ATO ID 2006/147: Consolidation: Special conversion event - application of sections 701-15 and 701-50
Date of decision: 17 May 2006
Year of income: Year ended 30 June 2005
Business line: Consolidation Centre of Expertise

Issue
Do sections 701-15 and 701-50 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to set the tax cost of membership interests in entities that cease to be subsidiary members of a consolidated group due to that group ceasing to exist when a special conversion event happens under section 719-40 of the ITAA 1997 in relation to it?

Decision
Yes. Sections 701-15 and 701-50 of the ITAA 1997 apply to set the tax cost of membership interests when entities cease to be subsidiary members of a consolidated group due to that group ceasing to exist when a special conversion event happens under section 719-40 of the ITAA 1997 in relation to it.

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 multiple entry consolidated group (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 a 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 its choice, in the approved form, as required by section 719-78 of the ITAA 1997. The MEC group comes into existence on 1 January 2004 and comprises the potential MEC group derived from H Co and its wholly-owned subsidiaries, and the other eligible tier-1 companies, A Co and B Co. H Co is the provisional head company of the MEC group.

Reasons for decision
Summary: When the head company of a consolidated group becomes a member of a MEC group as a result of a special conversion event, the group ceases to exist by operation of paragraph 703-5(2)(b) of the ITAA 1997. The subsidiary members of the consolidated group cease to be members of the group. Sections 701-15 and 701-50 of the ITAA 1997 apply to set the tax cost of membership interests in those entities which cease to be subsidiary members of a consolidated group. Subsection 701-15(3) of the ITAA 1997 provides that the tax cost of each membership interest the head company of the consolidated group holds in an entity that ceases to be a subsidiary member of the consolidated group, is set just before the entity ceases to be a subsidiary member of the consolidated group, at the membership interest's tax cost setting amount. Section 701-50 of the ITAA 1997 applies to set the tax cost of membership interests that one subsidiary member holds in another member of the consolidated group, where both entities leave the consolidated group at the same time because of an event that happens to one of them.

Legislative references: Income Tax Assessment Act 1997 section 701-15 subsection 701-15(3) section 701-50 subsection 703-5(2)(b) section 719-40 paragraph 719-40(1)(e) section 719-78
Related ATO interpretative decisions: ATO ID 2006/145 | ATO ID 2006/146 | ATO ID 2006/147 | ATO ID 2006/148
Subject references: Consolidation Consolidation - consolidated group Consolidation - exiting Consolidation - multiple entry consolidated group Cost of membership interests Cost setting rules Eligible tier-1 company Provisional head company Special conversion event Subsidiary member of a consolidated group Choice to form