Private ruling: Corporate restructure of the Australian MEC Group
Published: March 2012
Ruling period: Year ending 31 March 2012 | Year ending 31 March 2013
Date scheme commenced: 1 March 2012

Ruling: Q1: Will the Commissioner confirm that Top Co will be entitled to a rollover under Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the transfer of its shares in Sub C and Sub D to New Sub, and that as such any capital gain on those transfers will be disregarded under section 126-60 of the ITAA 1997? | A1: Yes | Q2: Will the Commissioner confirm that the transfer of shares in Sub B from Top Co to New Sub, and the consequent change of status of Sub B, from being an Eligible Tier 1 Company of the Australian Multiple Entry Consolidated group to a non-Eligible Tier 1 Company subsidiary member does not cause Sub B to momentarily leave the Australian Multiple Entry Consolidated group? | A2: Yes | Q3: Will the Commissioner confirm that the sale of Sub B from Top Co to New Sub and the consequent change of status of Sub B from being an Eligible Tier 1 Company of the Australian Multiple Entry Consolidated group to a non-Eligible Tier 1 Company subsidiary member will not cause a deconsolidation of the Australian Multiple Entry Consolidated group? | A3: Yes | Q4: Will the Commissioner confirm that the first element of Top Co's cost base of its shares under subsection 110-25 (2) of the ITAA 1997 in New Sub (issued to it in consideration for the sale of its shares in Sub B and Sub D) will be equal to the market value of the shares transferred at that time? | A4: Yes | Q5: Will the Commissioner confirm that any capital gains or losses on the transfer of shares in Sub C by Sub B to New Sub and Sub A will be ignored for income tax purposes due to the application of the single entity rule in section 701-1 of the ITAA 1997? | A5: Yes

Relevant facts and circumstances: Overview Top Co will conduct an internal restructure of its Australian division by rearranging the holding structure of its Australian subsidiaries. Background Top Co is a non-resident of Australia and owner of the Australian MEC group. Sub A is 100% owned by Top Co. Sub B is partly owned by Top Co and partly owned by Sub A. Sub C is 100% owned subsidiary of Sub B. Sub D is partly owned by Top Co, partly owned by Sub A and partly owned by an unrelated company. All of the companies in the Australian MEC group involved in the arrangement, apart from Top Co, are incorporated in Australia and resident of Australia for tax purposes. Top Co is a resident of a foreign country for tax purposes. Sub A, Sub B and Sub C are part of a Multiple Entry Consolidated (MEC) group (the Australian MEC group). Sub A is the head company of the Australian MEC group and will remain the head company. A number of other subsidiaries of Top Co in Australia are also part of the Australian MEC group. Sub D is not part of the Australian MEC group. Upon formation of the Australian MEC group a decision was made to retain existing tax values for the tax cost base of assets belonging to Sub C. All relevant shares held by Top Co are post-CGT assets. The shares owned by Top Co in Sub B and Sub D are taxable Australian property. The key reasons for the restructure are to ensure continued compliance with foreign competition law and other commercial considerations. There was no application of Division 126-B of the ITAA 1997 at the time that Top Co acquired its shares in Sub B and Sub D. Transaction A number of steps will be undertaken in the internal restructure. This includes the incorporation of New Sub, share sales and share transfers. Top Co will seek the consent of the unrelated shareholder in Sub D by executing a deed of assumption between the relevant parties in respect of the internal restructure. The relevant choice will be made prior to the date specified in subsection 719-5(6) of the ITAA 1997 the relevant notice in the approved form will be given as required by section 719-77 of the ITAA 1997. The notice will be given within the timeframe specified in subsection 719-77(3) of the ITAA 1997. New Sub will not be exempt from income tax in the income year of the trigger event. Top Co has confirmed that the transfer of shares in Sub B and Sub D by Top Co will result in Top Co making a capital gain on the disposal of the shares which satisfies the requirement in paragraph 126-55(1)(a)of the ITAA 1997 Top Co and New Sub will both choose to obtain roll-over relief under paragraph 126-55(1)(b) of the ITAA 1997. The choice will be made by the day that Sub A lodges its income tax return for the year in which the CGT event happened. Long term strategy Top Co has a long term strategy to continue to hold its interests in the Australian subsidiaries and is not considering divestment of these subsidiaries.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 103-25, | Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Subsection 104-10(1), | Income Tax Assessment Act 1997 Section 110-25, | Income Tax Assessment Act 1997 Subsection 110-25(2), | Income Tax Assessment Act 1997 Subdivision 126-B, | Income Tax Assessment Act 1997 Section 126-40, | Income Tax Assessment Act 1997 Section 126-45, | Income Tax Assessment Act 1997 Subsection 126-45(1) , | Income Tax Assessment Act 1997 Subsection 126-45(2), | Income Tax Assessment Act 1997 Section 126-50, | Income Tax Assessment Act 1997 Section 126-55, | Income Tax Assessment Act 1997 Paragraph 126-55(1)(a), | Income Tax Assessment Act 1997 Paragraph 126-55(1)(b), | Income Tax Assessment Act 1997 Section 126-60, | Income Tax Assessment Act 1997 Section 701-1, | Income Tax Assessment Act 1997 Section 719-5, | Income Tax Assessment Act 1997 Subsection 719-5(4) , | Income Tax Assessment Act 1997 Paragraph 719-5(4)(c), | Income Tax Assessment Act 1997 Subparagraph 719-5(4)(c)(ii), | Income Tax Assessment Act 1997 Subsection 719-5(6), | Income Tax Assessment Act 1997 Subsection 719-5(7), | Income Tax Assessment Act 1997 Section 719-10, | Income Tax Assessment Act 1997 Subsection 719-10(1), | Income Tax Assessment Act 1997 Section 719-15, | Income Tax Assessment Act 1997 Section 719-20, | Income Tax Assessment Act 1997 Paragraph 719-20(1)(b), | Income Tax Assessment Act 1997 Section 719-77, and | Income Tax Assessment Act 1997 Subsection 719-77(3).

Reasons for decision: Summary: Top Co will be entitled to a rollover under Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the transfer of its shares in Sub B and Sub D to New Sub. Any capital gain on those transfers will be disregarded under section 126-60 of the ITAA 1997. Top Co and New Sub are part of the same wholly owned group and Top Co is a foreign resident. Section 126-40 of the ITAA 1997 provides that a roll-over may be available for the transfer of a CGT asset between 2 companies. Both companies must be members of the same wholly-owned group and at least one of the companies must be a foreign resident. Subsection 126-45(1) of the ITAA 1997 relevantly provides that there may be a roll-over if a CGT event (the trigger event) happens involving the originating company and the recipient company in the circumstances set out in section 126-50 of the ITAA 1997. Subsection 126-45(2) of the ITAA 1997 states that CGT event A1 is a relevant event. Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. The transfer of shares in Sub B and Sub D, from Top Co to New Sub, constitute disposals of CGT assets by Top Co. Each of the requirements detailed in section 126-50 of the ITAA 1997 are satisfied for a roll-over to occur. Top Co have confirmed that the transfer of shares in Sub B and Sub D by Top Co will result in Top Co making a capital gain on the disposal of the shares. The requirement in paragraph 126-55(1)(a) of the ITAA 1997 that the trigger event will result in the originating company making a capital gain is satisfied. Top Co and New Sub will both choose to obtain roll-over relief under paragraph 126-55(1)(b) of the ITAA 1997. As the choice will be made by the day that Sub A lodges its income tax return for the year in which the CGT event happened, section 103-25 of the ITAA 1997 will be satisfied. As a consequence of the rollover, section 126-60 of the ITAA 1997 provides that the capital gain made by Top Co from the trigger event is disregarded. The transfer of shares in Sub B from Top Co to New Sub, and the consequent change of status of Sub B, from being an eligible tier-1 company of the Australian MEC group to a non-eligible tier-1 company subsidiary member does not cause Sub B to momentarily leave the Australian MEC group. At the commencement of the arrangement Sub B is an eligible tier-1 company because it satisfies the requirements in section 719-15 of the ITAA 1997 and paragraph 719-20(1)(b) of the ITAA 1997. Sub B is wholly owned by Top Co and Sub A. When the membership interests in Sub B stop being owned by Top Co, it stops being an eligible tier-1 company as it fails to satisfy the ownership requirements in section 719-15 of the ITAA 1997. At that time Sub B will cease to be a member of the potential MEC group and the Australian MEC group. The Australian MEC group continues to exist pursuant to subsection 719-5(7) of the ITAA 1997 after Sub B ceases to be a member of the potential MEC group (see response to question 3). After Sub A makes a written choice in accordance with the requirements of subsection 719-5(4) of the ITAA 1997, specifying that New Sub is to become a member of the Australian MEC group, New Sub is taken to be an eligible tier-1 company in the Australian MEC group from the time that New Sub qualified as an eligible tier-1 company ( GE Capital Finance Australasia Pty Ltd v Federal Commissioner of Taxation 2011 ATC 20-270). Column 3 of the table in subsection 719-10(1) of the ITAA 1997 requires that the 'non-eligible tier-1 company' subsidiary member be a wholly-owned subsidiary of one or more eligible tier-1 companies. As Sub A and New Sub both qualify as eligible tier-1 companies, as wholly owned subsidiaries of Top Co, this requirement is satisfied. As Sub B becomes a 'non-eligible tier-1' subsidiary member of the Australian MEC group at the same time it stops being an eligible tier-1 company member of the Australian MEC group, there is no moment in time that Sub B is not a member of the Australian MEC group. The sequence of events around the transfer of membership interests in Sub B to New Sub, and Sub A making the choice in subparagraph 719-5(4)(c)(ii) of the ITAA 1997 for New Sub to become a member as an eligible tier-1 company and notifying the Commissioner of this choice under section 719-77 of the ITAA 1997, prevent Sub B being regarded as ceasing to be a subsidiary member of the Australian MEC group at any particular time. The sale of Sub B from Top Co to New Sub and the consequent change of status of Sub B from being an eligible tier-1 company of the Australian MEC group to a non-eligible tier-1 company subsidiary member will not cause a deconsolidation of the Australian MEC group. Subsection 719-5(7) of the ITAA provides that 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 the group ceases to exist, the identity of the top company changes or there ceases to be a provisional head company of the first MEC group. The Australian MEC group comprises of a number of eligible tier-1 companies and a number of 'non-eligible tier-1' companies. Sub B is only one of several eligible tier-1 companies. Accordingly, the Australian MEC group continues in existence throughout the arrangement. Top Co continues as the top company of the Australian MEC group throughout the arrangement. Sub A also continues as the provisional head company of the Australian MEC group throughout the arrangement. None of the transactions in the arrangement cause the Australian MEC group to cease to exist. The first element of Top Co's cost base of its shares in New Sub (issued to it in consideration for the sale of its shares in Sub B and Sub D) will be equal to the market value of the shares transferred at that time. The cost base of a CGT asset acquired by a taxpayer is determined under section 110-25 of the ITAA 1997. When a company issues shares for non-monetary consideration, there is a valid contract, as the company is providing consideration, that is the share themselves, at their actual value. The actual value of what the shareholder has provided is the value of the shares nominated in the company' accounts. Paragraph 33 of Taxation Ruling TR 2008/5 'Income tax: tax consequences for a company of issuing shares for assets or for services' discusses the value of the consideration where assets are transferred to a shelf company. It relevantly states: In Federal Commissioner of Taxation v. Becker (1952) 87 CLR 456 ( Becker ), a landowner sold his land to a shelf company for shares: in doing so, he made no gain, as the shares were worth the same as the only asset of the company, the land. The landowner then sold the shares. But the cost to him of the shares was the full value of the land he gave to get them. That the shares had a paid-up value in the company of £8,000, that amount being nominated in the contract for the sale of the land to the company as the price of the land to be paid for in shares, while the land itself, and the market value of the shares, was worth £12,000, produced no gain to the landowner when he then sold the shares at that market value: what he had given for his shares was the full value of the land, not the nominal amount shown as paid up or nominated as the price of the land in the agreement under which the company was only obliged to issue shares. Per Kitto J, at 467: The question then is, what really was the cost to the respondent of the shares which he sold for £12,000? The plain fact of the matter is that the cost was the land which he transferred to the company. It simply is not true to say that the cost was only £8,000. That was the sum which the sale agreement named as the price of the land, and it was the sum which was credited as paid up on the respondent's shares. But the respondent did not sell his land for £8,000 payable in money, and he did not receive or become entitled to receive the 8,000 shares upon paying £8,000 in money. The sale agreement provided for only one method of completion: it bound the respondent to transfer his land to the company and it bound the company to issue fully-paid shares to him. As New Sub is a newly formed company with no other assets, it is accepted that the first element of the cost base of the shares issued by New Sub to Top Co as consideration for the sale of shares in Sub B and Sub D, will be equal to the market value of the shares in Sub B and Sub D. Any capital gains or losses on the transfer of shares in Sub C by Sub B to New Sub and Sub A will be ignored for income tax purposes as a result of the application of the single entity rule in section 701-1 of the ITAA 1997. Section 701-1 of the ITAA 1997 is central to the interpretation of the consolidation regime. It provides for all of the members of a consolidated group to be treated as a single entity for income tax purposes, rather than separate entities. This is the single entity rule. Paragraph 8 of 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 explains the consequences of the single entity rule as: · the actions and transactions of a subsidiary member are treated as having been undertaken by the head company; · the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group; · assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and · dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company. Paragraph 9 of TR 2004/11 explains that the transfer of a capital gains tax (CGT) asset from one group member to another is not treated for income tax purposes as a disposal or acquisition in the hands of the head company. Although the legal transfer of the CGT asset between the subsidiary members occurs at general law, it has no income tax consequences as the group's head company is taken to be the owner of the asset both before and after the transfer. As Sub B and New Sub and Sub A are all members of the Australian MEC group the transfer of Sub C shares from Sub B to Sub A and New Sub are ignored for taxation purposes. This is because the actions of Sub B and New Sub for taxation purposes are treated as if they were the actions of Sub A, i.e. the actions are treated as if they were internal transfers of assets within Sub A.

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