ATO ID 2009/8: Consolidation: eligibility to be a subsidiary member of a consolidated group - residence and the single entity rule
Date of decision: 15 December 2008
Year of income: Year ended 30 June 2009
Business line: Consolidation Centre of Expertise

Issue
Does the single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) apply for the purpose of determining whether an entity satisfies the 'Australian residence requirements' in column 3 of item 2 of the table in subsection 703-15(2) of the ITAA 1997?

Decision
No. The single entity rule does not apply in determining whether an entity satisfies the 'Australian residence requirements' in column 3 of item 2 of the table in subsection 703-15(2) of the ITAA 1997. The satisfaction of the Australian residence requirements for subsidiary membership of a consolidated group is a condition precedent to the application of the single entity rule. As a consequence, intra-group transactions are taken into account in determining whether that entity satisfies these requirements.

Facts
HCo, the head company of a consolidated group consisting of itself, Sub1 and Sub2 acquires all of the membership interests in OSCo, a company which was incorporated outside Australia. OSCo enters into agreements in Australia to provide management services to Sub1 and Sub2 and consequently derives any assessable income pursuant to the contracts from sources in Australia. OSCo is an Australian resident for the purpose of paragraph (b) of the definition of 'resident' or 'resident of Australia' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) since it carries on business in Australia and has its central management and control in Australia. OSCo is not a prescribed dual resident as defined in subsection 6(1) of the ITAA 1936. OSCo also satisfies the 'Income tax treatment requirements' and 'Ownership requirements' in columns 2 and 4 respectively of item 2 of the table in subsection 703-15(2) of the ITAA 1997.

Reasons for decision
Summary: Column 3 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 sets out the 'Australian residence requirements' for an entity to be a subsidiary member of a consolidated group at a particular time in an income year. If the entity is a company, it must be an 'Australian resident' but not a 'prescribed dual resident'. Subsection 995-1(1) of the ITAA 1997 provides that the term 'Australian resident' means a person who is a 'resident of Australia' for the purposes of the ITAA 1936. Paragraph (b) of the definition of 'resident' or 'resident of Australia' in subsection 6(1) of the ITAA 1936 outlines the residency requirements for a company including a company which was not incorporated in Australia. OSCo satisfies the 'Australian residence requirements' in column 3 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 because OSCo: OSCo also meets the requirements in columns 2 and 4 of item 2 of the table in subsection 703-15(2) of the ITAA 1997. Accordingly, OSCo becomes a subsidiary member of the consolidated group of which HCo is the head company at the particular time when OSCo meets all the requirements of being a subsidiary member in item 2 of the table in subsection 703-15(2) of the ITAA 1997. The single entity rule in subsection 701-1(1) of the ITAA 1997 provides: If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for... [core purposes] ...to be parts of the *head company of the group, rather than separate entities, during that period. [Emphasis added.] The single entity rule only applies ' if an entity is a subsidiary member of a consolidated group for any period...' [italics added]. Therefore, the satisfaction of the Australian residence requirements for subsidiary membership of a consolidated group is one of the conditions precedent to the application of the single entity rule. It follows that the single entity rule cannot be relevant in determining whether an entity, such as OSCo, meets the 'Australian residence requirements' in column 3 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 in order for it to become or remain a subsidiary member of a consolidated group. In determining whether OSCo continues to satisfy the 'Australian residence requirements' in subsection 703-15(2) of the ITAA 1997 and remains a subsidiary member of the consolidated group, transactions between OSCo and other members of the consolidated group (such as Sub1 and Sub2) are taken into account.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1)
Other references: Chapter 2 - Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002 Consolidation Reference Manual (26 October 2005) at C1-1
Subject references: Consolidation Consolidation - membership Residence of companies Single entity rule