ATO ID 2010/4: Consolidation: multiple entry consolidated group - special conversion event
Date of decision: 18 December 2009
Year of income: Year ended 30 June 2010
Business line: Consolidation Centre of Expertise

Issue
Can a special conversion event happen under section 719-40 of the Income Tax Assessment Act 1997 (ITAA 1997) to a potential MEC (multiple entry consolidated) group, which is also a consolidated group, when the head company of the consolidated group and another eligible tier-1 company (ET-1 company) of the same top company, which is not a member of any consolidated group or MEC group become ET-1 companies of another top company at the same time?

Decision
No. A special conversion event cannot happen to the potential MEC group when both the head company of the consolidated group and the other ET-1 company become ET-1 companies of another top company at the same time.

Facts
X Co and Y Co are both ET-1 companies of top company, TC1. X Co is the head company of a consolidated group (the X Co consolidated group). Y Co is not a member of any consolidated (or MEC) group. All of the membership interests in X Co and Y Co are later acquired at the same time (the acquisition time) by a foreign resident company, TC2. At the acquisition time, X Co and Y Co meet all of the requirements to be ET-1 companies of TC2, and TC2 meets all of the requirements to be the top company.

Reasons for decision
Summary: Section 719-40 of the ITAA 1997 states that a special conversion event (SCE) happens when the set of requirements in that section are met. The opening words of section 719-40 of the ITAA 1997 provide that a SCE will happen at a particular time to a potential MEC group derived from an ET-1 company of a top company. Subsection 719-40(1) of the ITAA 1997 identifies the ET-1 company and the top company of the potential MEC group to which the SCE happens, and the time at which the SCE happens. Paragraph 719-40(1)(b) of the ITAA 1997 requires that the ET-1 company identified in the opening words of subsection 719-40(1) must also be the head company of a consolidated group immediately before the time at which the SCE happens. Paragraph 719-40(1)(c) of the ITAA 1997 requires that, at that time (the particular time at which the SCE happens), one or more other companies become ET-1 companies of the top company. The time at which the other company, or companies, become ET-1 companies of the top company, is therefore the particular time at which the SCE happens. To meet the requirements in the opening words of subsection 719-40(1) of the ITAA 1997 and paragraphs 719-40(1)(b) and 719-40(1)(c) of the ITAA 1997, the head company of the consolidated group must be an ET-1 company of the top company at and immediately before the time of the SCE. The head company (also the company identified in the opening words of section 719-40 of the ITAA 1997) of the consolidated group must, therefore, be an ET-1 company of the entity which is the top company at the time the SCE happens, immediately before one or more other companies become ET-1 companies of that top company. This interpretation is supported by paragraph 4 18 of the Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, which states: 4.18 A special conversion event will happen if the head company of a consolidated group is an eligible tier-1 company of a top company and one or more other companies subsequently become eligible tier-1 companies of the same top company . [Schedule 1, item 2, paragraphs 719-40(1)(a) to (c)] (emphasis added) The head company of the consolidated group, X Co, is not an ET-1 company of TC2 (the company which is the top company at the time when the SCE would otherwise happen) immediately before the time Y Co becomes an ET-1 company of TC2. As the requirement in paragraph 719-40(1)(b) of the ITAA 1997 is not met, a SCE will not happen to the potential MEC group derived from X Co at the time X Co and Y Co become ET-1 companies of TC2 (the acquisition time).

Legislative references: Income Tax Assessment Act 1997 section 719-40 subsection 719-40(1) paragraph 719-40(1)(b) paragraph 719-40(1)(c)
Other references: Explanatory memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002
Subject references: Potential MEC group Consolidated group Consolidation - multiple entry consolidated group Special conversion event Eligible tier-1 company Head company