Private ruling: Transfer of shares
Date of advice: 8 September 2025
Published: 27 October 2025
Ruling period: July 20XX to 30 June 20XX
Date scheme commenced: DDMMYYYY

Ruling: Q1: Will Company A cease to be a subsidiary member, as defined in subsection 703-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997), of the Company N income tax consolidated group (ITCG) when the shares in Company A are transferred to Company M? | A1: Yes. | Q2: Will a special conversion event under section 719-40 of the ITAA 1997 happen on the transfer of shares in Company A to Company M? | A4: Yes - the Company N MEC group will come into existence on the transfer of shares in Company A to Company M. | Q3: Will Division 711 of the ITAA 1997 apply to determine Company N's tax cost base in its Company A shares in respect to Company A leaving the Company N ITCG? | A5: Yes. | Q4: Will a CGT event L5 capital gain, pursuant to section 104-520 of the ITAA 1997, be capable of arising in respect to Company A being transferred from Company N to Company M? | A10: Yes - the carried forward tax losses and non-refundable R&D tax offsets of the Company N ITCG will not be subject to an available fraction. | Q5: Upon Company N being sold to Company A will CGT event A1 arise pursuant to section 104-10 of the ITAA 1997 in respect to Company M's disposal of the Company N shares? | A11: Yes. | Q6: If the transfer of Company N to Company A gives rise to a CGT event A1, assuming the Company N shares are not an indirect Australian real property interest (IARPI), will the capital gain/loss be disregarded under Division 855 of the ITAA 1997? | A14: Yes - Company A will be eligible to become the PHC of the MEC group immediately after the cessation event. | Q7: Pursuant to section 719-90 of the ITAA 1997, will the history of the Company N MEC group and, in particular, carried forward tax losses, carried forward FRT disallowed amounts, franking credits and non-refundable R&D tax offsets be retained by the Company A MEC group? | A15: Yes. | Q8: Will the Company A MEC group convert into an ITCG pursuant to section 703-55 of the ITAA 1997 following the partial listing or a trade sale of Company M's shares? | A16: No.

Relevant facts and circumstances: Company F Limited 1. Company F is registered with the Country Y Companies Office. 2. Company F and its subsidiaries carry on a business for the purpose of gaining or producing assessable income. 3. Company F is a tax resident of Country Y. Company F's global group structure 4. Company F has subsidiaries (either directly or indirectly) in Country Y and across the globe, including Country X. 5. Company M is a Country Y incorporated company registered with the Country Y Companies Office. Company M is an indirectly wholly-owned subsidiary of Company F (via Company FE). 6. Company M owns 100% of the shares in Company N. 7. Company N is the current Country X parent and holding company for Company F's Country X subsidiaries. The Company N income tax consolidated group 8. Company N is the head company of a Country X income tax consolidated group (ITCG) (the Company N ITCG). • Company N has a number of wholly-owned subsidiaries, which are all Country X tax resident companies, including: • Company A; • Company FA; • Company FB; and • Company FI; Restructuring 9. Company F made a decision to divest its business via either a trade sale process or an initial public offering (IPO) (Transaction). 10. Company F formed the view that it was necessary to rearrange the ownership of Company N, Company FA, and Company FB before proceeding with the Transaction using the following steps: • Step 1: Company N transfers all the issued shares in Company FI to Company FE. • Step 2: Company N transfers all the issued shares in Company FB to Company FA. • Step 3: Company N transfers all the issued shares in Company A to Company M. • Step 4: Company N makes a choice in writing to convert the Company N ITCG to a multiple entry consolidated (MEC) group no later than its income tax return due date for the income year in which Step 3 occurs. • Step 5: Company N transfers all the issued shares in Company FA to Company A. • Step 6: Company M transfers all the issued shares in Company N to Company A.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6H | Income Tax Assessment Act 1936 section 23G | Income Tax Assessment Act 1997 Division 50 | Income Tax Assessment Act 1997 Division 65 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 section 104-520 | Income Tax Assessment Act 1997 subsection 104-520(1) | Income Tax Assessment Act 1997 paragraph 104-520(1)(b) | Income Tax Assessment Act 1997 Subdivision 126-B | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 701-1(2) | Income Tax Assessment Act 1997 paragraph 701-1(2)(a) | Income Tax Assessment Act 1997 paragraph 701-1(2)(b) | Income Tax Assessment Act 1997 subsection 701-1(4) | Income Tax Assessment Act 1997 section 701-5 | Income Tax Assessment Act 1997 section 701-10 | Income Tax Assessment Act 1997 section 701-15 | Income Tax Assessment Act 1997 section 701-50 | Income Tax Assessment Act 1997 section 703-5 | Income Tax Assessment Act 1997 subsection 703-5(2) | Income Tax Assessment Act 1997 paragraph 703-5(2)(b) | Income Tax Assessment Act 1997 section 703-15 | Income Tax Assessment Act 1997 subsection 703-15(2) | Income Tax Assessment Act 1997 section 703-20 | Income Tax Assessment Act 1997 subsection 703-30(1) | Income Tax Assessment Act 1997 section 703-55 | Income Tax Assessment Act 1997 subsection 703-55(1) | Income Tax Assessment Act 1997 paragraph 703-55(1)(b) | Income Tax Assessment Act 1997 Division 707 | Income Tax Assessment Act 1997 Subdivision 707-C | Income Tax Assessment Act 1997 Division 711 | Income Tax Assessment Act 1997 section 711-20 | Income Tax Assessment Act 1997 Subdivision 719-BA | Income Tax Assessment Act 1997 Subdivision 719-F | Income Tax Assessment Act 1997 section 719-5 | Income Tax Assessment Act 1997 subsection 719-5(1) | Income Tax Assessment Act 1997 paragraph 719-5(1)(b) | Income Tax Assessment Act 1997 subsection 719-5(7) | Income Tax Assessment Act 1997 paragraph 719-5(7)(a) | Income Tax Assessment Act 1997 paragraph 719-5(7)(b) | Income Tax Assessment Act 1997 section 719-10 | Income Tax Assessment Act 1997 subsection 719-10(1) | Income Tax Assessment Act 1997 subsection 719-10(7) | Income Tax Assessment Act 1997 section 719-15 | Income Tax Assessment Act 1997 subsection 719-15(3) | Income Tax Assessment Act 1997 paragraph 719-15(3)(b) | Income Tax Assessment Act 1997 paragraph 719-15(3)(c) | Income Tax Assessment Act 1997 section 719-20 | Income Tax Assessment Act 1997 subsection 719-20(1) | Income Tax Assessment Act 1997 section 719-25 | Income Tax Assessment Act 1997 subsection 719-25(2) | 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)(b) | Income Tax Assessment Act 1997 paragraph 719-40(1)(c) | Income Tax Assessment Act 1997 paragraph 719-40(1)(e) | Income Tax Assessment Act 1997 section 719-50 | Income Tax Assessment Act 1997 section 719-60 | Income Tax Assessment Act 1997 subsection 719-60(2) | Income Tax Assessment Act 1997 subsection 719-60(3) | Income Tax Assessment Act 1997 subsection 719-60(5) | Income Tax Assessment Act 1997 subsection 719-60(6) | Income Tax Assessment Act 1997 paragraph 719-60(6)(a) | Income Tax Assessment Act 1997 section 719-65 | Income Tax Assessment Act 1997 subsection 719-65(1) | Income Tax Assessment Act 1997 paragraph 719-65(1)(a) | Income Tax Assessment Act 1997 paragraph 719-65(1)(b) | Income Tax Assessment Act 1997 subsection 719-65(2) | Income Tax Assessment Act 1997 subsection 719-65(3) | Income Tax Assessment Act 1997 paragraph 719-65(3)(d) | Income Tax Assessment Act 1997 subparagraph 719-65(3)(d)(i) | Income Tax Assessment Act 1997 paragraph 719-65(3)(e) | Income Tax Assessment Act 1997 subsection 719-75(1) | Income Tax Assessment Act 1997 section 719-78 | Income Tax Assessment Act 1997 section 719-85 | Income Tax Assessment Act 1997 section 719-90 | Income Tax Assessment Act 1997 paragraph 719-90(2)(ca) | Income Tax Assessment Act 1997 paragraph 719-90(3)(a) | Income Tax Assessment Act 1997 section 719-95 | Income Tax Assessment Act 1997 section 719-120 | Income Tax Assessment Act 1997 subsection 719-120(1) | Income Tax Assessment Act 1997 paragraph 719-120(1)(b) | Income Tax Assessment Act 1997 subsection 719-120(2) | Income Tax Assessment Act 1997 section 719-125 | Income Tax Assessment Act 1997 subsection 719-125(1) | Income Tax Assessment Act 1997 paragraph 719-125(1)(a) | Income Tax Assessment Act 1997 subsection 719-125(3) | Income Tax Assessment Act 1997 paragraph 719-125(3)(c) | Income Tax Assessment Act 1997 section 719-130 | Income Tax Assessment Act 1997 subsection 719-130(3) | Income Tax Assessment Act 1997 subsection 719-130(4) | Income Tax Assessment Act 1997 subsection 719-130(5) | Income Tax Assessment Act 1997 paragraph 719-130(5)(c) | Income Tax Assessment Act 1997 section 719-135 | Income Tax Assessment Act 1997 section 719-160 | Income Tax Assessment Act 1997 subsection 719-160(1A) | Income Tax Assessment Act 1997 subsection 719-160(2) | Income Tax Assessment Act 1997 subsection 719-160(3) | Income Tax Assessment Act 1997 subsection 719-300(1) | Income Tax Assessment Act 1997 paragraph 719-300(1)(a) | Income Tax Assessment Act 1997 subsection 719-300(3) | Income Tax Assessment Act 1997 subsection 719-300(5) | Income Tax Assessment Act 1997 section 719-305 | Income Tax Assessment Act 1997 Division 855 | Income Tax Assessment Act 1997 subsection 855-10(1) | Income Tax Assessment Act 1997 section 855-15

Reasons for decision: Detailed Reasoning - Detailed reasoning: A subsidiary member of a consolidated group will cease to be a member of the consolidated group at a time it fails to satisfy the requirements in item 2 of the table in subsection 703-15(2). In this regard, column 4 of that table requires that: The entity must be a * wholly-owned subsidiary of the head company of the group and, if there are interposed between them any entities, the set of requirements in section 703-45, section 701C-10 of the Income Tax (Transitional Provisions) Act 1997 or section 701C-15 of that Act must be met. Pursuant to subsection 703-30(1): One entity (the subsidiary entity) is a wholly-owned subsidiary of another entity (the holding entity) if all the * membership interests in the subsidiary entity are beneficially owned by: (a) the holding entity; or (b) one or more wholly-owned subsidiaries of the holding entity; or (c) the holding entity and one or more wholly-owned subsidiaries of the holding entity. Once the shares in Company A are transferred to Company M, Company A ceases to be a wholly-owned subsidiary of Company N (the head company of the Company N ITCG) and therefore fails to satisfy the ownership requirements in column 4 of the table in subsection 703-15(2). Accordingly, Company A ceases to be a subsidiary member of the Company N ITCG when the shares in it are transferred to Company M. | Detailed Reasoning - Question 2: Will a special conversion event under section 719-40 of the ITAA 1997 happen on the transfer of shares in Company A to Company M? | Detailed Reasoning - Detailed reasoning: A special conversion event happens when one or more companies become eligible tier-1 (ET1) companies of the top company of a potential MEC group and the requirements in subsection 719-40(1) are satisfied. These requirements are: | Detailed Reasoning - Potential MEC group - section 719-10: A potential MEC group derived from one or more ET1 companies of a top company consists of those ET1 companies and their wholly-owned subsidiaries that also meet the requirements in the table in subsection 719-10(1). Following the transfer of Company A by Company N to Company M, there will be a potential MEC group comprising Company A and Company N as the ET1 companies and their wholly-owned subsidiaries. Further, these entities will all satisfy the income tax treatment, Australian residence and ownership requirements outlined in columns 1-3 of the table in subsection 719-10(1). In this regard, Company N's wholly-owned subsidiaries: • Are not tax-exempt entities or entities that are not subject to Australian income tax at the corporate tax rate, and therefore satisfy the income tax treatment requirements outlined in column 1 of subsection 719-10(1). • Are Australian tax resident and not prescribed dual resident companies, and therefore satisfy the Australian residence requirements outlined in column 2 of subsection 719-10(1). • Are wholly-owned subsidiaries of Company N (an ET1 company, refer below for further details), and therefore satisfy the ownership requirements outlined in column 3 of subsection 719-10(1). | Detailed Reasoning - Top company - section 719-20: A foreign resident company that is not a wholly-owned subsidiary of another company (other than a company that is a prescribed dual resident or an Australian resident company that fails to qualify as an ET1 company) satisfies the conditions to be a top company. Company F will qualify as the top company of a potential MEC group on the basis it is a foreign resident company and is not a wholly-owned subsidiary of another entity. | Detailed Reasoning - ET1 company - sections 719-15 and 719-20: A company will be considered an ET1 company if it satisfies all of the following: • It is an Australian resident company (but not a prescribed dual resident) some or all of whose taxable income (if any) is taxable at a rate that is or equals the corporate tax rate; • It is not a recognised credit union (as defined in section 6H of the ITAA 1936), an approved credit union (for the purposes of section 23G of the ITAA 1936), a pooled development fund, or an exempt entity (under Division 50); • It is a wholly-owned subsidiary of the top company (either directly or indirectly through an interposed entity/entities) and not a wholly-owned subsidiary of a company that is an Australian resident (other than an entity that is otherwise ineligible to be an ET1 company); and • Where an entity is interposed between the company and the top company - membership interests in the interposed foreign entity must not be held by another ET1 company or its subsidiary. Company N and Company A will qualify as ET1 companies on the basis that Company N and Company A have the following tax attributes: • All or some of their taxable income (if any) will be taxed at the general company tax rate; • Neither is a company listed in section 703-20; • Neither is a non-profit company (as defined in the Income Tax Rates Act 1986 ); • Both are Australian resident companies and neither is a prescribed dual resident; • Both are wholly-owned subsidiaries of Company F; and • Neither is a wholly-owned subsidiary of an Australian resident company (i.e., there are no Australian resident companies interposed between the direct shareholder, Company M, and the top company, Company F). Although there are entities that are foreign resident companies interposed between Company F (the top company) and Company N and Company A (the ET1 companies), none of the following entities hold a membership interest in the interposed entities (as outlined in paragraphs 719-15(3)(b) and (c)): • The ET1 companies of Company F; • A wholly-owned subsidiary of the ET1 companies of Company F; or • An entity that holds membership interests only as a nominee of one or more of the above. Accordingly, the potential MEC group consists of Company N and Company A as ET1 companies of Company F as the top company, as well as Company N's wholly-owned subsidiaries. Subsection 719-40(1) describes the required circumstances for a special conversion event to happen to a consolidated group that is also a potential MEC group. Subsection 719-40(1) prescribes that: 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. Immediately following the time that Company A is transferred to Company M, the Company N ITCG constitutes a potential MEC group pursuant to section 719-10 on the basis that Company A is an ET1 company of Company F (the top company). The requirements of subsection 719-40(1) are satisfied on the basis that: • The Company N ITCG is not a MEC group as a result of a choice under section 719-50; • Prior to the transfer of Company A to Company M, Company N is both an ET1 company and the head company of the Company N ITCG; • At the time of the transfer of Company A to Company M, Company A becomes an ET1 company of Company F; • Immediately after the transfer of Company A to Company M, no membership interests in either Company N or Company A are beneficially owned by another member of the potential MEC group; and • It is assumed that Company N will make a choice in writing to convert the Company N ITCG to a MEC group no later than the day on which Company N lodges its income tax return for the income year in which Company A is transferred to Company M. Accordingly, and provided section 719-78 in relation to notification of Company N's choice is complied with, a special conversion event will happen at the time Company A is transferred to Company M and becomes an ET1 company of Company F such that the Company N ITCG is converted to a MEC group (Company N MEC group). Company N will automatically become the PHC of the Company N MEC group pursuant to subsection 719-60(2), which provides that: If a * special conversion event happens to a * potential MEC group, the * eligible tier-1 companies that were the members of the MEC group that resulted from the event are taken to have appointed the company mentioned in paragraph 719-40(1)(b) as the provisional head company of the * MEC group. The appointment is taken to have come into force when the event happened. | Detailed Reasoning - Question 3a: Will the Company N ITCG cease to exist pursuant to paragraph 703-5(2)(b) of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: Section 703-5 provides the time at which an ITCG comes into existence and outlines the circumstances in which an ITCG ceases to exist. In particular, subsection 703-5(2) states: The consolidated group continues to exist until the * head company of the group: (a) ceases to be a head company; or (b) becomes a member of a * MEC group. The consolidated group ceases to exist when one of those events happens to the head company. Accordingly, when the special conversion event under section 719-40 happens, Company N will become a member of a MEC group, as defined in section 719-25. Resultantly, the Company N ITCG will cease to exist at that time pursuant to paragraph 703-5(2)(b). | Detailed Reasoning - Question 3b: Will a MEC group come into existence pursuant to paragraph 719-5(1)(b) of the ITAA 1997? If yes, when will the MEC group come into existence? | Detailed Reasoning - Detailed reasoning: Section 719-5 provides the time when, and the circumstances in which, a MEC group comes into existence or ceases to exist. Subsection 719-5(1) states: A MEC (multiple entry consolidated) group comes into existence when: (a) a choice, by 2 or more * eligible tier-1 companies of a * top company, that the * potential MEC group derived from those companies be consolidated starts to have effect under section 719-55; or (b) a * special conversion event happens to a potential MEC group derived from an eligible tier-1 company of a top company. Therefore, the Company N MEC group will come into existence under paragraph 719-5(1)(b) when the special conversion event happens to the Company N ITCG pursuant to section 719-40. As it is assumed for the purpose of this ruling that a choice is made by Company N (as required under paragraph 719-40(1)(e)), the special conversion event occurs on the transfer of Company A to Company M, and therefore the Company N MEC group will come into existence at that time. | Detailed Reasoning - Question 4: Will Division 711 of the ITAA 1997 apply to determine Company N's tax cost base in its Company A shares in respect to Company A leaving the Company N ITCG? | Detailed Reasoning - Detailed reasoning: Subdivision 719-BA outlines the consequences when an existing ITCG converts to a MEC group via a special conversion event. In particular, subsections 719-130(3) and (5) operate to switch off the application of certain consolidation rules for continuing members (as outlined in subsection 719-120(2)), which were members of the former ITCG prior to the conversion and become members of the newly formed MEC group following the conversion. However, continuing members which become an ET1 of the MEC group are excluded from the scope of subsections 719-130(3) and (5), as outlined in subsection 719-130(4): Subsection (3) does not apply if: (a) the old group mentioned in subsection 719-120(1) is a *consolidated group; and (b) the new group mentioned in subsection 719-120(1) is a *MEC group; and (c) the entity ceasing to be a *member of the old group becomes an *eligible tier-1 company in respect of the new group. In this regard, Company A becomes an ET1 company in respect of the Company N MEC group following the special conversion event. Accordingly, subsections 719-130(3) and (5) will not apply to Company A, to otherwise switch off the operation of Part 3-90, including the operation of Division 711 in relation to establishing the tax cost for membership interests where entities cease to be subsidiary members of consolidated groups. This is confirmed in the Explanatory Memorandum to Tax Laws Amendment (2010 Measures No. 1) Bill 2010 at paragraphs 5.83 to 5.85 as follows: 5.83 Where an on-going member becomes an eligible tier-1 company in respect of a new MEC group because a foreign resident company acquires all the membership interests, tax consequences will arise for the head company of the old consolidated group in respect of the disposal of the membership interests in the ongoing member to the foreign resident company. Therefore, the tax cost setting amount of those membership interests will be worked out under Division 711. 5.84 Where this eligible tier-1 company holds membership interests in another ongoing subsidiary member (that is, a lower tier subsidiary member) of the group, the old group's allocable cost amount for this lower tier subsidiary member will need to be worked out to determine the tax costs for the membership interests in the eligible tier-1 company. However, section 719-130 will ensure that CGT event L5 is not triggered in relation to the lower tier subsidiary member. 5.85 The disposal of the membership interests in the on-going member that becomes an eligible tier-1 company to a foreign resident company may result in the head company of the old group making: • a capital gain or loss under CGT event A1; or • a capital gain under CGT event L5. In addition, the comments and example in section C10-1-210 of the Consolidation Reference Manual ( MEC group created from a consolidated group - special conversion event due to transfer-up (Division 711 and CGT event L5) ) confirm that the tax cost setting rules in Division 711 should apply to determine the tax cost base of the membership interests in the entity being transferred up (i.e., Company A). The tax cost base in the entity as determined by Division 711, will in turn inform whether the head company of the ITCG (i.e., Company N) will make a capital gain or loss on the transfer. | Detailed Reasoning - Question 5: Will a CGT event L5 capital gain, pursuant to section 104-520 of the ITAA 1997, be capable of arising in respect to Company A being transferred from Company N to Company M? | Detailed Reasoning - Detailed reasoning: As per Question 4 above, the tax cost setting rules in Division 711 should continue to apply to determine the tax cost of the membership interests in Company A in respect to it exiting the Company N ITCG. In applying Division 711, CGT event L5 may also arise. This is confirmed in the comments in section C10-1-210 of the Consolidation Reference Manual ( MEC group created from a consolidated group - special conversion event due to transfer-up (Division 711 and CGT event L5) ). The requirements for CGT event L5 arising are set out in subsection 104-520(1): CGT event L5 happens if: (a) an entity ceases to be a *subsidiary member of a *consolidated group or a *MEC group; and (b) in working out the group's *allocable cost amount for the entity, the amount remaining after applying step 4 of the table in section 711-20 is negative. As outlined in paragraph 104-520(1)(b), CGT event L5 should only arise if in working out Company A's allocable cost amount (ACA), there is a negative amount following step 4. The exit ACA calculation, which will inform whether a CGT event L5 will arise, will be performed after the sale of Company A to Company M. | Detailed Reasoning - Question 6a: Will Subdivision 719-BA of the ITAA 1997 apply such that sections 701-10, 701-15 and 701-50 of the ITAA 1997 will not result in the reset of the tax cost of membership interests in entities that cease to be subsidiary members of the Company N ITCG (to the exception of Company A) when the Company N ITCG ceases to exist? | Detailed Reasoning - Detailed reasoning: As described at paragraph 5.69 of the Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No. 1) Bill 2010, Subdivision 719-BA was introduced to ensure that there would be minimal tax consequences for ongoing members when a MEC group is created from a consolidated group or a consolidated group is created from a MEC group . The scope of the application of Subdivision 719-BA is outlined in section 719-120: (1) This Subdivision applies if, at a particular time (the conversion time): (a) a *consolidated group (the new group) is *created from a *MEC group (the old group); or (b) a MEC group (the new group) is created from a consolidated group (the old group). (2) However, sections 719-130 and 719-135 apply only in relation to entities that: (a) were *members of the old group just before the conversion time; and (b) are members of the new group at that time. As per Question 3 above, the Company N ITCG will cease to exist at the time of the special conversion event (i.e., which coincides with the transfer of Company A to Company M) and a MEC group will come into existence at the same time. Accordingly, paragraph 719-120(1)(b) will be satisfied. The subsidiary members of the Company N ITCG, inclusive of Company A, would have been members of the existing Company N ITCG immediately prior to the special conversion event. On the special conversion event, the entities will become subsidiary members of the Company N MEC group as outlined in Question 2 above. In this regard, an ET1 company which is not the PHC (such as Company A) is also a member of a MEC group as defined in subsection 719-25(2). Accordingly, the subsidiary members (inclusive of Company A) should satisfy the requirements in subsection 719-120(2) for section 719-130 to prima facie apply. Whilst the subsidiary members, inclusive of Company A, should satisfy subsection 719-120(2), the application of section 719-130 is precluded in respect of subsidiary members of the former ITCG that become ET1 companies of the new MEC group (outlined in subsection 719-130(4) below): (4) Subsection (3) does not apply if: (a) the old group mentioned in subsection 719-120(1) is a *consolidated group; and (b) the new group mentioned in subsection 719-120(1) is a *MEC group; and (c) the entity ceasing to be a *member of the old group becomes an *eligible tier-1 company in respect of the new group. In this regard, Company A was a subsidiary member of the Company N ITCG immediately prior to its transfer. Following Company A's transfer to Company M, Company A will become an ET1 company (as outlined above in Question 2). Accordingly, Company A will be precluded from the scope of the operating provisions of section 719-130 (subsections 719-130(3) and (5)). The operating provisions of section 719-130 will therefore only apply to the subsidiary members of the former Company N ITCG (to the exception of Company A). Subsections 719-130(3) and (5) provide that: (3) A provision mentioned in subsection (5) that applies on an entity ceasing to be a *member of a *consolidated group or *MEC group does not apply to an entity ceasing being such a member because of a situation described in subsection 719-120(1), unless the provision is expressed to apply despite this subsection. ... (5) The provisions are as follows: (a) Subdivision 104-L; (b) section 165-212E; (c) this Part (other than this Subdivision); (d) Part 3-90 of the Income Tax (Transitional Provisions) Act 1997 . Subsections 719-130(3) and (5) operate in conjunction to prevent a number of provisions from applying that would otherwise apply when an entity ceases to be a member of a ITCG (old group) because a MEC group (new group) is created from the old group. Paragraph 719-130(5)(c) will operate to prevent the application of Part 3-90 to reset the tax cost of membership interests in the subsidiary members of the Company N ITCG (to the exception of Company A). | Detailed Reasoning - Question 6b: Will Subdivision 719-BA of the ITAA 1997 apply such that sections 701-10, 701-15 and 701-50 of the ITAA 1997 will not result in the reset of the tax cost to Company N of assets of entities that were subsidiary members of the former Company N ITCG, and are then members of the new MEC group, when the MEC group comes into existence? | Detailed Reasoning - Detailed reasoning: When an entity becomes a subsidiary member of a MEC group, the application of section 701-10 to reset the tax cost bases of assets of joining entities is outlined in section 719-160: (1A) This section applies if an entity (the MEC joining entity ) becomes a * subsidiary member of a * MEC group at a time (the MEC joining time ). (1) This section has effect for the head company core purposes set out in subsection 701-1(2). General modifying rule (2) The provisions mentioned in subsection (3) operate, for the purposes of setting the • tax cost of an asset of the MEC joining entity, as if each * subsidiary member of the group (including the MEC joining entity) that is an * eligible tier-1 company at the MEC joining time were a part of the * head company of the group, rather than a separate entity. ... (3) The provisions are: (a) section 701-10 (about setting the tax cost of assets of an entity joining a group); and (b) Subdivision 705-A; and (c) any other provision of this Act giving Subdivision 705-A a modified effect in circumstances other than those covered by that Subdivision. As Company A will become an ET1 company of the Company N MEC group, subsection 719-160(2) operates to treat Company A as part of the head company of the group (Company N) and therefore precludes the tax cost bases of its assets from otherwise being reset under section 701-10. This is made abundantly clear in Note 2 to subsection 719-160(2): Note 2: If the MEC joining entity is an eligible tier-1 company, this subsection means the assets of the entity do not have their tax cost reset at the MEC joining time. This is because Subdivision 705-A (and related provisions) reset the tax cost of assets of subsidiary members of a group, but not assets of the head company. Accordingly, pursuant to subsections 719-160 (1A), (2) and (3), section 701-10 will only apply to reset the tax cost bases of assets of the subsidiary members of the former Company N ITCG (other than Company A) at the time they become members of the Company N MEC group. Further, as discussed above in Question 6a, paragraph 719-130(5)(c) also operates to prevent the application of Part 3-90 (which includes section 701-10) in relation to group conversions, which applies to subsidiary members of the former Company N ITCG (to the exception of Company A). | Detailed Reasoning - Question 7a: Pursuant to subsection 719-125(1) of the ITAA 1997, will the history of the Company N ITCG, in particular, carried forward tax losses, non-refundable R&D tax offsets, carried forward FRT disallowed amounts and franking credits be retained by the MEC group? | Detailed Reasoning - Detailed reasoning: When an ITCG is converted into a MEC group as part of a special conversion event under section 719-40, the tax history of the former ITCG is retained by the MEC group. This is outlined in subsection 719-125(1) as follows: (1) Everything that happened in relation to the *head company of the old group before the conversion time is taken instead to have happened in relation to: (a) if the head company of the old group is the same entity as the head company of the new group - that entity in its role as head company of the new group; or (b) otherwise - the head company of the new group (just as if the head company of the new group had been the head company of the old group at all times before the conversion time). As outlined in Question 2 above, as a result of the special conversion event Company N will automatically become the PHC of the resultant MEC group. As Company N was also the head company of the former Company N ITCG, the tax attributes will be retained by Company N as the PHC of the MEC group pursuant to paragraph 719-125(1)(a). Further, subsection 719-125(3) states that: (3) Subsections (1) and (2) have effect: (a) for the *head company core purposes in relation to an income year ending after the conversion time; and (b) for the entity core purposes in relation to an income year ending after the conversion time; and (c) for the purposes of determining the balance of the *franking account of the head company of the new group at and after the conversion time. Head company core purposes are defined in subsection 701-1(2) as: Head company core purposes (2) The purposes covered by this subsection (the head company core purposes) are: (a) working out the amount of the * head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the head company's loss (if any) of a particular * sort for any such income year. Note: The single entity rule would affect the head company's income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member. The definition of a "loss" relevant to the interpretation of paragraph 701-1(2)(b) is outlined in subsection 701-1(4): What is a sort of loss? (4) Each of these paragraphs identifies a sort of loss: (a) * tax loss; (b) * film loss; (c) * net capital loss. Carried forward tax losses, non-refundable R&D tax offsets and carried forward FRT disallowed amounts are relevant for working out a head company's liability for income tax and therefore those attributes are relevant for "head company core purposes" as defined in paragraph 701-1(2)(a). This conclusion in respect to non-refundable R&D tax offsets is consistent with the view expressed, in the context of an entity with carried forward R&D tax offsets joining an ITCG, in ATO Interpretative Decision ATO ID 2015/6 Income tax: Research and Development: Carry forward R&D tax offsets at joining time for a consolidated group : One of the steps in working out this liability involves taking into account any carried forward tax offsets which ultimately reduces any liability the head company is required to pay. Thus, working out whether the head company is entitled to access the non-refundable carry forward R&D tax offset is something that falls within the head company core purposes. By virtue of the entry history rule, the R&D entity that is entitled under Division 65 of the ITAA 1997 to carry forward any excess R&D tax offset amount, and which subsequently joins a consolidated group as a subsidiary member, effectively transfers this entitlement to the head company. This is the intent and effect of the entry history rule in section 701-5 of the ITAA 1997, which deems any acts and transactions of the R&D entity prior to the joining time to have been experienced by the head company once the R&D entity joins the consolidated group. Accordingly, as carried forward losses, non-refundable R&D tax offsets and denied debt deductions are relevant for "head company core purposes" they should be taken to have been incurred by Company N in its capacity as PHC of the MEC group, and therefore they are retained by the MEC group following the conversion pursuant to paragraph 719-125(1)(a). In respect to franking credits, paragraph 719-125(1)(a) will also apply to deem the franking credits of the former ITCG as having been accumulated by Company N in its capacity as PHC of the MEC group (and therefore retained by the MEC group following conversion). This construction is made clear in paragraph 719-125(3)(c). | Detailed Reasoning - Question 7b: If the answer to question 7a is yes, will subsection 719-300(5) of the ITAA 1997 apply so that the carried forward tax losses and non-refundable R&D tax offsets of the Company N ITCG will not be subject to an available fraction? | Detailed Reasoning - Detailed reasoning: Subdivision 707-C contains rules which limit the rate at which a head company can utilise transferred tax losses within a given income year by reference to an available fraction. Subdivision 719-F modifies the application of Division 707 with respect to MEC groups, taking into account their special characteristics. In particular, section 719-305 may result in transferred losses of an "ongoing head company" (as defined in paragraph 719-300(1)(a)) being subjected to an available fraction in accordance with the principles in Subdivision 707-C. However, section 719-305 only applies if the following conditions outlined in subsection 719-300(1) are satisfied: (1) Sections 719-305, 719-310, 719-315, 719-320 and 719-325 operate only if: (a) a company (the ongoing head company) is the * head company of a * MEC group for an income year or a period in an income year; and (b) an event (the application event) described in subsection (2) or (3) happens at a time in the income year in relation to the group. Relevant to the Company N MEC group, subsection 719-300(3) defines an "application event" as: (3) The other application event is that the * MEC group comes into existence as a result of a • special conversion event happening to the * potential MEC group derived from the ongoing head company. Note: This application event happens only if the ongoing head company was the head company of a consolidated group just before the special conversion event. The Company N ITCG's conversion into the Company N MEC group under section 719-40 satisfies the subsection 719-300(3) definition of an application event, on the basis that Company N was also the head company of the former Company N ITCG. However, subsection 719-300(5) provides an exception to the operating provision of subsection 719-300(1) applying where there has been an application event under subsection 719-300(3): (5) Those sections do not operate because of the event described in subsection (3) if all the other companies that are described in paragraph 719-40(1)(c) and are involved in the * special conversion event were * subsidiary members of the * consolidated group just before the event. Relevantly, a company described in paragraph 719-40(1)(c) is a company which at the time of a special conversion event is an ET1 company (but not a PHC) of a MEC group. The only member of the potential Company N MEC group which would meet this criteria would be Company A (noting, whilst Company N is an ET1 company, it is the PHC and therefore would not meet the criteria). Company A was also a subsidiary member of the former Company N ITCG (as defined in section 703-15) up until such time as the conversion event happens. Accordingly, the exception provided under subsection 719-300(5) will apply to prevent the application of section 719-305, which would otherwise apply to subject the Company N MEC group's carried forward tax losses to an available fraction. This outcome is consistent with the legislative intention which underlies Subdivision 719-F. The Explanatory Memorandum to New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002 outlines the legislative intention behind tax losses of an ongoing member becoming subject to an available fraction upon a new ET1 company joining a MEC group at paragraphs 3.75 to 3.77 as follows: 3.75 A group's annual use of its transferred losses is limited by their available fraction. That is, they may only be offset against a fraction of the group's income and gains. Essentially the available fraction is a proxy for determining the proportion (i.e. fraction) of the group's income or gains generated by the loss entity. The inclusion of a new eligible tier-1 company increases the group's income generating capacity which reduces the proportion of the group's income that the original loss entities can now be regarded as generating. 3.76 The increase in value or income generating capacity occurs because the group has not paid cash or assets (or increased its liabilities) in order to acquire the additional eligible tier-1 company. That is, there has been no exchange of one type of group assets for another (which would generally leave the group's value unchanged). The inclusion in the group of the additional eligible tier-1 company (and its wholly-owned subsidiaries) occurs purely because of the company's relationship with the group's top company. 3.77 Therefore, the inclusion of a new eligible tier-1 company in a group effectively introduces capital into the group from outside the group. However, it is not covered by the existing rule requiring a group's available fractions to be adjusted if there is an injection of capital into the group. That is because the existing rule is triggered by an injection of capital into a member of the group. That has not happened here. Rather, the eligible tier-1 company is included in the group purely because of its relationship with the group's top company. Nevertheless, the effect is the same. For that reason, a group's existing available fractions will be adjusted whenever a new eligible tier-1 company joins. While Company A becomes an ET1 company of the Company N MEC group, there is no change in the composition or tax profile of the Company N MEC group as compared with the former Company N ITCG given Company A was also a member of the former group prior to the special conversion event. Further, no new capital or income generating capacity will be introduced into the Company N MEC group on the basis that Company A has no material assets and liabilities, and its market value is nominal. | Detailed Reasoning - Question 8: Upon Company N being sold to Company A will CGT event A1 arise pursuant to section 104-10 of the ITAA 1997 in respect to Company M's disposal of the Company N shares? | Detailed Reasoning - Detailed reasoning: Prior to the transfer of Company N, Company N was the PHC of the Company N MEC group and therefore its shares are recognised as an asset for income tax purposes. After the transfer, which results in Company N becoming a subsidiary member of the MEC group, the shares of Company N will cease to be recognised for income tax purposes by operation of the single entity rule (SER) (outlined in section 701-1). It is considered that CGT event A1 will arise in respect of the disposal. CGT event A1 occurs as set out in subsections 104-10(1) and (2): (1) CGT event A1 happens if you *dispose of a *CGT asset. (2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 (TR 2004/11) provides the following comments at paragraph 11: Intra-group assets transferred to a non-group entity 11. Transactions where intra-group assets are transferred to a non-group entity are recognised as a transfer by the head company. For example, the disposal of an intra-group CGT asset will ordinarily result in CGT event A1 (section 104-10 of the ITAA 1997) happening to the head company. The cost base of the asset in such a case will only be incidental costs incurred by the group to non-group members in relation to the transfer. However, in the case of the transfer of an intra-group debt, because the transfer is in substance equivalent to borrowing money or obtaining credit from another entity, no CGT event happens (see Taxation Determination TD 2004/33). In this regard, the fact pattern of example 1 in Taxation Determination TD 2006/28 Income tax: consolidation: capital gains: may roll-over relief under Subdivision 126-B of the Income Tax Assessment Act 1997 be available where three or more eligible tier-1 companies are restructured such that one of the eligible tier-1 companies becomes a wholly-owned subsidiary of one of the other eligible tier-1 companies and a choice to form a MEC group is made for that same day? (TD 2006/28) is analogous with the transfer of Company N to Company A. In TD 2006/28, the Commissioner considered that Subdivision 126-B rollover relief should be available in respect to the transfer of an eligible ET1 company beneath another eligible ET1 company, such that it would become a subsidiary member of the potential MEC group. In reaching such conclusion, it was considered that the transfer of shares in the eligible ET1 company gave rise to CGT event A1. Therefore, it is considered that CGT event A1 will arise in respect to the transfer of Company N to Company A. | Detailed Reasoning - Question 9: If the transfer of Company N to Company A gives rise to a CGT event A1, assuming the Company N shares are not an indirect Australian real property interest (IARPI), will the capital gain/loss be disregarded under Division 855 of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: Australia's foreign resident CGT regime is outlined in Division 855. Under subsection 855-10(1), foreign residents are entitled to disregard capital gains/losses in respect to CGT events if the CGT event happens in relation to a CGT asset that is not taxable Australian property (TAP). Company M is a foreign resident entity that holds its shares in Company N on capital account, therefore if the shares are not TAP it will be able to rely on subsection 855-10(1) to disregard its capital gain/loss from the CGT event A1 event that would arise on its disposal of the Company N shares. TAP is defined in section 855-15, and is broadly limited to the following five asset categories: (1) Taxable Australian real property (TARP); (2) An indirect Australian real property interest (IARPI); (3) A business asset of a permanent establishment in Australia; (4) An option or right to acquire any of the CGT assets in categories 1 to 3; or (5) A CGT asset that is deemed to be TAP where a taxpayer, on ceasing to be an Australian resident, makes an election to dispose of the CGT asset. As relevant to shares in a company, the relevant category of TAP is IARPI. For the purpose of this ruling, it is assumed that the Company N shares are not an IARPI and therefore not TAP. Accordingly, Company M's capital gain/loss in respect to its disposal of the Company N shares is able to be disregarded pursuant to subsection 855-10(1). | Detailed Reasoning - Question 10a: As a result of the transfer of Company N to Company A will there be a cessation event pursuant to section 719-60 of the ITAA 1997 such that Company N is no longer eligible to be the provisional head company (PHC) of the MEC group? | Detailed Reasoning - Detailed reasoning: Subsection 719-60(5) provides that an appointment as the PHC remains in force until a "cessation event" occurs to the PHC. If a cessation event occurs, a new PHC may be appointed pursuant to subsection 719-60(3). The new PHC's appointment takes immediate effect to ensure the continuity of the MEC group. A "cessation event" is defined in subsection 719-60(6) as follows: (6) A cessation event happens to a * provisional head company of a * MEC group if: (a) the company ceases to be qualified to be the * provisional head company of the group under section 719-65; or (b) the company ceases to exist. A company will cease to qualify as PHC pursuant to subsection 719-65(1) if the following requirements are no longer met: • the company is an eligible tier-1 company of the top company; and • no membership interests in the company are beneficially owned by another member of the group. As outlined in Question 2 above, a company is considered an ET1 company pursuant to sections 719-15 and 719-20 only if it satisfies all of the following: • It is an Australian resident company (but not a prescribed dual resident) some or all of whose taxable income (if any) is taxable at a rate that is or equals the corporate tax rate; • It is not a recognised credit union (as defined in section 6H of the ITAA 1936), an approved credit union (for the purposes of section 23G of the ITAA 1936), a pooled development fund, or an exempt entity (under Division 50); • It is a wholly-owned subsidiary of the top company and not a wholly-owned subsidiary of a company that is an Australian resident (other than an entity that is otherwise ineligible to be a tier-1 company); and • Where an entity is interposed between the company and the top company - membership interests in the interposed foreign entity must not be held by another ET1 company or its subsidiary. Once Company N is acquired by Company A, Company N will cease to be an ET1 company on the basis that it will become wholly-owned by an Australian resident entity that is eligible to be an ET1 company (i.e., Company A). That is, Company N will no longer satisfy the ownership requirements specified in column 4 of the table in subsection 719-20(1). As Company N will cease to be an ET1 company, on its transfer to Company A, it will also cease to qualify as a PHC of the MEC group pursuant to paragraph 719-65(1)(a). Consequently, at that time, a cessation event will arise under paragraph 719-60(6)(a). | Detailed Reasoning - Question 10b: As a result of the transfer of Company N to Company A will Company A be eligible to become the PHC of the MEC group pursuant to section 719-65 of the ITAA 1997? If so, from when? | Detailed Reasoning - Detailed reasoning: The eligibility criteria for a company to be a PHC is outlined in section 719-65: Qualifications for the provisional head company (1) A company is qualified to be the * provisional head company of a * MEC group if: (a) the company is an * eligible tier-1 company of the * top company; and (b) no * membership interests in the company are beneficially owned by another member of the group. (2) Subsection (1) has effect subject to subsection (3). Period during which new provisional head company must have been a member of the group (3) If: (a) a company (the new company) is to be appointed as the * provisional head company of a * MEC group under subsection 719-60(3); and (b) the appointment will come into force immediately after a * cessation event happens to the former provisional head company of the group; and (c) a company (the original company) (which may be the former provisional head company) was appointed as the provisional head company of the group under subsection 719-60(1) or (2); the new company is not qualified to be the provisional head company of the group unless the new company has been a member of the group at all times during the period: (d) beginning at whichever of the following times is applicable: (i) if the cessation event happened in the income year of the original company in which the group came into existence - the time when the group came into existence; (ii) in any other case - the start of the income year of the former provisional head company in which the cessation event happened; and (d) ending when the cessation event happened. As outlined above at Question 2, Company A will satisfy the requirements to be an ET1 company. The transfer of Company N to Company A will not affect the eligibility of Company A to be an ET1 company, as the ownership requirements specified in column 4 of the table in subsection 719-20(1) and the prohibitions on certain interposed entities specified in subsection 719-15(3) only relate to the upstream ownership of Company A rather than its shareholdings in downstream entities. Accordingly, Company A will satisfy paragraph 719-65(1)(a). Further, as Company A is a wholly-owned subsidiary of a foreign entity (Company M), none of Company A's membership interests are capable of being beneficially owned by another member of the MEC group. Accordingly, Company A will also satisfy paragraph 719-65(1)(b). Whilst Company A will satisfy subsection 719-65(1), paragraphs 719-65(3)(d) and (e) impose an additional temporal requirement that must also be satisfied for Company A to be eligible to be a PHC. The Explanatory Memorandum to Tax Laws Amendment (2010 Measures No.1) Bill 2010 provides clarification regarding how the reference to "group" in paragraph 719-65(3)(d) should be interpreted. Paragraphs 5.101-5.104 provide that: 5.101 Where the provisional head company of a MEC group ceases to be wholly-owned by its foreign holding company (that is, a cessation event happens), it is no longer eligible to be the head company of the group. In these circumstances, the MEC group will need to appoint a new provisional head company so that the group can continue to exist. 5.102 Where a MEC group is created part way through an income year and a cessation event happens to the original provisional head company in the same income year as the MEC group was created, the new provisional head company must have been a member of the MEC group from the start of the original provisional head company's income year (subparagraph 719-65(3)(d)(ii)). 5.103 Therefore, if the MEC group comes into existence after the start of the original provisional head company's income year because, for example, a MEC group is created from a consolidated group, and the cessation event happens before the end of that income year, the MEC group is effectively prevented from appointing a new provisional head company because no company is capable of satisfying the requirements in subparagraph 719-65(3)(d)(ii). 5.104 To overcome this difficulty, a company will be eligible to be appointed as the new provisional head company of a MEC group in these circumstances provided the company was a member of the MEC group from the time the MEC group came into existence. [Schedule 5, item 13, subparagraph 719-65(3)(d)(i)]. Based on the paragraphs of the Explanatory Memorandum extracted above, it is made clear that the reference to "group" in paragraph 719-65(3)(d) is intended to refer to the MEC group that comes into existence following a special conversion event (rather than the former ITCG). The key dates with respect to the application of paragraphs 719-65(3)(d) and (e) are as follows: • Formation of the Company N MEC group (subparagraph 719-65(3)(d)(i)): Coincides with the transfer of Company A to Company M. • Cessation event (paragraph 719-65(3)(e)): Coincides with the transfer of Company N to Company A. Company A will have been a member of the Company N MEC group at all times between the two points in time outlined above. Therefore, Company A will satisfy the temporal requirement imposed by paragraphs 719-65(3)(d) and (e) and accordingly is eligible to be the new PHC of the Company N MEC group. Pursuant to subsection 719-60(3), Company A as the sole remaining ET1 company immediately after the cessation event is able to make a choice in writing, appointing itself as the PHC of the MEC group with effect immediately after the cessation event. This mechanism and outcome is confirmed in ATO Interpretative Decision ATO ID 2007/165 Consolidation: MEC group - appointment of a replacement provisional head company - MEC group reduced to a single eligible tier-1 company . | Detailed Reasoning - From what time will Company A become PHC?: Subsection 719-75(1) provides that: Group in existence throughout income year (1) If: (a) a company is the * provisional head company of a * MEC group at the end of the income year of the company; and (b) the group was in existence throughout the income year; the company is the head company of the group at all times during the income year. Company A is expected to become the PHC (i.e., on transfer of Company N to Company A) sometime soon after the scheme commences and is expected to remain the PHC until the end of the income year ending 31 July 20YY. The MEC group comes into existence from the special conversion event (i.e., on transfer of Company A to Company M) which will also occur sometime soon after the scheme commences. 1 August 20YY will be the beginning of the MEC group's income year and the MEC group is expected to remain in existence throughout the income year. Accordingly, pursuant to subsection 719-75(1), Company A is expected to be the PHC of the MEC group from the time it becomes the PHC of the Company A MEC group until the end of the income year ending 31 July 20YY. | Detailed Reasoning - Question 11: Pursuant to section 719-90 of the ITAA 1997, will the history of the Company N MEC group and, in particular, carried forward tax losses, carried forward FRT disallowed amounts, franking credits and non-refundable R&D tax offsets be retained by the Company A MEC group? | Detailed Reasoning - Detailed reasoning: Sections 719-85 and 719-95 contain a "transfer history rule" which may apply in circumstances where there is a change in head company of the MEC group. In particular, section 719-85 provides that: Sections 719-90 to 719-95 set out the effects if: (a) a company (the old head company) is the * head company of a * MEC group at the end of an income year; and (b) a different company (the new head company) is the head company of the group at the start of the next income year (the transition time). Note:This case can arise from the operation of section 719-75, which treats an entity that is the provisional head company of the group at a certain time in the income year as being the group's head company at all times in the income year when the group is in existence. The old head company is also taken to become a subsidiary member of the group at the transition time, and the new head company is taken to cease being a subsidiary member at that time. Section 719-95 ensures that these results do not change the tax position of the group. This section will apply to the change in PHC of the MEC group on the basis that Company N would have been the PHC of the MEC group part way through the income year ending 31 July 20YY (i.e., sometime soon after the scheme commences, prior to the transfer of Company N to Company A) and Company A will be the PHC of the MEC group at the beginning of the next income year by virtue of subsection 719-75(1). Section 719-90 provides that: New head company treated as substituted for old head company at all times before the transition time (1) Everything that happened in relation to the old head company before the transition time is taken to have happened in relation to the new head company instead, just as if the new head company had been the old head company at all times before the transition time. Note: This section treats the new head company as having in effect assumed the identity of the old head company throughout the period before the transition time, but without affecting any of the other attributes of the old head company. (2) To avoid doubt, subsection (1) also covers everything that, immediately before the transition time, was taken, because of: (a) section 701-1 (Single entity rule); or (b) section 701-5 (Entry history rule); or (c) section 703-75 (about the effects of choice to continue consolidated group after shelf company becomes new head company); or (ca) section 719-125 (about the effects of a group conversion involving a MEC group); or (d) one or more previous applications of this section; to have happened in relation to the old head company. (3) Subsections (1) and (2) have effect: (a) for the head company core purposes in relation to an income year ending after the transition time; and (b) for the entity core purposes in relation to an income year ending after the transition time. (4) Subsections (1) and (2) have effect subject to: (a) section 701-40 (Exit history rule); and (b) a provision of this Act to which section 701-40 is subject because of section 701-85 (about exceptions to the core rules in Division 701). Note: An example of provisions covered by paragraph (b) of this subsection is section 707-410, which ensures that section 701-40 (Exit history rule) does not result in a leaving entity inheriting a loss of any sort. Paragraph 719-90(3)(a) refers to "head company core purposes" which is defined in subsection 701-1(2). Carried forward tax losses, non-refundable R&D tax offsets and carried forward FRT disallowed amounts are relevant for "head company core purposes" (refer to Question 7 above). The Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No.1) 2002 outlines the rationale for sections 719-125 and 719-90 at paragraphs 3.117 to 3.124 as follows: 3.117 The membership rules for MEC groups can accommodate changes to the identity of the head company of the group. A change to the head company of a MEC group will occur when a company (the 'old head company') that is the head company of the group at the end of an income year is different to the company (the 'new head company') that is the head company at the start of the next income year. 3.118 When one head company of a MEC group is replaced with another, everything that happened in relation to the old head company of a MEC group before the time that it ceased to be the head company (the 'transition time') is instead taken to have happened in relation to the new head company of the group, just as if the new head company had been the old head company at all times before the transition time [Schedule 8, item 8, section 719-85 and subsection 719-90(1)]. For brevity, this will be referred to as the 'transfer of history rule' in this explanatory memorandum. 3.119 The transfer of history rule also ensures that things that happened to the old head company prior to the transition time because of the single entity rule, the entry history rule, the substitution rule (see paragraph 2.16 in Chapter 2) or a previous application of the transfer of history rule will be taken to have happened to the new head company [Schedule 8, item 8, subsection 719-90(2)]. The single entity rule and the entry history rule were contained in the May Consolidation Act. The single entity rule treats subsidiary members of a MEC group or a consolidated group as part of the head company of the group and allows such groups to be treated as single entities for income tax purposes. The entry history rule allows the head company to inherit the income tax history of subsidiary members once they become subsidiary members of the group. ... 3.122 ...when the old head company ceases to be a subsidiary member of the MEC group, it will 'take with it' only the income tax history that relates to the assets, liabilities and businesses that leave the group with the company. ... 3.124 One implication of the transfer of history rule is that all of the tax attributes of the old head company that are relevant to the head company core purposes (e.g. losses and foreign tax credits) will instead become those of the new head company once the old head company is replaced... It should also be noted that section 719-90 was amended to include paragraph 719-90(2)(ca) which provides that the effects of a group conversion under section 719-125 should be covered by section 719-90. In this regard, the Explanatory Memorandum to Tax Laws Amendment (2010 Measures No. 1) Bill 2010 provides that (at paragraph 5.99): 5.99 A consequential amendment will clarify that everything that happened in relation to the original head company because of a group conversion involving a MEC group is also taken to have happened in relation to the new head company. Pursuant to section 719-90, read together with the Explanatory Memorandum extracts referred to above, the carried forward tax losses, non-refundable R&D tax offsets, carried forward FRT disallowed amounts and franking credits of Company N as the former PHC of the MEC group will transfer to Company A as the new PHC of the Company A MEC Group. The assets, liabilities and businesses that gave rise to those tax attributes remain with the MEC group and it is therefore consistent with the policy objectives that the MEC group continue to have access to such tax attributes as there has only been an identity change in the head company of the group. | Detailed Reasoning - Question 12: Will the Company A MEC group convert into an ITCG pursuant to section 703-55 of the ITAA 1997 following the partial listing or a trade sale of Company M's shares? | Detailed Reasoning - Detailed reasoning: Following the transfer of Company N, the MEC group will continue with Company A as the sole ET1 company and also the new PHC. The Company A MEC group will continue to exist until such time that one of the circumstances described in subsection 719-5(7) occurs: Continued existence of MEC group (7) If a MEC group (the first MEC group) consists of the members of a potential MEC group derived from one or more eligible tier-1 companies of a top company, the first MEC group continues to exist until: (a) the potential MEC group ceases to exist; or (b) there is a change in the identity of the top company, and the eligible tier-1 companies that were members of the first MEC group immediately before the change become members of another MEC group immediately after the change; or (c) there ceases to be a provisional head company of the first MEC group. The first MEC group ceases to exist when one of those events happens. In respect to paragraph 719-5(7)(a), circumstances in which a potential MEC group ceases to exist are outlined in subsection 719-10(7): When potential MEC group ceases to exist (7) If a * potential MEC group is derived from one or more * eligible tier-1 companies of a * top company, the potential MEC group ceases to exist when: (a) none of those companies are eligible tier-1 companies of the top company; or (b) there is a change in the identity of the top company, and the eligible tier-1 companies that were members of the group immediately before the change are not the same as the eligible tier-1 companies that are members of the group immediately after the change. It is intended that the shares in Company M will be issued on the XSX and YX for acquisition by third party investors, or there will be a disposal of some of Company M's shares to a third party as part of a trade sale. This will result in Company M and Company A ceasing to be wholly-owned subsidiaries of Company F. Consequently, Company F would cease to be the Company A MEC group's top company, on the basis that a top company as described in the table of subsection 719-20(1) must wholly own the relevant ET1 companies of a MEC group (in this case, Company A). However, Company M will satisfy the requirements within Item 1 of the table in subsection 719-20(1) to be the new top company of the Company A MEC group and therefore the identity of the top company as described in paragraph 719-5(7)(b) will simply change rather than there be a cessation of the MEC group. That is, whilst there will have been a change in identity of the top company, the second part of paragraph 719-5(7)(b) would also need to be satisfied for a cessation of the MEC group. It is considered that the ET1 companies relevant to paragraph 719-5(7)(b) do not include the PHC of the original group but rather the ET1 companies at the time of the change in identity of the top company. Subsection 703-55(1) outlines the conditions, which if satisfied, will trigger a conversion of a MEC group into an ITCG: (1) A * consolidated group comes into existence at the time a * MEC group ceases to exist if: (a) the MEC group included only one * eligible tier-1 company just before the time; and (b) the MEC group ceases to exist only because the company ceases to be an eligible tier-1 company; and (c) the company is a * head company as defined in section 703-15 at the time. Paragraph 703-55(1)(b) specifies that the relevant cessation of the MEC group must be as a result of the only remaining ET1 company ceasing to be eligible to continue being an ET1. This is highlighted in the example in C10-2-140 of the Consolidation Reference Manual ( A consolidated group is created from a MEC group ): Figure 1 shows a MEC group where the provisional head company, ACo, no longer qualifies as an eligible tier-1 company due to some of its membership interests being acquired by UE, an unrelated entity. Because there are no other eligible tier-1 companies, the MEC group ceases to exist. Paragraph 703-55(1)(b) is nonetheless not satisfied. This is on the basis that the potential MEC group would still have a remaining ET1 company, Company A. Therefore, following the listing of Company M or a trade sale of Company M's shares to a third party, the Company A MEC group will not cease to exist and will not convert into an ITCG pursuant to section 703-55.

Will a multiple entry consolidated (MEC) group come into existence pursuant to paragraph 719-5(1)(b) of the ITAA 1997? If yes, when will the MEC group come into existence? | Yes - the tax attributes listed will be retained by the MEC group. | Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. While you provided the commercial rationale for the restructure, more information would be necessary to make a Part IVA decision. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar . | Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. | Will Company A cease to be a subsidiary member, as defined in subsection 703-15(2) of the ITAA 1997, of the Company N ITCG when the shares in Company A are transferred to Company M?