Private ruling: Income tax consolidated group
Date of advice: 4 July 2017
Published: September 2017
Ruling period: Income year ending 31 December 201X | Income year ending 31 December 201Y
Date scheme commenced: DDMMYY

Ruling: Q1: Pursuant to section 719-40 of the Income Tax Assessment Act 1997 (ITAA 1997), if Australian Holding Company ( AHC ) makes a choice in writing no later than the date specified in subsection 719-40(2), does a special conversion event occur on DDMMYY, resulting in the formation of a Multiple Entry Consolidated group comprising all members of the AHC tax consolidated group immediately before the proposed special conversion event (including Former Subsidiary Holding Company ( FSHC ) and its wholly-owned subsidiaries)? | A1: Yes.

Relevant facts and circumstances: AHC's operations in Australia are related to its interest in two large infrastructure projects. Prior to DDMMYY, all 100% owned subsidiaries of AHC, including the holding entities for those infrastructure projects, were members of the AHC income tax consolidated group. On DDMMYY, AHC began to hold one share FSHC (a subsidiary entity of AHC) on trust for the overseas parent entity of AHC ( OS Co ). AHC is an Australian resident corporate taxpayer and is not a prescribed dual resident. OS Co, a resident corporate taxpayer of another jurisdiction beneficially owns 100% of the membership interests in AHC. These membership interests were acquired post-20 September 1985. All of the membership interests OS Co are held equally by two other overseas entities in different tax jurisdictions. Prior to DDMMYY, there were a number of members of the AHC income tax consolidated, which included FSHC and its subsidiaries. On DDMMYY, AHC declared a bare trust over 1 share in FSHC, for the benefit of OS Co. AHC has lodged a notification with the Australian Taxation Office ( ATO ) indicating that FSHC and its subsidiaries had exited the AHC income tax consolidated group. Prior to July 201Y, AHC and FSHC intend to make a choice in writing stating a Multiple Entry Consolidated ( MEC ) group is to come into existence at that time (DDMMYY) as a result of FSHC becoming an 'eligible tier-1' ( ET1 ) company. The members of the MEC group will reflect the AHC income tax consolidated group membership immediately before the MEC group is proposed to come into existence on DDMMYY.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 5-5 | Income Tax Assessment Act 1997 subsection 5-5(4) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 section 719-10 | Income Tax Assessment Act 1997 section 719-15 | Income Tax Assessment Act 1997 subsection 719-15(2) | Income Tax Assessment Act 1997 paragraph 719-15(2)(a) | Income Tax Assessment Act 1997 paragraph 719-15(2)(b) | Income Tax Assessment Act 1997 subsection 719-15(3) | Income Tax Assessment Act 1997 section 719-20 | Income Tax Assessment Act 1997 subsection 719-20(1) | Income Tax Assessment Act 1997 section 719-40 | Income Tax Assessment Act 1997 subsection 719-40(1) | Income Tax Assessment Act 1997 paragraph 719-40(1)(a) | Income Tax Assessment Act 1997 paragraph 719-40(1)(b) | Income Tax Assessment Act 1997 paragraph 719-40(1)(c) | Income Tax Assessment Act 1997 paragraph 719-40(1)(d) | Income Tax Assessment Act 1997 paragraph 719-40(1)(e) | Income Tax Assessment Act 1997 paragraph 719-40(1)(f) | Income Tax Assessment Act 1997 subsection 719-40(2) | Income Tax Assessment Act 1997 section 719-50 | Income Tax Assessment Act 1997 section 730-20

Reasons for decision: Summary: Section 719-40 outlines the circumstances whereby a MEC group comes into existence as a result of a special conversion event. Pursuant to subsection 719-40(1): (1) A special conversion event happens at a particular time to a * potential MEC group derived from an *eligible tier-1 company of a *top company if: (a) at that time, the group is not a *MEC group as a result of a choice under section 719-50; and (b) immediately before that time, a company is: (i) that eligible tier-1 company; and (ii) the *head company of a *consolidated group; and (c) at that time, one or more other companies become eligible tier-1 companies of the top company; and (d) immediately after that time, no *membership interests in the company mentioned in paragraph (b) are beneficially owned by another member of the potential MEC group derived from: (i) the company mentioned in paragraph (b); and (ii) the companies mentioned in paragraph (c); and (e) the company mentioned in paragraph (b) makes a choice in writing no later than the day mentioned in subsection (2): (i) specifying one or more of the companies mentioned in paragraph (c); and (ii) stating that a MEC group is to come into existence at that time as a result of the specified companies becoming eligible tier-1 companies of the top company; and (f) if: (i) a company specified in the choice was a member of another MEC group immediately before that time; and (ii) all of the eligible tier-1 companies in that other MEC group became eligible tier-1 companies of the top company at that time; each eligible tier-1 company in that other MEC group is specified in the choice. Note: The company mentioned in paragraph (b) must give the Commissioner a notice in the approved form containing information about the special conversion event (see sections 719-78 and 719-80). (2) The day mentioned in paragraph (1)(e) is: (a) if the company is required to give the Commissioner its *income tax return for the income year during which that time occurs—the day on which the company gives the Commissioner that income tax return; or (b) otherwise—the last day in the period within which the company would be required to give the Commissioner such a return if it were required to give the Commissioner such a return. Before applying the various paragraphs of subsection 719-40(1) to determine if a special conversion event happens, it is first necessary to identify: ● the relevant 'Top Company' ● the 'eligible tier-1 company' ( ET1 Company ) of that Top Company, and ● the 'potential MEC group'. | Detailed Reasoning - Top Company: Relevantly, 'Top Company' is defined by section 719-20, which provides: (1) At a particular time, a company is: (a) a top company if the requirements in item 1 of the table are met; or (b) … Top companies and tier-1 companies Column 1 Kind of entity Column 2 Income tax treatment requirements Column 3 Residence requirements Column 4 Ownership requirements 1 Top company No specific requirements The company must be a foreign resident The company must not be a *wholly-owned subsidiary of another company (other than a company that is a *prescribed dual resident, or a company that is an Australian resident that fails to meet a condition in column 2 of item 2) In the present case, OS Co will satisfy the requirements of subsection 719-20(1) as it: ● is a resident company of a jurisdiction other than Australia, and ● in accordance with section 703-30, is not a wholly-owned subsidiary of another company that is a prescribed dual resident or an Australian resident, because it is 50% directly owned by a non-Australian tax resident. Therefore, as OS Co is a foreign resident and not a wholly-owned subsidiary of another company, OS Co meets the requirements of a 'Top Company' for the purposes of section 719-20. | Detailed Reasoning - Tier-1 company: Before determining whether a company is an ET1 Company, it must first be established that it is a 'tier-1 company' as defined by section 719-20. Item 2 of the table in subsection 719-20(1) provides: Top companies and tier-1 companies Column 1 Kind of entity Column 2 Income tax treatment requirements Column 3 Residence requirements Column 4 Ownership requirements 2 Tier-1 company The company must have all or some of its taxable income (if any) taxed at a rate that is or equals the *corporate tax rate apart from this Part The company must not be covered by an item in the table in section 703-20 The company must be an Australian resident (but not a *prescribed dual resident) The company: (a) must be a *wholly-owned subsidiary of the *top company; and (b) must not be a wholly-owned subsidiary of a company that is an Australian resident (other than a company that fails to meet a condition in column 2 or 3) AHC In the present case, AHC is a corporate taxpayer and the head company of a tax consolidated group. All of AHC's ordinary and statutory income is taxable at the Australian corporate tax rate. AHC is not an entity covered in the table in section 730-20, as it is not an exempt entity, a medium credit union, an approved credit union, a pooled development fund, a complying or non-complying superannuation fund, nor a non-complying approved deposit fund. AHC is an Australian resident company and not a prescribed dual resident, and is a wholly-owned subsidiary of OS Co (the Top Company). Finally, AHC is not a wholly-owned subsidiary of a company that is an Australian resident. Accordingly, AHC satisfies the requirements set out in subsection 719-20(1) and is a tier-1 company as defined in the scheme which is the subject of this private ruling. FSHC Similarly, when a bare trust was declared over 1 share in FSHC (for the benefit of OS Co), FSHC ceased to be a wholly-owned subsidiary of AHC within the meaning of section 703-30 (which requires beneficial ownership of all of the membership interests in the relevant company). As required by Column 2 of Item 2 of the table in section 719-20, FSHC is a corporate taxpayer whose ordinary and statutory income is taxable at the Australian corporate tax rate. In addition, it is not any of the types of entities listed in the table in section 703-20. FSHC is an Australian resident company and not a prescribed dual resident, and is a wholly-owned subsidiary of OS Co (the Top Company). Finally, FSHC is not a wholly-owned subsidiary of a company that is an Australian resident. Accordingly, FSHC satisfies the requirements set out in subsection 719-20(1) and is a tier-1 company as defined in the scheme which is the subject of this private ruling. | Detailed Reasoning - Eligible tier-1 company: Having established that AHC is a 'tier-1 company', it then needs to be established that AHC is an ET1 Company as provided by section 719-15, which provides: (1) A *tier-1 company of a *top company is an eligible tier-1 company if subsection (2) does not apply to the tier-1 company. (2) This subsection applies to a *tier-1 company if: (a) there are one or more entities interposed between the tier-1 company and the *top company; and (b) the conditions in subsection (3) are satisfied in relation to at least one of those interposed entities. (3) For the purposes of paragraph (2)(b), the conditions are as follows: (a) the interposed entity must be one of the following: (i) a company that is a foreign resident; (ii) a *prescribed dual resident; (iii) a trust that does not meet the conditions in item 1, 2 or 3 of the table in section 703-25; (iv) a trust that meets the conditions in item 1, 2 or 3 of the table in section 703-25 and is not a *wholly-owned subsidiary of another *tier-1 company of the *top company; (v) an entity covered by an item in the table in section 703-20; (vi) a company that is an Australian resident, where no part of its taxable income (if any) would be taxable at a rate that is or equals the *general company rate; (vii) a non-profit company (as defined in the Income Tax Rates Act 1986 ) that is a wholly-owned subsidiary of another tier-1 company of the top company; (b) the interposed entity must not hold *membership interests only as nominee of one or more entities each of which is: (i) another tier-1 company of the top company; or (ii) an entity that is a wholly-owned subsidiary of another tier-1 company of the top company; (c) at least one of the following entities must hold a membership interest in the interposed entity: (i) another tier-1 company of the top company; (ii) a wholly-owned subsidiary of another tier-1 company of the top company; (iii) an entity that holds membership interests only as a nominee of one or more entities each of which is mentioned in subparagraph (i) or (ii). (4) For the purposes of subparagraphs (3)(a)(iv) and (vii) and paragraphs (3)(b) and (c), in determining whether an entity is a wholly-owned subsidiary of another *tier-1 company of the *top company, assume that all of the *membership interests that are beneficially owned by tier-1 companies of the top company were owned by a single tier-1 company of the top company. Applying subsection 719-15(1) to the present case, AHC (a 'tier-1 company') will be an ET1 Company if subsection 719-15(2) does not apply to it. Relevantly, subsection 719-15(2) can only apply if 'there are one or more entities interposed between the tier-1 company and the Top Company'. In the present case, the corporate structure of OS Co (the Top Company) reveals that there are no entities interposed between itself and AHC. It follows that subsection 719-15(2) cannot apply, and accordingly, AHC is an ET1 Company. | Detailed Reasoning - Potential MEC group: Relevantly, 'Potential MEC group' is defined by reference to section 719-10. (1) A potential MEC group derived from one or more *eligible tier-1 companies of a *top company consists of the following members: (a) those eligible tier-1 companies; (b) all of the other entities (if any) which: (i) meet the requirements of the table; or (ii) … Requirements for other entities Column 1 Income tax treatment requirements Column 2 Australian residence requirements Column 3 Ownership requirements The entity must be a company, trust or partnership and, if it is a company, all or some of its taxable income (if any) must have been taxable at a rate that is or equals the *corporate tax rate apart from this Part The entity must not be covered by an item in the table in section 703-20 The entity must not be a non-profit company (as defined in the Income Tax Rates Act 1986 ) The entity must: (a) be an Australian resident (but not a *prescribed dual resident), if it is a company; or (b) meet the conditions in item 1, 2 or 3 of the table in section 703-25, if it is a trust; or (c) be a partnership The entity must be: (a) a *wholly-owned subsidiary of any of those *eligible tier-1 companies; or (b) an entity that would be covered by paragraph (a), if it were assumed that all of the membership interests that are beneficially owned by any of those eligible tier-1 companies were owned by a single one of those eligible tier-1 companies In the present case, a 'potential MEC group' existed at the time of the proposed special conversion event in June 201X. As AHC is the head company of the AHC tax consolidated group at that time, the subsidiary members of the group are treated as part of AHC under the single entity rule in section 701-1 for 'head company core purposes' and 'entity core purposes' within the meaning of that section. Accordingly, it is unnecessary to consider whether these entities satisfy the requirements in table in section 719-10. | Detailed Reasoning - Special conversion event: As noted above, the requirements of section 719-40 must be satisfied in order for a special conversion event to happen. These are discussed in turn as follows. Paragraph 719-40(1)(a) Paragraph 719-40(1)(a) provides that a special conversion event cannot occur in relation to a MEC group which exists 'at that time' and was formed as a result of a choice under section 719-50. In the present case, AHC is the head company of a tax consolidated group and is not part of an existing MEC group. In addition, FSHC and none of its wholly-owned subsidiaries are part of an existing MEC group. Accordingly, paragraph 719-40(1)(a) will not apply. Paragraph 719-40(1)(b) Paragraph 719-40(1)(b) requires that there must be a company that is both a ET1 Company and the head company of a consolidated group (which is not a MEC group) immediately before the special conversion event. As discussed above, AHC is both an ET1 Company, and the head company of a tax consolidated group (which is not a MEC group), at the time a bare trust is declared over the 1 share in FSHC (i.e. at the time of the proposed special conversion event on DDMMYY). Accordingly, paragraph 719-40(1)(b) will be satisfied. Paragraph 719-40(1)(c) Paragraph 719-40(1)(c) provides that one or more companies, other than the ET1 Company that is the head company of a tax consolidated group (in this case, AHC), must become an ET1 Company at that time. As discussed above, FSHC also becomes an ET1 Company at the time a bare trust is declared over the 1 share in FSHC (ie at the time of the proposed special conversion event on DDMMYY). Accordingly paragraph 719-40(1)(c) will be satisfied. Paragraph 719-40(1)(d) Paragraph 719-40(1)(d) provides that immediately after the special conversion event, no membership interests in the company mentioned in paragraph (b) (which, in the present case, is AHC) are to be beneficially owned by another member of the potential MEC group derived from that company, and any companies mentioned in paragraph (c) (which, in the present case, is FSHC). In the present case, 100% of the membership interests in AHC will be held by OS Co (the Top Company) immediately after the proposed special conversion event. Based on the Facts provided, there is no change in the membership interests in AHC as a result of the proposed special conversion event. Accordingly, the requirement in paragraph 719-40(1)(d) will be satisfied. Paragraph 719-40(1)(e) AHC must make a choice in writing specifying the ET1 Companies of the potential MEC group, and this choice must state that a MEC group is to come into existence. This choice must state that a MEC group is to come into existence at the time FSHC becomes an ET1 of OS Co. Paragraph 719-40(1)(e) provides that the company mentioned in paragraph (b) (which, in the present case, is AHC) must make its choice in writing no later than the day mentioned in subsection 719-40(2). Subsection 719-40(2) provides that the choice in writing must be made no later than the day on which the income tax return is due for the year in which the special conversion event occurred. In the present case, the statutory due date for lodgment of AHC's income tax return for the relevant income year is July 201Y. In addition, AHC must give the Commissioner a notice in the approved form containing information about the special conversion event as outlined in sections 719-78 and 719-80. The question assumes that AHC will make the relevant choice in accordance with paragraph 719-40(1)(e) by July 201Y. Paragraph 719-40(1)(f) The final requirement for a MEC group to come into existence relates to situations where a company specified in the choice is a member of an existing MEC group immediately prior to the choice. In the present case, none of the members of the MEC group formed under the proposed special conversion event was a member of another MEC group immediately before the time of the proposed special conversion event in June 201X. Accordingly, paragraph 719-40(1)(f) will not apply. Conclusion Based on the preceding analysis, a special conversion event will occur on DDMMYY, resulting in the formation of a MEC group comprising all members of the AHC tax consolidated group immediately before the proposed special conversion event (including FSHC and the wholly-owned subsidiaries of FSHC), if AHC makes a choice in writing no later than the date specified in subsection 719-40(2) (i.e. July 201Y). AHC will be the provisional head company of the MEC group immediately after the special conversion event (subsection 719-60(2)).

Reasons for decision: All references are to the Income Tax Assessment Act 1997 unless stated otherwise.