18A
Related ATO interpretative decisions: ATO ID 2003/1180
Subject references: Consolidation Consolidation - continuity of ownership test Consolidation - exiting Consolidation - formation Consolidation - membership Consolidation - tax liabilities Effect of an Australian law Formation time Leaving time Measurement days Member of a group Non-membership period Working days