ATO ID 2010/40: Consolidation: tax cost setting rules - acquisition of a MEC group
Date of decision: 15 January 2010
Year of income: Year ended 30 June 2010
Business line: Consolidation Centre of Expertise

Issue
Does Subdivision 705-C of the Income Tax Assessment Act 1997 (ITAA 1997) apply where a single entity, that is not a member of a consolidated group or a multiple entry consolidated (MEC) group, acquires all the membership interests in the head company and the other eligible tier-1 companies of a MEC group and immediately makes a choice to form a consolidated group?

Decision
No. Subdivision 705-C of the ITAA 1997 does not apply where a single entity, that is not a member of a consolidated group or MEC group, acquires all the membership interests in the head company and the other eligible tier-1 companies of a MEC group and immediately makes a choice to form a consolidated group.

Facts
A Co and B Co are eligible tier-1 companies of top company, X Co. A Co has a wholly owned subsidiary, S Co. A Co and B Co make a choice under section 719-50 of the ITAA 1997 to form a MEC group with A Co appointed as the provisional head company. Later, Z Co, an Australian resident company which is not a member of a consolidated group or MEC group, acquires all of the membership interests in A Co and B Co. Z Co immediately makes a choice under section 703-50 of the ITAA 1997 to form a consolidated group with Z Co as head company and A Co, B Co and S Co as subsidiary members.

Reasons for decision
Summary: Subdivision 705-C of the ITAA 1997 modifies Division 701 of the ITAA 1997 (the core rules) and Subdivision 705-A of the ITAA 1997 (tax cost setting amount for assets where a single entity joins a consolidated group) when an existing consolidated group acquires another consolidated group. Where a MEC group is acquired by another MEC group or a consolidated group, the MEC cost setting rules in Subdivision 719-C of the ITAA 1997 are modified to align with Subdivision 705-C. Subsection 705-175(1) of the ITAA 1997 sets out the circumstances in which Subdivision 705-C of the ITAA 1997 applies: This Subdivision applies if all of the *members of a *consolidated group (the acquired group ) become members of another consolidated group (the acquiring group ) at a particular time (the acquisition time ) as a result of the *acquisition of *membership interests in the *head company of the acquired group. Subsection 705-175(1) of the ITAA 1997 applies only where an existing consolidated group acquires all the membership interests in the acquired group. The words 'become members of another consolidated group' (emphasis added) indicate that there must be an existing consolidated group as the acquiring group. This view is supported by the Guide to Subdivision 705-C in section 705-170 of the ITAA 1997 and the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No.1) 2002 (see paragraph 1.16). Section 719-170 of the ITAA 1997 modifies subsection 705-175(1) of the ITAA 1997 for MEC groups where all the members of a MEC group become members of a consolidated group or another MEC group as a result of the acquisition of membership interests in the head company and the other eligible tier-1 companies of the acquired MEC group. Under subsection 719-170 of the ITAA 1997, an eligible tier-1 company of an acquired MEC group is treated in a similar manner as head company of an acquired group for the purposes of subsection 705-175(1) of the ITAA 1997. Consistent with the operation of Subdivision 705-C of the ITAA 1997, section 719-170 of the ITAA 1997 applies only where the acquiring group is either an existing consolidated group or an existing MEC group. This view is supported by the Notes 1 and 2 to subsection 719-170(2) of the ITAA 1997 and the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No.2) 2002 which both explain how the modifications in section 719-170 of the ITAA 1997 operate in situations where a MEC group is acquired by another group (see paragraphs 2.14 to 2.20). Subsection 705-175(1) of the ITAA 1997 does not apply where the members of the acquired group become members of a consolidated group that forms because a choice is made to consolidate the consolidatable group arising from the acquisition of the acquired group. Although that choice may have effect from the date on which the acquired group is acquired, it is not sufficient to satisfy the requirements of subsection 705-175(1). Z Co is not a member of a consolidated group or a MEC group at the time it acquires the membership interests in A Co and B Co. The consolidated group formed with Z Co as the head company and all the former members of the MEC group, A Co, B Co and S Co, as subsidiary members, only comes into existence when Z Co makes a choice, under section 703-50 of the ITAA 1997, to consolidate the group. This choice may have effect from the date on which the membership interests in A Co and B Co are acquired, but it is not sufficient to satisfy the requirements of subsection 705-175(1) of the ITAA 1997, as modified by section 719-170 of the ITAA 1997. Accordingly, Subdivision 705-C of the ITAA 1997 does not apply where a single entity, which is not a member of a consolidated group or a MEC group, acquires all the membership interests in the head company and eligible tier-1 companies of a MEC group and then makes the choice to form a consolidated group

Legislative references: Income Tax Assessment Act 1997 Division 701 section 703-50 Division 705 Subdivision 705-A Subdivision 705-B Subdivision 705-C section 705-170 subsection 705-175(1) Division 711 section 719-50 Subdivision 719-C section 719-170 subsection 719-170(2) Subdivision 719-J Subdivision 719-K
Related ATO interpretative decisions: ATO ID 2009/160
Subject references: Consolidation Consolidated group Consolidation - formation Consolidation - joining Consolidation - multiple entry consolidated group Eligible tier-1 company Head company Head company of a MEC group Subsidiary member of a consolidated group Subsidiary mem