ATO ID 2006/146: Consolidation: Special conversion event - MEC group coming into existence
Date of decision: 17 May 2006
Year of income: Year ended 30 June 2005
Business line: Consolidation Centre of Expertise

Issue
Does a multiple entry consolidated (MEC) group come into existence under paragraph 719-5(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) when a special conversion event happens under section 719-40 of the ITAA 1997?

Decision
Yes. A MEC group comes into existence under paragraph 719-5(1)(b) of the ITAA 1997 when a special conversion event happens under section 719-40 of the ITAA 1997.

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.

Reasons for decision
Summary: Section 719-40 of the ITAA 1997 provides that a special conversion event happens at a particular time to a potential MEC group (a potential MEC group has the meaning given by section 719-10 of the ITAA 1997) derived from an eligible tier-1 company of a top company, if the eligible tier-1 company is the head company of a consolidated group, and the conditions set out in section 719-40 are satisfied. Because the conditions in section 719-40 are satisfied, a special conversion event happens at the time A Co and B Co become eligible tier-1 companies of the top company. Therefore, a MEC group comes into existence when the special conversion event happened on 1 January 2004: see paragraph 719-5(1)(b) of the ITAA 1997. Subject to subsection 719-5(4) of the ITAA 1997, subsection 719-5(3) of the ITAA 1997 says a MEC group that results from a special conversion event consists of the potential MEC group derived from time to time from whichever one or more of the following companies that continue to be eligible tier-1 companies of the top company:

Legislative references: Income Tax Assessment Act 1997 paragraph 719-5(1)(b) subsection 719-5(3) subsection 719-5(4) section 719-10 section 719-40 paragraph 719-40(1)(e) section 719-78 Subdivision 719-BA
Related ATO interpretative decisions: ATO ID 2006/145 | ATO ID 2006/147 | ATO ID 2006/148
Subject references: Consolidation Consolidation - multiple entry consolidated group Eligible tier-1 company Member of a group Provisional head company Special conversion event Choice to form