Private ruling: Consolidatable group
Date of advice: 3 December 2020
Published: January 2021
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Company X part of a consolidatable group under section 703-10 of the Income Tax Assessment Act 1997 (ITAA 1997), where a discretionary trust (the trust) is the head entity and Company X and Company Y are the subsidiary members? | A1: No.

Relevant facts and circumstances: Company X is a service entity which employs and pays wages. Company X bills the operating entity Company Y which is the main contractor for all projects and is the entity that generates external revenue. Company X has been the testing entity for the Jobkeeper payment program and met the initial decline in turnover test in March 20XX. Company Y has recently picked up a labour hire project, meaning that Company X's labour charge to Company Y will increase. Company X foresees problems meeting the new Jobkeeper extension eligibility because of the increased labour charge to Company Y. Company X only bills to Company Y and has no external clients. Company Y is experiencing a substantial decline in turnover compared to 12 months ago due to projects being delayed because of the Covid-19 uncertainties. This labour based project is the only project Company Y could secure at the moment and is only generating a small margin. Company X and Company Y are wholly owned subsidiaries of a discretionary trust (the Trust). Company X and Company Y are not the sole beneficiaries of the Trust. Company Z is the corporate trustee of the Trust and the non-beneficial holder of 100% of the shares in Company X and Company Y. Company Z does not lodge income tax returns of its own. Company X and Company Y have the same shareholders and directors but are not currently consolidated for tax or ASIC purposes. Company X, Company Y and the Trust are not part of any other consolidated or consolidatable groups. Company X and Company Y do not have any wholly owned subsidiaries.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 703-10 | Income Tax Assessment Act 1997 - Paragraph 703-15(2)(a) | Income Tax Assessment Act 1997 - Paragraph 703-15(2)(b) | Income Tax Assessment Act 1997 - Section 703-20 | Income Tax Assessment Act 1997 - Section 703-25 | Income Tax Assessment Act 1997 - Section 703-50 | Income Tax Assessment Act 1997 - Section 713-130

Reasons for decision: Summary: Section 703-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a consolidatable group consists of a single head company and all the subsidiary members of the group. | Detailed Reasoning - Head company: Paragraph 703-15(2)(a) of the ITAA 1997 states that an entity is a head company if all the requirements in item 1 of the table are met. The requirements are that: (1) the entity must be a company (but not one covered by section 703-20) that has all or some of its taxable income taxed at a rate that is or equals the corporate tax rate (2) the entity must be an Australian resident (but not a prescribed dual resident), and (3) the entity must not be a wholly-owned subsidiary of another entity that meets the requirements above, or, if it does, it must not be a subsidiary of a consolidatable or consolidated group. The Trust is not a company, therefore the first requirement is not met. As all the requirements must be met, the Trust cannot be the head company under paragraph 703-15(2)(a) of the ITAA 1997. Section 713-130 of the ITAA 1997 allows a public trading trust to make a choice under section 703-50 of the ITAA 1997 to consolidate a consolidatable group, as if the trust were a company, provided certain conditions are met. The Trust is not a public trading trust, therefore section 713-130 of the ITAA 1997 has no application in this case. | Detailed Reasoning - Subsidiary member: Paragraph 703-15(2)(b) of the ITAA 1997 states that an entity is a subsidiary member of a consolidatable group if all the requirements in item 2 of the table are met in relation to the entity. The requirements are that: (1) the entity must be a company, trust or partnership (but not one covered by section 703-20 of the ITAA 1997) (2) a trust must comply with the residency requirements in section 703-25 of the ITAA 1997, and (3) the entity must be a wholly-owned subsidiary of the head company of the group. In this case, all of the above requirements are not satisfied because the third requirement is not met. Even though Company X and Company Y are wholly owned by the Trust, because the Trust cannot be the head company of the group, Company X and Company Y do not meet the requirement of being a wholly-owned subsidiary of the head company of the group. | Detailed Reasoning - Conclusion: A consolidatable group must consist of a head company and all wholly-owned subsidiaries of the head company. The trust cannot be the head company of the group because it is a discretionary trust and not a company. It follows therefore that Company X and Company Y are not wholly-owned subsidiaries of the head company of the group. Accordingly, Company X is not part of a consolidatable group, comprising the Trust as the head entity and Company X and Company Y as the subsidiary members, under section 703-10 of the ITAA 1997.