Private ruling: Modified continuity of ownership test multiple entry consolidated group
Date of advice: 9 December 2021
Published: January 2022
Date scheme commenced: 1 July 2021.

Ruling: Q1: Will the MEC Group continue to exist pursuant to s. 719-5(7) of the ITAA 1997 notwithstanding the Restructure? | A1: Yes | Q2: Will the Restructure cause the conditions in s. 165-12 of the ITAA 1997 not to have been met because of a failure of COT in respect of the Losses? | A2: No. | Q3: Will the anti-avoidance provisions in Part IVA of the ITAA 1936 apply to the MEC Group or any other party in respect of the Restructure? | A3: No. This ruling applies for the following periods: Income year ending 30 June 2022 Income year ending 30 June 2023


Relevant legislative provisions: Section 165-12 of the Income Tax Assessment Act 1997 | Section 165-207 of the Income Tax Assessment Act 1997 | Section 719-5(7) of the Income Tax Assessment Act 1997 | Section 719-10 of the Income Tax Assessment Act 1997 | Section 719-90 of the Income Tax Assessment Act 1997 | Section 719-260 of the Income Tax Assessment Act 1997 | Section 719-265 of the Income Tax Assessment Act 1997 | Section 719-270 of the Income Tax Assessment Act 1997 | Section 719-275 of the Income Tax Assessment Act 1997 | Section 719-280 of the Income Tax Assessment Act 1997 | Section 719-65 of the Income Tax Assessment Act 1997 | Section 177A of the Income Tax Assessment Act 1936 | Section 177C of the Income Tax Assessment Act 1936 | Section 177CB of the Income Tax Assessment Act 1936 | Section 177D of the Income Tax Assessment Act 1936 | Section 177F of the Income Tax Assessment Act 1936 | Detailed reasoning | Continuation of a MEC Group | The MEC Group is a MEC Group for the purposes of Subdivision 719-B. | Section 719-5(7) of the ITAA 1997 provides that a MEC Group (the first MEC group) derived from a potential MEC group of one or more ET1s of a top company 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 [ET1s] 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 (i.e MEC Group) ceases to exist when one of those events happens. | Event 1: the potential MEC group ceases to exist | The relevant potential MEC group is the MEC Group (Potential MEC Group). | Section 719-10(7) of the ITAA 1997 provides that a potential MEC group ceases to exist when: | (a) none of those companies [that were ET1s of a top company] are [ET1s] of the top company; or | (b) there is a change in the identity of the top company, and the [ET1s] that were members of the group immediately before the change are not the same as the [ET1s] that are members of the group immediately after the change. | Section 719-10(8) of the ITAA 1997 provides further that the potential MEC group or the status of any entity as an ET1 of the top company is not affected if: | (a) a potential MEC group is derived from one or more [ET1s] of a top company; and | (b) there is a change in the identity of the top company in relation to the potential MEC group; and | (c) the [ET1s] that were members of the group immediately before the change are the same as the [ET1s] that are members of the group immediately after the change. | The Restructure will cause a change in the top company of the MEC Group from Holdings to x, and the ET1s of the Potential MEC Group under Holdings as the top company before the Restructure will be the same as the ET1s of the Potential MEC Group under x as top company after the Restructure. | Accordingly, pursuant to s.719-10(8) of the ITAA 1997, the status of the ET1s as ET1s of the Potential MEC Group is not impacted by the Restructure. | It follows that the Restructure does not cause the Potential MEC Group to cease in accordance with s.719-10(7). | Event 2: there is a change in the identity of the top company and the ET1s of the MEC Group also change | The Restructure will give rise to a change in the identity of the top company of the MEC Group from holdings to CaymanCo, and the ET1s comprising the MEC Group will not change as a consequence of the Restructure. | Accordingly, there is no change to the ET1s of the MEC Group as a consequence of the Restructure that would cause the MEC Group to cease to exist. | Event 3: there ceases to be a provisional head company of the first MEC Group | Pursuant to s.719-65(1) of the ITAA 1997, a company is qualified to be the provisional head company of a MEC Group if: | (a) the company is an [ET1] of the top company; and | (b) no * membership interests in the company are beneficially owned by another member of the group. | The provisional head company of the MEC Group prior to the Restructure is x. | Pursuant to s.719-10(8), Services will continue to be an ET1 of the top company notwithstanding the Restructure. | The Restructure does not otherwise relevantly impact the ownership of membership interests in Services. In particular, no membership interests in Services will be owned by another member of the MEC Group as a consequence of the Restructure or otherwise after the Restructure. | Accordingly, Services will continue to be the provisional head company of the MEC Group as a consequence of the Restructure such that the MEC Group continues to exist after the Restructure. | On the basis that the Restructure does not give rise to an event specified in s.719-5(7) of the ITAA 1997, the MEC Group should not cease as a consequence of the Restructure and should continue to exist with x as the top company after the Restructure. | Question 2 | Will the Restructure cause the conditions in s. 165-12 of the ITAA 1997 not to have been met because of a failure of COT in respect of the Services Losses? | Answer | No. | Detailed reasoning | Loss utilisation overview | Section 165-10 of the ITAA 1997 provides that a company is not entitled to deduct a tax loss unless it satisfies either the COT or BCT. | Broadly, a company satisfies the COT if, from the start of the income year in which it made the loss until the end of the income year in which it wishes to utilise the loss (the ownership test period), the same individuals, directly or indirectly have: | (collectively referred to as COT Conditions). | Pursuant to s.165-207 of the ITAA 1997, a single notional entity that is a person is deemed to own the voting power, rights to dividends and rights to capital distributions in fact directly or indirectly owned by a family trust for these purposes. | MEC Group modification | Overview | The loss utilisation rules contained in Divisions 165 are modified by Subdivision 719-F to apply to MEC Groups. | These modified rules draw a distinction between: | Pursuant to s.719-260 of the ITAA 1997, the focal company is taken to satisfy COT if the test company would have satisfied the COT Conditions for that year based on a series of assumptions. | Services is the 'focal company' for the purposes of applying Subdivision 719-F. | Identifying the test company | The 'test company' is determined in accordance with s.719-265 of the ITAA 1997. The test company may differ depending on the tax basis on which the focal company makes the loss. | In respect of the Services Losses that were transferred into the MEC Group: | Assumption 1: when the test company made the loss for the relevant income year | Section 719-270 of the ITAA 1997 determines when the test company is deemed to have made the loss for an income year. | Item 2 of s.719-270(1) of the ITAA 1997 provides that the Holdings Losses are deemed to be made by Holdings on x. | Item 1 of s.719-270(4) of the ITAA 1997 provides that the Original entity Losses are deemed to be made by x respectively at the start of the income year that that test company in fact made the loss, being x. | Assumption 2: nothing happening to affect direct and indirect ownership of the test company | Section 719-275 of the ITAA 1997 sets out assumptions regarding changes to the membership interests and voting power in the test company. | Where a relevant event occurs, we must assume that nothing happens in relation to the membership interests or voting power in the identified entities that would affect whether the test company would meet the conditions in s.165-12 of the ITAA 1997 for the period from the start of the loss year to the end of the income year. | The relevant items are applied below: | Item 1 of s.719-275(2) of the ITAA 1997 (Item 1 Assumption) | The application of COT in respect of the Original entity Losses assumes that nothing happens in relation to membership interests or voting power in: | Practically, once the x MEC Group is formed, the COT as it applies to the Original entity Losses practically turns on the continuity of ownership in Holdings (subject to the assumption discussed below). | Item 3 of s.719-275(2) of the ITAA 1997 (Item 3 Assumption) | The application of COT to losses made by the head company of a x Group in circumstances where the top company changes requires an assumption be made that, after the change in the top company, nothing happens in relation to membership interests or voting power in: | The Restructure will cause a change in the top company from Holdings to x. | The effect of the Item 3 Assumption is that: | The 'freezing' of the structure under the Item 3 Assumption between the old top company (Holdings) and the new top company takes place after the change of top company (thereby allowing any change in relation to membership interests or voting power of Holdings to be taken into account in working out whether the COT is satisfied). A deemed COT failure is therefore not triggered, because any actual change is able to be 'seen' despite the assumed freezing of the ownership structure. | After the freezing event (that resulted from the introduction of x), the disposal or dissolution of the test company will not be relevant in determining whether the COT is satisfied. That is, after the freezing event, only changes in the membership interests and voting power of x and 'above' will be relevant to determining if the test company satisfies the COT - because any changes that took place in the membership interests of the test company were able to be able to be measured when x was introduced into the structure. | Accordingly, the combined effect of the Item 1 Assumption and the Item 3 Assumption is that each of x as test companies in respect of the Services Losses continue to satisfy the COT after the Restructure. | Same share same interest rule | While the acquisition of 100% of the shares in Holdings would ordinarily cause Holdings to fail COT on the basis the same shares were not owned by the same persons for the ownership test period (s.165-165(1)), this rule is 'switched off' where loss duplication is less than 50% (s.165-12(7)). The same share rule should not apply in the present case on the basis that the loss duplication is less than 50%. | Services Losses should not be "reflected" in deductions, capital losses, or reduced assessable income as a consequence of the Restructure to any material degree. | The first element of Trust's cost base in its Holdings shares is $. This cost base limits any possible duplication of Services Losses in net capital losses made by Trust as a consequence of the Restructure to approximately % of Services tax losses at x. | In addition, the Restructure is not expected to give rise to a deduction or reduced assessable income to Trust. | Assumption 3: test company assumed to fail the COT | Section 719-280 of the ITAA 1997 deems a test company to fail COT in relation to a MEC Group whose head entity was the focal company in circumstances where: | - a thing happens at a time in relation to the membership interests in either: | - that thing causes the top company of that potential MEC Group to change while the potential MEC Group continues to exist; or | - the MEC Group ceasing to exist because there ceases to be a provisional head company of the group. | We have previously established that the Restructure causes neither: | None of Holdings, x should be assumed to fail the COT Conditions due to: | The remaining assumption concerns a "thing" or event happening in relation to the membership interests in an ET1 or an entity interposed between an ET1 and the top company ( Tested Interests ) just before that thing happens which causes a change in the top company while the potential MEC Group survives. | "Membership interest" is defined at s.960-135 of the ITAA 1997 and practically means shares in a company. | The relevant "thing" or event that happens and that causes the change in the top company of the Potential MEC Group is the Restructure. | However, the disposal of shares in Holdings by Trust to x does not involve a "thing" or event happening to the shares in either: | As such, COT should not be deemed to be failed under this aspect of s.719-280 of the ITAA 1997. | The subsequent dissolution of SEA Holdings is not relevant here as it is not the "thing" or event that causes the change in the top company. | Conclusion | Under ss.719-260(1), the focal company is considered to meet the COT conditions in s.165-12 if the test company meets those conditions (based on the relevant assumptions). | The focal company, Services, does meet the conditions in s.165-12 because each of the test companies, Holdings, x respectively, meet those conditions based on all the assumptions in s.719-270, 719-275 and 719-280. | Question 3 | Will the anti-avoidance provisions in Part IVA of the ITAA 1936 apply to the MEC Group or any other party in respect of the Restructure? | Answer | No | Detailed reasoning | The Commissioner is empowered under s.177F(1) of Part IVA of the ITAA 1936 to cancel a 'tax benefit 'that has been obtained by a taxpayer. | For the Commissioner to exercise this power, the following requirements under Part IVA must be satisfied: | The general anti-avoidance provisions can only apply where a taxpayer has obtained a tax benefit in connection with a scheme identified by the commissioner. To identify the scheme, regard must be had for its definition under s.177A(1) of the ITAA 1936. | Scheme | A scheme is broadly defined under s.177A(1) of the ITAA 1936 to mean: | a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and | b) any scheme, plan, proposal, action, course of action or course of conduct. | The relevant scheme identified for this ruling includes the Restructure steps comprising the interposition of Co and the subsequent dissolution of Holdings. | Tax Benefit | Amounts not being included in assessable income that would otherwise have been and the preservation of losses would constitute a tax benefit under s.177C(1) of the ITAA 1936. | The transaction was entered into with the purpose of addressing concern around requirements to publicly disclose certain sensitive financial information, and to realise administrative cost savings | This exclusion amounts to a tax benefit for the purposes of s.177C(1)(a) and more broadly, Part IVA of the ITAA1936. | The eight factors under s.177D of Part IVA of the ITAA 1936 must be explored to examine whether the steps taken were done purely to enable the choice to be made. Where the dominate purpose for a tax benefit is established, the exclusion of a tax benefit gained from a choice made under the Act as provided for in s.177C(2)(a) of the ITAA 1936 will not apply. Dominant Purpose | The objective factors under s. 177D of Part IVA of the ITAA 1936 must be examined when determining the existence of a tax benefit. | These factors are: | (a) the manner in which the scheme was entered into or carried out; | (b) the form and substance of the scheme; | (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; | (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; | (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; | (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; | (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). | Upon examination of the factors above, the Commissioner is of the view that the sole or dominate purpose of the scheme was not to obtain a tax benefit. The Group wishes to undertake the group rationalisation to remove entities to address concern around requirements to publicly disclose certain sensitive financial information and to realise administrative cost savings. The restructure steps taken have not predominantly been taken to enable the preservation of losses. Part IVA of the ITAA 1936 will not apply to the proposed restructure.


Relevant facts and circumstances | Background: The Taxpayer is the provisional head company of a multiple entry consolidated group (MEC Group). The MEC Group is part of a broader commercial group. | Holdings is the top company of the MEC Group. | The Family were the founders. | The Group is comprised of: | a number of discretionary trusts; and | entities (eg, unit trusts and companies) owned by those discretionary trusts. | The Group is currently undertaking a rationalisation of its structure to simplify and reduce the costs and administrative burden of its operations and wind-up redundant entities. | It is sensitive to releasing financial information in relation to its business publicly and actively ensures that such disclosures by it are limited, if not avoided. | Prior to setting up in X, the Group was not aware of the public financial reporting and disclosure requirements in X. If this had been known at the time, X would not have been chosen as an appropriate jurisdiction. | The proposed changes arise from the desire to address these confidentiality concerns (and the desire to reduce ongoing costs of maintaining a X holding company). | Aside from Holdings, there are X other entities that have been voluntarily wound up and deregistered as part of the Group restructure. There are material ongoing costs in maintaining entities, in particular financial accounts must be audited which adds to the costs burden. Total cost savings of approximately $ per year are expected to be realised from the wind ups of those entities. Further, the overall ongoing costs for maintaining Holdings is approximately $ per year. | MEC Group Structure at formation: The MEC Group was formed on X by the written choice of the following eligible tier one companies (ET1s): | The Group also comprised the following entities as members on formation: | The top company of the MEC Group was Holdings. | Holdings owned its interests in each ET1 as follows: | Change in MEC Group members: Between X, the Group undertook various acquisitions and intra-group transfers which broadly resulted in: | These changes did not affect the top company of the MEC Group, which at all times has been Holdings. | The Group is currently considering the possibility of winding up Services and appointing a different group company to become the provisional head company of the MEC Group. | Between X, the Group underwent a restructure whereby the entities interposed between Holdings and the MEC Group ET1s were replaced by Holdings Limited to address concern around requirements to publicly disclose certain sensitive financial information, and realise administrative cost savings (the Privacy and Commercial Objectives). | There are other entities that have been voluntarily wound up and deregistered as part of the Group restructure. Total cost savings of approximately $ per year are expected to be realised from these wind ups. | As a consequence of this restructure: | Each of the following ET1s Services, x were transferred by their "original" holding company to x | The top company of the MEC Group, Holdings, did not change. | The Group is undertaking a rationalisation of its structure (Group Rationalisation). One aspect of the Group Rationalisation involves interposing a new company that will be incorporated x above Holdings (Restructure). As a consequence, x will replace Holdings as top company of the MEC Group. | It is intended that Trust will incorporate a wholly owned company to acquire 100% of the shares in Holdings. | As a consequence of the Restructure, as it relates to the MEC Group: | Holdings will no longer meet the requirements to be the top company of the MEC Group; and | x will become eligible to be the top company of the MEC Group. | Subsequent to the Restructure, and as part of the Group Rationalisation, it is intended that Holdings will be dissolved by way of members' voluntary winding up. | The surplus assets of Holdings after settlement of creditors' claims is expected to include the shares in x. | x as the sole member of Holdings, is expected to consent to those x shares being delivered to it "in specie". | The Restructure and the subsequent dissolution of Holdings will not otherwise impact the members of the MEC Group. In particular, the ET1s of the MEC Group immediately before and immediately after the Restructure will be the same. | control of more than 50% of the voting power in the company; | rights to more than 50% of the company's dividends; and | rights to more than 50% of the company's capital distributions, | the entity that made the loss (the "focal company"); and | the entity that practically must satisfy the COT (the "test company"). | the transferor (i.e., the test companies, x respectively); or | any entity that was, at the time of the transfer, interposed between the transferor and the top company for the MEC Group. | the former top company; or | any entity interposed between it and the new top company. | you take into account the fact that x holds 100% of Holdings; and | after the change in the top company, only changes in x will be relevant. | an entity that was an ET1 of the MEC Group just before that time; or | an entity interposed between an ET1 and the top company of the MEC Group just before that time; and | the Potential MEC Group to cease; nor | the MEC Group to cease, including as a consequence of the eligibility of Services to continue to be the provisional head company of the MEC Group. | the Potential MEC Group ceasing to exist; or | the MEC Group ceasing to exist due to there not being a provisional head company. | an entity interposed between an ET1 and the top company (i.e. Holdings) just before that time. | A 'tax benefit' as identified in s.177C, was or would but for s.177F(1), have been obtained; | The tax benefit was or would have been obtained in connection with a 'scheme' as defined in s.177A; and | Having regard to s.177D, the scheme is one to which Part IVA applies.