ATO ID 2003/739: Consolidation - liquidation of a head company
Date of decision: 5 May 2003
Year of income: Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005
Business line: Consolidation Centre of Expertise

Issue
Does a wholly-owned subsidiary company have its tax cost setting amount calculated under section 711-15 of the Income Tax Assessment Act 1997 (ITAA 1997) if the head company of a consolidated group is deregistered after liquidation?

Decision
Yes. As part of the liquidation process, the head company's assets (its shares in its subsidiary) will be disposed of. The subsidiary will exit the group when the beneficial ownership of the subsidiary's shares changes. The subsidiary must have its tax cost setting amount calculated under section 711-15 of the ITAA 1997 when the beneficial ownership in those shares changes.

Facts
Company A is the holding company of Company B. Company B is a wholly-owned subsidiary of Company A. Company A successfully chooses to consolidate from 1 July 2003. A consolidated group, comprising of Company A and Company B is formed. Company A has a liquidator appointed after that date. Company A no longer has beneficial ownership of its shares in Company B as a result of the liquidation process. All profits from the change in ownership of its assets and other profits and capital reserves are distributed to its creditors and shareholders. Company A is deregistered after Company B has left the group.

Reasons for decision
Summary: Under subsection 703-5(2) of the ITAA 1997, a consolidated group ceases to exist when the head company ceases to be a head company. A head company ceases to be eligible to be a head company when it can no longer meet the requirements of Item 1 in the table contained in subsection 703-15(2) of the ITAA 1997. Deregistration is the final step in liquidation and completes the liquidation process (section 601AC of the Corporations Act 2001 ). A company ceases to exist when it is deregistered (subsection 601AD(1) of the Corporations Act 2001). Accordingly, a company that has been deregistered cannot meet the requirements of Item 1, which, among other things, requires a head company to be a company as defined by section 995-1 the ITAA 1997. A company means: Company A ceases to be company at the time of its deregistration and simultaneously ceases to be eligible to be a head company. As a result, the consolidated group ceases to exist. In order for Company A to be deregistered, it can no longer have beneficial or equitable ownership of assets or retain profits. Any profits from the change in ownership of its assets must be distributed amongst its creditors and contributories (shareholders). Thus, Company A's beneficial ownership of its shares in Company B must be disposed of, and the resultant profits distributed, before liquidation can be completed and deregistration can occur. Section 701-15 of the ITAA 1997 aligns the cost to the head company of the membership interest of the entity that leaves the group with the assets of that entity reduced by its liabilities, just before the entity ceases to be a subsidiary member of the group. In this instance, Company B leaves the group at the point in time when Company A's beneficial ownership in its shares changes. Section 701-60 of the ITAA 1997 explains which is the relevant section for calculating the tax cost setting amount. In this case, Item 2 of the table in section 701-60 of the ITAA 1997 explains that if the asset's tax cost is set by section 701-15 the tax cost setting amount is worked out in accordance with section 711-15 (for single exits) or 711-55 (for multiple exits). Section 711-15 of the ITAA 1997 outlines the steps involved in calculating the tax cost setting amount where there is no multiple exit. As Company B is the only subsidiary to leave the group, section 711-15 will apply, requiring Company B's tax cost setting amount for its membership interests (that is, its shares) to be calculated. Note 1: Section 701-40 of the ITAA 1997 (the exit history rules) will ensure that the assets leaving the group with Company B will retain their tax history. Note 2: a head company is required by Item 3 of the table in subsection 703-60(1) to provide the Commissioner with a notice of events effecting consolidated group. In the event of liquidation, it is expected the liquidator will perform this duty on behalf of the liquidated company.

Legislative references: Income Tax Assessment Act 1997 section 701-15 section 701-40 section 701-60 subsection 703-5(2) subsection 703-15(2) subsection 703-60(1) section 711-15 section 711-55 section 995-1
Subject references: Consolidation Consolidation - exiting Insolvency Liquidation Member of a group Provisional liquidation Voluntary liquidation Wholly owned subsidiary