Private ruling: Part IVA of the (ITAA 1936) and Part 3-90 of the (ITAA 1997) - corporate restructure
Date of advice: 21 January 2016
Published: April 2016
Date scheme commenced: The date when NewCo is incorporated under the corporate restructure and the MEC group comes into existence as a result of the special conversion event happening.

Ruling: Q1: Will a special conversion event happen pursuant to section 719-40 when NewCo is incorporated by SecondForeignCo? | A1: Yes. | Q2: Will the consolidated group cease to exist pursuant to paragraph 703-5(2)(b)? | A2: Yes. | Q3: Will a Multiple Entry Consolidated group (MEC group) come into existence pursuant to paragraph 719-5(1)(b)? | A3: Yes. | Q4: Will Subdivision 719 BA apply such that sections 701-15 and 701-50 will not result in the reset of the tax cost of membership interests in entities that cease to be subsidiary members of the consolidated group when the consolidated group ceases to exist? | A4: Yes. | Q5: Will Subdivision 719 BA apply such that section 701-10 will not result in the reset of the tax cost to AusCo of assets of entities that were subsidiary members of the consolidated group, and are then members of the MEC group, when the MEC group comes into existence? | A5: Yes. | Q6: Will the carry forward tax losses of the AusCo tax consolidated group (AusCo TCG) be subject to an available fraction pursuant to section 719-305? | A6: Yes. | Q7: Will the Commissioner make a determination under subsection 177F(1) of the ITAA 1936 to cancel the tax benefit described in this ruling being either a reduction in the assessable income arising from a capital gain or the benefit of a capital loss that would otherwise arise for AusCo as the head company of the AusCo TCG under a direct sale of Sub2Co to SecondForeignCo in connection with a corporate restructure? | A7: No.

Relevant facts and circumstances: 1 TopCo is the ultimate holding company of a global group of companies (TopCo group) which is incorporated and tax resident in Country A. 2 TopCo is also foreign listed public company that is not a wholly-owned subsidiary of another company. 3 The TopCo group intends to develop its existing assets in Country X and Country Y (Foreign Project). 4 AusCo is an Australian resident company that is the head entity of an income tax consolidated group (AusCo TCG). 5 AusCo wholly owns an Australian resident company, Sub1Co. 6 Sub1Co wholly owns an Australian resident company, Sub2Co, which derives non-assessable non-exempt income from its interests in the assets in Country X. Sub1Co also wholly owns a foreign resident company, Sub1ForeignCo. 7 AusCo is wholly owned by a foreign resident company, FirstForeignAusCo. 8 FirstForeignAusCo is wholly owned by a foreign resident company, TopSubCo. 9 TopSubCo also wholly owns another foreign resident company, SecondForeignCo, which holds interests indirectly in assets in Country B. 10 TopSubCo is wholly owned by TopCo. AusCo TCG's tax profile 11 The AusCo TCG is a potential MEC group with TopCo as the top company. 12 All wholly-owned Australian entities of the TopCo group are incorporated in Australia and are tax residents in Australia. All of these entities are a part of the current AusCo TCG, with AusCo as the head company. 13 Sub2Co is incorporated and tax resident in Australia. Sub2Co is also a tax resident company under the domestic legislation of Country X on the basis that it conducts business operations in that country. 14 Sub2Co is also a resident corporate entity and is not a prescribed dual resident. 15 AusCo TCG tax attributes are as follows: a. the non-assessable non-exempt income arising for the AusCo TCG under section 23AH relates to income generated from activities in Country X b. the non-deductible branch expenses under section 23AH relate to activities currently conducted in Country X, and c. its carry forward revenue and capital losses are not currently subject to any available fraction and represent prior group losses of the AusCo TCG. The Foreign Project 16 The proposed corporate restructure will be undertaken to attract investment into the Foreign Project. 17 The Foreign Project is estimated to require substantial capital expenditure (capex) and as a consequence additional funding is required from unrelated third-party investors. 18 In order to attract additional investments, TopCo proposes to undertake a corporate restructure to align the assets in Country X and Country Y under a common ownership under SecondForeignCo. 19 A common ownership under SecondForeignCo is commercially more favourable than a direct sale of Sub2Co to SecondForeignCo. Overview of the corporate restructure of the TopCo group 20 Below are the transactions in Step A to Step F of the corporate restructure. 21 Step A : NewCo is incorporated by SecondForeignCo. NewCo will be incorporated, managed and controlled in Australia; and, will be an Australian resident for tax purposes. 22 The following are the tax attributes of NewCo and AusCo: a. all or some of their taxable income (if any) will be taxed at the general company tax rate b. neither is a company listed in section 703-20 of the ITAA 1997 c. neither is a prescribed dual resident d. both are wholly-owned subsidiaries of TopCo, and e. neither is a wholly-owned subsidiary of an Australian resident company. 23 Although there will be entities that are foreign resident companies interposed between TopCo and the two entities, AusCo and NewCo, none of the following entities holds a membership interest in the interposed entities: a. another tier-1 company of the top company b. a wholly-owned subsidiary of another tier-1 company of the top company, or c. an entity that holds membership interests only as a nominee of one or more of the above. 24 Step B : AusCo will make a choice in writing that a MEC group is to come into existence as a result of NewCo becoming an eligible tier-1 (ET-1) company of TopCo, the top company. 25 Both AusCo and NewCo are taken to have appointed AusCo as the provisional head company of the MEC group at the time the special conversion event happens. 26 AusCo will give the Commissioner a notice in the approved form containing the information listed in subsection 719-78(2) of the ITAA 1997. 27 Step C : SubCo1 transfers its shares in a foreign subsidiary (Sub1ForeignCo) to SecondForeignCo for consideration reflective of fair market value . 28 Step D : TopCo subscribes for shares in TopSubCo. TopSubCo subscribes for shares in SecondForeignCo who subscribes for shares in NewCo. The shares subscription is equal to the market value of Sub1Co at the time of transaction. 29 Step E : Sub1Co will issue ordinary shares to NewCo in exchange for the funds raised at Step D. 30 Step F : AusCo will approve cancellation of its shareholding in Sub1Co for consideration equal to the market value of Sub1Co at the time of the transaction. 31 After Step F of the corporate restructure, all the assets in Country X and Country Y will be held under a common ownership under SecondForeignCo.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 section 177CB | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 section 177F | 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 section 707-310 | Income Tax Assessment Act 1997 section 707-320 | Income Tax Assessment Act 1997 section 719-5 | Income Tax Assessment Act 1997 section 719-15 | Income Tax Assessment Act 1997 section 719-40 | Income Tax Assessment Act 1997 section 719-120 | Income Tax Assessment Act 1997 section 719-130 | Income Tax Assessment Act 1997 section 719-300 | Income Tax Assessment Act 1997 section 719-305

Reasons for decision: Summary: Provided paragraph 719-40(1)(e) is complied with, a special conversion event will happen pursuant to section 719-40 when NewCo is incorporated by SecondForeignCo. | Detailed Reasoning - Detailed reasoning: 1 A MEC group comes into existence when a special conversion event happens to a consolidated group that is also a potential MEC group. A special conversion event happens when one or more companies become ET-1 companies of the top company of the potential MEC group, and the requirements in section 719-40 are satisfied. 2 Under the proposed scheme, SecondForeignCo will incorporate NewCo in Australia; AusCo will make a written choice to convert the existing AusCo TCG into a MEC group; and, AusCo will notify the Commissioner in the approved form. 3 In addition, the scheme also entails those relevant intra-group transactions necessary to achieve common ownership of the assets in Country X and Country Y under SecondForeignCo in order to facilitate subsequent investment by an unrelated third-party to fund the Foreign Project. 4 Accordingly, provided that paragraph 719-40(1)(e) is complied with along with the other requirements in section 719-40, a special conversion event will happen at the time NewCo is incorporated by SecondForeignCo and becomes an ET-1 company of TopCo. | Summary: The AusCo TCG ceases to exist pursuant to paragraph 703-5(2)(b). | Detailed Reasoning - Detailed reasoning: 1 Section 703-5 specifies the time at which a consolidated group comes into existence and sets out the circumstances in which a consolidated group ceases to exist. 2 Accordingly, when the special conversion event happens, AusCo will become a member of a MEC group (proposed AusCo MEC group) with the result that the AusCo TCG will cease to exist at that time (paragraph 703-5(2)(b)). | Summary: A MEC group comes into existence pursuant to paragraph 719-5(1)(b). | Detailed Reasoning - Detailed reasoning: 1 Section 719-5 specifies the time at which, and circumstances in which, a MEC group comes into existence or ceases to exist. 2 Accordingly, the AusCo MEC group will come into existence under paragraph 719-5(1)(b) when the special conversion event happens to the AusCo TCG pursuant to section 719-40. | Summary: Subdivision 719-BA applies such that sections 701-15 and 701-50 will not apply to reset the tax cost of the membership interests in entities that cease to be subsidiary members of the AusCo TCG when the consolidated group ceases to exist. | Detailed Reasoning - Detailed reasoning: 1 Subdivision 719-BA was enacted by Tax Laws Amendment (2010 Measures No 1) Act 2010 and applies where at a particular time (the "conversion time") a MEC group is created from a consolidated group or where a consolidated group is created from a MEC group. 2 The Subdivision 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 (paragraph 5.69 of the Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No. 1) Bill 2010). 3 Therefore, section 719-120 and subsections 719-130(3) and (5) will operate to prevent a number of provisions from applying that would otherwise apply when an entity ceases to be a member of a consolidated group (old group) because a MEC group (new group) is created from the old group. 4 Specifically, 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 entities that cease to be subsidiary members of the AusCo TCG (old group) and become members of the AusCo MEC group (new group) as a result of the special conversion event happening pursuant to section 719-40. 5 Section 719-130 will only apply to entities that were members of the AusCo TCG just before the special conversion event happens and remain members of the AusCo MEC group after the conversion (subsection 719-120(2)). | Summary: Subdivision 719-BA applies such that section 701-10 will not apply to reset the tax cost of assets of entities that were subsidiary members of the AusCo TCG, and are then members of the AusCo MEC group, when the MEC group comes into existence. | Detailed Reasoning - Detailed reasoning: 1 When an entity becomes a subsidiary member of a MEC group, section 701-10 requires the tax cost setting amount of each asset of the subsidiary member to be set at its tax cost setting amount at the time the entity becomes a member of the group (subsection 701-10(4) and section 719-2). 2 Therefore, subsections 719-130(1) and 719-130(5) will operate to prevent section 701-10 from applying when an entity that was a subsidiary member of the AusCo TCG becomes a subsidiary member of the AusCo MEC group because of the special conversion event happening. | Summary: The carry forward tax losses (prior group losses) of the former AusCo TCG will be subject to an available fraction pursuant to section 719-305. | Detailed Reasoning - Detailed reasoning: 1 Division 707 contains rules for, among other things, determining where an unrecouped tax loss, a net capital loss or a foreign loss made by an entity before joining a consolidated group is transferred to the head company of the group; and, the extent to which the head company can utilise a transferred loss for an income year. 2 Subdivision 719-F modifies Division 707 so that it applies appropriately to MEC groups, taking into account its special characteristics. 3 At the time the AusCo MEC group comes into existence, an application event happens at the time of the special conversion event happening (paragraph 719-300(1)(b) and subsection 719-300(3)). Furthermore, the exceptions listed at subsections 719-300(4) to (6) do not operate to prevent the adjustment required under section 719-305 from affecting the utilisation of prior group loses. 4 Subsection 719-305(2) applies to the new AusCo MEC group to deem AusCo to have transferred its prior group losses to itself as the new head company of the MEC group at the time of the application event, being the time the special conversion event happens. 5 The amount of the bundle of losses that can be utilised by AusCo is limited by the relevant 'available fraction' (subsection 707-310(1)) whereby the available fraction is the proportion that the joining entity's modified market value bears to the market value of the whole group at the initial transfer time pursuant to section 707-320. 6 Furthermore, the modified market value of AusCo, the ongoing head company, is worked out at the time of the special conversion event happening having regard to the factors listed in subsection 719-305(3). | Summary: The Commissioner will not make a determination under subsection 177F(1) of the ITAA 1936 to cancel the tax benefit described in this ruling being either a reduction in the assessable income arising from a capital gain or the benefit of a capital loss that would otherwise arise for AusCo as the head company of the AusCo TCG under a direct sale of Sub2Co to SecondForeignCo in connection with a corporate restructure. | Detailed Reasoning - Detailed reasoning: 1 Part IVA applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F of ITAA 1936 to cancel the tax benefit obtained under the scheme. The Scheme 2 The identified scheme involves a restructure of the TopCo group of companies to align all the assets in Country X and Country Y under a common ownership under SecondForeignCo. A single ownership of the assets is considered preferable in facilitating subsequent investment by an unrelated third-party in new shares issued by the SecondForeignCo in order to fund the substantial capex for the Foreign Project. The restructure is more commercially favourable than directly transferring Sub2Co to SecondForeignCo. 3 The relevant steps and transactions of the scheme are identified above. The Tax Benefit 4 Broadly, subsection 177C(1) provides that a tax benefit exists for the purposes of Part IVA where it would, or might reasonably be expected that an amount would be included in the assessable income; a deduction would not be allowable; a capital loss would not be incurred; or, a foreign tax credit would not be allowable; to the taxpayer in a year of income, if the scheme had not been entered into or carried out. 5 Determining whether this is the case depends on the facts and involves 'a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable. This prediction is often referred to the counterfactual. 6 A counterfactual might reasonably exist in connection with the scheme if there had been a direct sale of Sub2Co to SecondForeignCo and the identified tax benefits in connection with the scheme will be the result of a capital gains tax event happening. 7 The tax benefit that might be obtained under this counterfactual is the amount that would have been included in AusCo's assessable income or the capital loss that would not otherwise arise for AusCo if the scheme had not been entered into or carried out. The applicable purpose test 8 In determining whether Part IVA applies to a scheme it is necessary to consider whether having regard to each of the factors set out in subsection 177D(2), it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit. 9 Having regard to the Part IVA analysis set out in the ruling request and the Commissioner's consideration of the eight factors set out in subsection 177(D)(2) the Commissioner has concluded that the scheme was not entered into for the dominant purpose of obtaining a tax benefit.

Subject: Part IVA of the (ITAA 1936) and Part 3-90 of the (ITAA 1997) - corporate restructure: All legislative references in Questions 1 to 6 of the edited version of the private ruling are to the ITAA 1997. All legislative references in Question 7 of the edited version of the private ruling are to the ITAA 1936.