ATO ID 2009/44: Consolidation: MEC group - interposition of a partnership of foreign resident wholly-owned subsidiaries of a top company, between the top company and an eligible tier-1 company
Date of decision: 17 June 2009
Year of income: Year ended 30 June 2009
Business line: Consolidation Centre of Expertise

Issue
Will the insertion of a partnership, all the partners of which are foreign resident wholly-owned subsidiary companies of the top company, between the top company and an eligible tier-1 company member of the multiple entry consolidated (MEC) group cause the eligible tier-1 company to cease to be an eligible tier-1 company of the top company?

Decision
No. The insertion of a partnership in which all the partners are foreign resident wholly-owned subsidiaries of the top company will not cause the eligible tier-1 company member to cease to be an eligible tier-1 company of the top company. A partner's interests in the partnership are membership interests for the purposes of determining under section 703-30 of the Income Tax Assessment Act 1997 (ITAA 1997) whether the partnership is a wholly-owned subsidiary of the top company. The partnership will be a wholly-owned subsidiary of the top company (provided the partners beneficially own their interests in the partnership). As the partners and the partnership are wholly-owned subsidiaries of the top company, the eligible tier-1 company above which the partnership is inserted will continue to be a wholly-owned subsidiary of the top company, and an eligible tier-1 company member of the MEC group.

Facts
X Co is the top company of a multiple entry consolidated group (MEC group 1) derived from the eligible tier-1 company members, A Co and B Co. A Co and B Co made the choice to form MEC group 1 and have continued to be X Co's only eligible tier-1 companies since the group formed. A Co is a directly held, wholly-owned subsidiary of X Co. B Co is a wholly-owned subsidiary of Y Co, a wholly-owned foreign resident subsidiary of X Co. Y Co incorporates two new wholly-owned foreign resident subsidiary companies, W Co and Z Co. W Co and Z Co form a partnership (WZ Partnership) and Y Co transfers all of the shares in B Co to the WZ Partnership. The WZ Partnership is a general partnership formed under a foreign partnership law which provides that the partnership is not a separate legal entity distinct from its partners. W Co and Z Co are entitled to all of the rights and benefits conferred on them as partners of the WZ Partnership under the general law and the WZ Partnership Agreement.

Reasons for decision
Summary: The residency and ownership requirements for a company to be a top company are in subsection 719-20(1) of the ITAA 1997. The insertion of the WZ Partnership will not change the residency or ownership structure of X Co. It will continue to meet the requirements in subsection 719-20(1) of the ITAA 1997 to be a top company. The requirements for a company to be an eligible tier-1 company are in sections 719-15 and 719-20 of the ITAA 1997. The insertion of the partnership does not affect the tax treatment, residency or ownership structure of A Co. It continues to meet all of the requirements in sections 719-15 and 719-20 of the ITAA 1997 to be an eligible tier-1 company of X Co. The insertion of the WZ Partnership between the top company (X Co) and B Co will not affect the tax treatment or residency of B Co, but will change the structure of the ownership of B Co. B Co will, however, continue to be a wholly-owned subsidiary of X Co and, therefore, an eligible tier-1 company of X Co. B Co is a wholly-owned subsidiary of X Co because it is a wholly-owned subsidiary of WZ Partnership which is a wholly-owned subsidiary of X Co (section 703-30 of the ITAA 1997). WZ Partnership is a wholly-owned subsidiary of X Co because all of the membership interests in WZ Partnership are beneficially owned by X Co's wholly-owned subsidiaries, W Co and Z Co. The partnership is a wholly-owned subsidiary of the partners W Co and Z Co because they beneficially own all of the membership interests in WZ Partnership (section 703-30 of the ITAA 1997).

Legislative references: Income Tax Assessment Act 1997 section 703-30 section 719-15 section 719-20 subsection 719-20(1) section 960-130 section 960-135
Related public rulings and determinations: Taxation Determination TD 2008/24
Subject references: Consolidation Consolidation - multiple entry consolidated group Consolidation - membership Consolidation - partnerships Membership interest of a partnership