ATO ID 2008/122: Consolidations: a company interposed between the shareholders and the head companies of two separate consolidated groups
Date of decision: 30 July 2008
Year of income: Year ended 30 June 2009
Business line: Consolidation Centre of Expertise

Issue
Can a new shelf company, interposed above two companies each of which is the head company of a separate consolidated group, make a choice under subsection 124-380(5) if the Income Tax Assessment Act 1997 (ITAA 1997) to continue the existence of two consolidated groups as a single consolidated group, after the interposition?

Decision
No. A new shelf company interposed between the shareholders and the head companies of two separate consolidated groups cannot make a choice under subsection 124-380(5) of the ITAA 1997 to continue the existence of both consolidated groups as a single consolidated group, as it would be contrary to the intention of subsection 124-380(5). Neither can the two groups continue to exist as two separate consolidated groups.

Facts
A Co and B Co are the head companies of two separate consolidated groups (CG1 and CG2 respectively). A single new shelf company, X Co, is interposed between two companies, A Co and B Co, and the shareholders of the two companies. Prior to the interposition of X Co, the shares in each of A Co and B Co were held by the same individual shareholders and in the same proportions. The shareholders of A Co and B Co exchanged all their shares in A Co and B Co for shares in X Co in the same proportions that they originally held in A Co and B Co. All of the requirements for roll-over relief under Subdivision 124-G of the ITAA 1997, aside from those in subsections 124-380(5) and 124-380(6) of the ITAA 1997 about the choice to be made by the interposed company regarding continuation of a consolidated group, are met.

Reasons for decision
Summary: For a member of a company to choose to obtain roll-over under Subdivision 124-G of the ITAA 1997 where there has been a reorganisation of the company's affairs, the requirements of subsection 124-380(5) of the ITAA 1997 must be satisfied (section 124-360 of the ITAA 1997). Subsection 124-380(5) of the ITAA 1997 requires: If: (a) immediately before the completion time, the original company is the *head company of a *consolidated group; and (b) immediately after the completion time, the interposed company is the head company of a *consolidatable group consisting only of itself and the *members of the group immediately before the completion time All of the provisions in Subdivision 124-G of the ITAA 1997, including subsection 124-380(5) of the ITAA 1997, are worded in the singular. However, so long as there is no contrary intention, words in the plural number include the singular, and vice versa (section 23 of the Acts Interpretation Act 1901). In considering whether a contrary intention appears, it is appropriate to consider the section in its setting in the legislature, and to consider the substance of the legislation as a whole (Blue Metal Industries Limited v. Dilley and Anor (1969) 117 CLR 651). Although Subdivision 124-G of the ITAA 1997 is worded in the singular, and provides for the reorganisation of a company's affairs it does not exclude reorganisation of more than one company from roll-over relief provided they use the same interposed shelf company and maintain economic interests in the underlying assets of each company. Such a reorganisation will remain within the spirit and intent of the roll-over relief under Subdivision 124-G (paragraphs 1 to 15 of the Addendum to Taxation Ruling TR 97/18). However, where the company subject to the reorganisation is the head company of a consolidated group, the provisions of Subdivision 124-G of the ITAA 1997 are to be considered along with sections 703-65 to 703-80 of the ITAA 1997. These sections set out the effects of a choice to continue the existence of a consolidated group under subsection 124-380(5) of the ITAA 1997. The effect of sections 703-65 to 703-80 of the ITAA 1997, also worded in singular form, include that the consolidated group is taken not to have ceased to exist, and that the interposed company replaces the former head company as the head company of the ongoing consolidated group. It is deemed that all things that happened to the original head company (prior to the insertion of the new head company) are taken to have happened to the new head company. The intention of the provisions is to allow a consolidated group to continue in existence in certain cases where nothing of substance has changed within the group, thereby reducing unnecessary compliance costs and aiding in protecting the integrity of the consolidation regime (paragraph 2.7 of the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No.1) 2002). Adopting a plural construction of subsection 124-380(5) and sections 703-65 to 703-80 of the ITAA 1997 would be contrary to that intention. The interposition above two consolidated groups is a substantial change and would mean that the interposed company had to be taken to have always been either and both the two separate head companies. In a circumstance where there is a reorganisation of the affairs of two companies, each being the head company of a consolidated group, a choice cannot be made to continue the existence of both consolidated groups as a new single consolidated group. Each of the consolidated groups will cease to exist when the respective head companies cease to be head companies (paragraph 703-5(2)(a) of the ITAA 1997). X Co cannot make a choice under subsection 124-380(5) of the ITAA 1997 because the conditions in subsection 124-380(5) for making the choice are not met. The members of the consolidatable group of which X Co is the head company after the interposition do not consist of either only X Co and the members of the consolidated group CG1, or only X Co and the members of consolidated group CG2. Both consolidated groups CG1 and CG2 will cease to exist when their respective head companies, A Co and B Co, cease to be head companies.

Legislative references: Act Interpretation Act 1901 section 23
Case references: Blue Metal Industries Limited v. Dilley and Anor (1969) 117 CLR 651
Related public rulings and determinations: Taxation Ruling TR 97/18 | Addendum to TR 97/18
Related ATO interpretative decisions: ATO ID 2007/216
Other references: Chapter 2 - Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No.1) 2002
Subject references: Consolidation Consolidated group CGT roll-over relief CGT exchange of shares in one company for shares in another company (124-G)