ATO ID 2005/214: Consolidation: subsidiary member
Date of decision: 7 July 2005
Year of income: Year ended 30 June 2003 Year ended 30 June 2004
Business line: Public Groups and International

Issue
Will the beneficial ownership timing rule set out in section 703-33 of the Income Tax Assessment Act 1997 (ITAA 1997) be prevented from applying where the seller and the buyer of shares in a company first became associates of one another at the 'transfer time'?

Decision
No. The beneficial ownership timing rule will not be prevented from applying because the seller and the buyer of shares in a company are not associates of one another during the period referred to in paragraph 703-33(1)(d) of the ITAA 1997.

Facts
HCo is the head company of a consolidated group. XCo, which is not a member of the HCo consolidated group, beneficially owned all of the shares issued by SubCo. XCo sold all of its SubCo shares to HCo by way of a contract. At settlement XCo stopped being entitled to be registered as the holder of the shares in SubCo and HCo became entitled to be registered as the holder of those shares. Under the terms of the contract HCo paid XCo consideration for the SubCo shares by way of issuing shares in itself to XCo at settlement. The number of shares that HCo issued to XCo was sufficient for HCo to commence to be an associate of XCo in terms of section 318 of the Income Tax Assessment Act 1936 from that time.

Reasons for decision
Summary: Section 703-33 of the ITAA 1997 is a provision which provides a timing overlay to section 703-30 of the ITAA 1997 in certain circumstances. One of the requirements which needs to be satisfied for the timing rule to apply is set out in paragraph 703-33(1)(d) of the ITAA 1997. This provision requires that: Although HCo and XCo were associates of one another from the transfer time, they were not associates of one another during the period starting when the contract was entered into and ending at the transfer time. The requirement that the seller and buyer not be associates, as well as the requirement in paragraph 703-33(1)(c) of the ITAA 1997 that they deal with each other at arms length in relation to the contract, is a limitation to protect against collusion. In this regard paragraph 12.18 of the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures Bill (No. 2) 2002 (EM) states: Further, the timing rule will only apply to dealings at arm's length between parties that are not associates. This limitation protects against collusion between vendor and purchaser to effect a joining or leaving time that is not in accordance with the true transfer of ownership for other purposes. (Emphasis added) In the example above, transfer time was at the same time that settlement occurred. XCo had no influence over HCo until it acquired its interest in HCo which also occurred at transfer time. The associate relationship between HCo and XCo only arose 'as a result' of settlement of the contract at transfer time. Irrespective of the words of the EM it is evident from a reading of the provisions that section 703-33 of the ITAA 1997 is only intended to be prevented from applying where the associate relationship arises prior to the transfer time. This is clearly the case because the provision is directed at determining the transfer time. Accordingly, while XCo and HCo were associates of one another 'from' the transfer time they were not associates of one another 'during the period' starting when the contract was entered into and 'ending at the transfer time'. This being the case, the beneficial ownership timing rule will not be prevented from applying because the seller and the buyer of shares in a company are not associates of one another during the period referred to in paragraph 703-33(1)(d) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 703-30 section 703-33 paragraph 703-33(1)(c) paragraph 703-33(1)(d)
Related public rulings and determinations: Taxation Ruling TR 2005/5
Related ATO interpretative decisions: ATO ID 2004/619
Subject references: Acquisition of shares Associate Consolidation Consolidation - membership Member of a group Shares Subsidiary member of a consolidatable group Subsidiary member of a consolidated group Wholly owned Wholly owned subsidiary