Law Companion Ruling LCR 2019/2
Date of effect: 14 May 2013

What this ruling is about: 1. This Ruling provides guidance on the churning measure [1] in section 716-440 of the Income Tax Assessment Act 1997 (ITAA 1997). [2] 2. All legislative references in this Ruling are to the ITAA 1997 unless otherwise indicated. 3. The churning measure switches off certain entry tax cost setting rules [3] (as specified in subsection 716-440(3)) when a joining entity becomes a subsidiary member of a consolidated group where: 4. The Explanatory Memorandum to the Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018 (the EM) contains a detailed outline of the measure in paragraphs 1.173 to 1.191. 5. This Ruling supplements the EM by providing:

Class of entities or scheme: 42. Another situation where the condition in paragraph 716-440(1)(f) would not be satisfied (such that the churning measure would not apply) is where, for example: 43. When the foreign resident top company transfers ET Co to the other consolidated group or MEC group, the controlling group may benefit from the application of Division 855. Even if the majority underlying economic ownership of those Australian assets by the controlling group has not changed for more than 12 months, the controlling group may also benefit from an uplift in the tax cost of ET Co's Australian assets. In effect, the controlling group can uplift the tax cost of those Australian assets where there has been no change in their underlying ownership and without recognising a capital gain from the transfer to the joining entity. [23] 44. In such circumstances, the requirements of paragraph 716-440(1)(f) would not be satisfied because that condition focuses on the ownership of participation interests in the joining entity and not the assets of the joining entity. 45. However, where a controlling group enters into such an asset transfer arrangement with a newly acquired or created entity and obtains a benefit under Division 855 and the tax cost setting rules, the application of Part IVA would be carefully considered if the restructure is not motivated by commercial reasons but is entered into for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit. Where Part IVA applies to such restructure, the Commissioner may make a determination, under section 177F of the ITAA 1936, to cancel any tax benefit obtained in connection with it. Commissioner of Taxation 17 July 2019 © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously released in draft format as LCR 2018/D3

Ruling: 1. This Ruling provides guidance on the churning measure [1] in section 716-440 of the Income Tax Assessment Act 1997 (ITAA 1997). [2] 2. All legislative references in this Ruling are to the ITAA 1997 unless otherwise indicated. 3. The churning measure switches off certain entry tax cost setting rules [3] (as specified in subsection 716-440(3)) when a joining entity becomes a subsidiary member of a consolidated group where: 4. The Explanatory Memorandum to the Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018 (the EM) contains a detailed outline of the measure in paragraphs 1.173 to 1.191. 5. This Ruling supplements the EM by providing:

Examples: Example 1: 100 % owned subsidiary 12. On 1 July 2017, FP Co (a foreign resident company) beneficially owns all of the membership interests in NH Co, HL Co and PHC Co respectively. HL Co, in turn, beneficially owns all of the membership interests in JE Co. 13. NH Co, HL Co, PHC Co and JE Co are all Australian resident companies. HL Co, PHC Co and JE Co are members of a MEC group. NH Co is not a member of a consolidated group or MEC group. 14. On 1 September 2018, FP Co disposed of all of its membership interests in HL Co to NH Co. As a result, CGT event A1 happened and FP Co makes a capital gain which is disregarded under Division 855. It is reasonable to conclude that throughout the test period there were no other changes to the beneficial ownership of membership interests in NH Co, HL Co, PHC Co and JE Co. 15. Upon NH Co becoming the beneficial owner of all of the membership interests in HL Co, NH Co makes a choice to form a consolidated group with effect from 1 September 2018 (the joining time) consisting of NH Co, HL Co and JE Co (the NH Co consolidated group) and notifies the ATO of this choice. 16. The conditions in subsection 716-440(1) are satisfied for both HL Co and JE Co in this example. The following analysis focuses on the application of the churning rule to JE Co: | Example 2: 70% owned subsidiary 17. On 1 May 2017, FP Co (a foreign resident company) beneficially owns all of the membership interests in NH Co, HL Co and PHC Co respectively. HL Co, in turn, owns 70% of the membership interests in JE Co. The remaining 30% of the membership interests in JE Co are owned by NH Co. 18. HL Co, PHC Co and JE Co are all Australian resident companies. HL Co and PHC Co are members of a MEC group. NH Co is a wholly owned Australian resident subsidiary of FP Co but sits outside the MEC group. 19. On 1 July 2018, FP Co disposed of all of its membership interests in HL Co to NH Co. As a result, CGT event A1 happened and FP Co makes a capital gain which is disregarded under Division 855. It is reasonable to conclude that throughout the test period there were no other changes to the beneficial ownership of membership interests in NH Co, HL Co and JE Co. 20. Upon NH Co becoming the beneficial owner of all of the membership interests in HL Co, NH Co makes a choice to form a consolidated group with effect from 1 July 2018 (the joining time) consisting of NH Co, HL Co and JE Co (the NH Co consolidated group) and notifies the ATO of this choice. 21. The conditions in subsection 716-440(1) are satisfied for both HL Co and JE Co in this example. The following analysis focuses on the application of the churning rule to JE Co: Associates of the control entity 22. The operation of paragraphs 716-440(1)(f) and 716-440(1)(g) are outlined in the EM at paragraphs 1.179 to 1.181. As noted at paragraph 1.189 of the EM, the extension of the control test in these paragraphs to include participation interests held by associates (of a relevant control entity) applies in respect of arrangements (under which the entity becomes a subsidiary member of a consolidated or MEC group) that commence on and after 15 February 2018. 23. The test in paragraph 716-440(1)(f) requires that throughout the period mentioned in paragraph 716-440(1)(b) The period mentioned in paragraph 716-440(1)(b) is the period beginning 12 months before the joning time and ending immediately after the joining time. 24. If the control entity is not the disposing entity, then the test in paragraph 716-440(1)(g) applies. This test requires the sum of the total participation interests held by the control entity and its associates in the disposing entity to be 50% or more at the time the CGT event happened. 25. The term 'associate' takes its meaning from section 318 of the ITAA 1936. In this context, the control entity's associates may include: | Example 3: associate-inclusive control 26. On 1 September 2018, Foreign Co 1, Foreign Co 2 and Foreign Co 3 (all foreign resident companies) beneficially own all of the membership interests in Aus Co. Aus Co is an Australian resident company. 27. The membership interests in Foreign Co 1, Foreign Co 2 and Foreign Co 3 are all owned by a foreign family. 28. On 1 October 2019, Foreign Co 1, Foreign Co 2 and Foreign Co 3 jointly incorporate an Australian resident company, New Co. 29. On 1 October 2019, Foreign Co 1, Foreign Co 2 and Foreign Co 3 dispose of the membership interests in Aus Co to New Co. CGT event A1 happens to each of Foreign Co 1, Foreign Co 2 and Foreign Co 3 and each company makes a capital gain that is disregarded under Division 855. It is reasonable to conclude that throughout the test period there were no other changes to the beneficial ownership of membership interests in Aus Co. 30. New Co makes a choice to form a consolidated group with Aus Co (the New Co consolidated group) with effect from 1 October 2019 (the joining time) and notifies the ATO of that choice. 31. The conditions in subsection 716-440(1) are satisfied in this example. That is: Relief for post-acquisition restructures within 12 months 32. As stated at paragraph 23 of this Ruling, the test in paragraph 716-440(1)(f) requires that it must be reasonable to conclude that an entity (the control entity) and its associates held (collectively) total participation interests of 50% or more in the joining entity throughout the period that started 12 months before the joining time and ended immediately after the joining time. 33. The condition in paragraph 716-440(1)(f) ensures that the churning measure does not apply, when it otherwise would, where it is reasonable to conclude that 50% or more of the participation interests in the joining entity have not been held by an entity (the control entity) and its associates throughout the 12-month period ending immediately after the joining time. [21] The condition reflects Recommendation 5.6 of the Board of Taxation's June 2012 Report. As explained in the Report, the churning measure should not apply where the ownership of a newly acquired joining entity is restructured within 12 months of it first becoming majority (50% or more) owned by an entity and its associates. [22] | Example 4: post-acquisition restructure within 12 months 34. On 1 July 2019, the Head Co consolidated group consists of two Australian resident companies, Head Co and Acquirer Co. At the same time, Foreign Co, a foreign resident subsidiary of Foreign Parent Co, owns all of the membership interests in Target Co, an Australian resident company having acquired all of these membership interests on 1 July 2018. Foreign Parent Co and Foreign Co are unrelated to the Head Co consolidated group. 35. On 1 February 2020, Head Co acquired all the membership interests in Foreign Co from (unrelated third party) Foreign Parent Co. 36. On 1 May 2020, Foreign Co disposed of all of its membership interests in Target Co to Acquirer Co. As a result, CGT event A1 happens and Foreign Co makes a capital gain which is disregarded under Division 855. 37. At the time Acquirer Co became the owner of all of the membership interests in Target Co, Target Co became a subsidiary member of the Head Co consolidated group. 38. Applying the churning conditions (other than paragraph 716-440(1)(f)) in subsection 716-440(1): 39. The control entity can be any entity that owns direct or indirect participation interests in the joining entity. In this example, both Head Co and Foreign Co can be regarded as a control entity for the purposes of paragraph 716-440(1)(f). However, paragraph 716-440(1)(f) is not satisfied in respect of either control entity in this example. 40. This is because throughout the 12-month test period (beginning 1 May 2019 and ending immediately after the joining time on 1 May 2020), Head Co together with its associates did not hold total participation interests of 50% or more in Target Co. 41. Foreign Co holds participation interests of 50% or more until just before the joining time, but does not hold any participation interest immediately after the joining time. Paragraph 716-440(1)(f) is not considered to be satisfied where Head Co was not an associate of Foreign Co for the first part of the test period (from 1 May 2019 to 1 February 2020). This conclusion is consistent with the policy articulated in the Board of Taxation's June 2012 Report and the EM that the churning measure should not apply where there has been a change in the majority economic ownership of the joining entity within 12 months of the joining time. Arrangements which may seek to exploit the relief from the churning measure for post-acquisition restructures within 12 months 42. Another situation where the condition in paragraph 716-440(1)(f) would not be satisfied (such that the churning measure would not apply) is where, for example: 43. When the foreign resident top company transfers ET Co to the other consolidated group or MEC group, the controlling group may benefit from the application of Division 855. Even if the majority underlying economic ownership of those Australian assets by the controlling group has not changed for more than 12 months, the controlling group may also benefit from an uplift in the tax cost of ET Co's Australian assets. In effect, the controlling group can uplift the tax cost of those Australian assets where there has been no change in their underlying ownership and without recognising a capital gain from the transfer to the joining entity. [23] 44. In such circumstances, the requirements of paragraph 716-440(1)(f) would not be satisfied because that condition focuses on the ownership of participation interests in the joining entity and not the assets of the joining entity. 45. However, where a controlling group enters into such an asset transfer arrangement with a newly acquired or created entity and obtains a benefit under Division 855 and the tax cost setting rules, the application of Part IVA would be carefully considered if the restructure is not motivated by commercial reasons but is entered into for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit. Where Part IVA applies to such restructure, the Commissioner may make a determination, under section 177F of the ITAA 1936, to cancel any tax benefit obtained in connection with it. Commissioner of Taxation 17 July 2019 © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously released in draft format as LCR 2018/D3



What this Ruling is about | Where multiple entities join the consolidated group | Example 4 - post-acquisition restructures within 12 months | If this Ruling applies to you, and you correctly rely on it in good faith, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. | Further, if we think that this Ruling disadvantages you, we may apply the law in a way that is more favourable to you. | Date of effect: 6. This Ruling applies in relation to an income year in respect of an entity that becomes a subsidiary member of a consolidated group or multiple entry consolidated (MEC) group under an arrangement that commences on or after 7.30pm, by legal time in the Australian Capital Territory, on 14 May 2013 unless paragraph 7 of this Ruling applies. | 7. The extension of the control test to cover participation interests of associates, as discussed in paragraphs 22 to 31 of this Ruling will only apply to an arrangement that commences on or after the start of the day on 15 February 2018. [6] | Where multiple entities join the consolidated group: 8. Subsection 716-440(1) sets out the conditions to be satisfied in order for the entry tax cost setting rules, as they apply to a joining entity's assets, to be switched off under subsection 716-440(3). | 9. One of these conditions requires a disposing entity to cease holding membership interests in the: | during the test period that starts 12 months before the joining time and ends immediately after the joining time (the 'ceasing to hold' condition). [8] | 10. A membership interest means each interest or set of interests, or each right or set of rights, in relation to an entity by virtue of which another entity is a member. | 11. The purpose of the 'ceasing to hold' condition applying to membership interests in a higher level entity is to ensure that the entry tax cost setting rules are switched off in respect of the assets of all joining entities with linked membership interests when multiple entities join a consolidated group or MEC group at the same time. | 'the sum of the *total participation interests held by an entity (the control entity) and its *associates in the joining entity was 50% or more'


Legislative references: ITAA 1936 ITAA 1936 177F ITAA 1936 318 ITAA 1936 318(2)(d)(i) ITAA 1936 318(2)(d)(ii) ITAA 1936 318(2)(e)(i) ITAA 1936 318(2)(e)(ii) ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 Div 230 ITAA 1997 715-375 ITAA 1997 716-440 ITAA 1997 716-440(1) ITAA 1997 716-440(1)(a) ITAA 1997 716-440(1)(b) ITAA 1997 716-440(1)(c) ITAA 1997 716-440(1)(d) ITAA 1997 716-440(1)(d)(ii) ITAA 1997 716-440(1)(e) ITAA 1997 716-440(1)(f) ITAA 1997 716-440(1)(g) ITAA 1997 716-440(2) ITAA 1997 716-440(3) ITAA 1997 716-440(4) ITAA 1997 716-440(4)(a) ITAA 1997 716-440(4)(b) ITAA 1997 716-440(4)(c) ITAA 1997 716-440(5) ITAA 1997 719-2 ITAA 1997 Div 855 ITAA 1997 960-100 TAA 1953 Treasury Laws Amendment (Income Tax Consolidation Integrity) Act 2018
Other references: Explanatory Memorandum to the Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018 Board of Taxation 2012, Post-Implementation Review into Certain Aspects of the Consolidation Regime - A Report to the Assistant Treasurer, Board of Taxation Board of Taxation 2010, Post-Implementation Review into Certain Aspects of the Consolidation Regime - Position Paper, Board of Taxation