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Legal database

ATO Interpretative Decision

ATO ID 2006/146

Income tax

Consolidation: Special conversion event - MEC group coming into existence
FOI status: may be released
  • History note: This ATO ID has been amended to reflect the changes to paragraph 719-40(1)(e) of the Income Tax Assessment Act 1997 (ITAA 1997), the introduction of section 719-78 of the ITAA 1997 and Subdivision 719-BA of the ITAA 1997.
    The amendments to this ATO ID do not affect the answer to the issue raised in this ATO ID.
    Date of amendment 03.06.2010

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does a multiple entry consolidated (MEC) group come into existence under paragraph 719-5(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) when a special conversion event happens under section 719-40 of the ITAA 1997?

Decision

Yes. A MEC group comes into existence under paragraph 719-5(1)(b) of the ITAA 1997 when a special conversion event happens under section 719-40 of the ITAA 1997.

Facts

H Co, an Australian resident, is the head company of a consolidated group and is an eligible tier-1 company of the top company, X Co. On 1 January 2004, X Co acquires all of the membership interests in two other Australian resident companies, A Co and B Co, in a way that they both become eligible tier-1 companies of X Co at the same time. A Co and B Co are not members of a MEC group just before being acquired by X Co. Immediately after the acquisition, neither A Co nor B Co beneficially owns any membership interests in H Co, nor does any other member of the potential MEC group.

H Co makes the choice in writing under paragraph 719-40(1)(e) of the ITAA 1997 specifying A Co and B Co have become eligible tier-1 companies and stating that a MEC group is to come into existence as a result of A Co and B Co becoming eligible tier-1 companies of X Co.

H Co, when lodging its income tax return for the 2003-2004 income year in October 2004, informs the Commissioner the details of the choice, in the approved form, as required by section 719-78 of the ITAA 1997.

Note: Changes in relation to making a choice (paragraph 719-40(1)(e) of the ITAA 1997) for a special conversion event and notifying the Commissioner of the special conversion event in the approved form (section 719-78 of the ITAA 1997) were introduced by Tax Laws Amendment (2010 Measures No.1) Act 2010 (Act No. 56 of 2010). The changes apply from 1 July 2002, unless a choice to apply the changes from 10 February 2010 is made, within the prescribed time, by the head company of the group.

Reasons for Decision

Section 719-40 of the ITAA 1997 provides that a special conversion event happens at a particular time to a potential MEC group (a potential MEC group has the meaning given by section 719-10 of the ITAA 1997) derived from an eligible tier-1 company of a top company, if the eligible tier-1 company is the head company of a consolidated group, and the conditions set out in section 719-40 are satisfied. Because the conditions in section 719-40 are satisfied, a special conversion event happens at the time A Co and B Co become eligible tier-1 companies of the top company. Therefore, a MEC group comes into existence when the special conversion event happened on 1 January 2004: see paragraph 719-5(1)(b) of the ITAA 1997.

Subject to subsection 719-5(4) of the ITAA 1997, subsection 719-5(3) of the ITAA 1997 says a MEC group that results from a special conversion event consists of the potential MEC group derived from time to time from whichever one or more of the following companies that continue to be eligible tier-1 companies of the top company:

•
the company that was the head company of the former consolidated group, and
•
companies that become eligible tier-1 companies of the top company at the time of the event.

Note: Under Subdivision 719-BA of the ITAA 1997, when a MEC group comes into existence because of a special conversion event, provisions in Part 3-90 of the ITAA 1997 that ordinarily apply when an entity joins a MEC group will not apply. Subdivision 719-BA applies for special conversion events that happen on or after 27 October 2006 or from 1 July 2002, if the head company makes a choice in writing within the prescribed time.

Date of decision:  17 May 2006

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   paragraph 719-5(1)(b)
   subsection 719-5(3)
   subsection 719-5(4)
   section 719-10
   section 719-40
   paragraph 719-40(1)(e)
   section 719-78
   Subdivision 719-BA

Related ATO Interpretative Decisions
ATO ID 2006/145
ATO ID 2006/147
ATO ID 2006/148

Keywords
Consolidation
Consolidation - multiple entry consolidated group
Eligible tier-1 company
Member of a group
Provisional head company
Special conversion event
Choice to form

Siebel/TDMS Reference Number:  5251183

Business Line:  Consolidation Centre of Expertise

Date of publication:  9 June 2006

ISSN: 1445-2782


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