ATO Interpretative Decision

ATO ID 2006/100

Income tax

Consolidation: membership - restructure of membership interests supporting components of life insurance business
FOI status: may be released

The terms 'virtual PST', 'virtual PST asset' and 'virtual PST life insurance policy' were repealed by First Home Saver Accounts (Consequential Amendment) Act 2008, effective 26 June 2008. They were replaced by the terms 'complying superannuation/FSHA asset pool' 'complying superannuation/FSHA asset' and 'complying superannuation/FSHA life insurance policy' respectively. From this date, references to 'virtual PST life insurance policy liabilities' in the following document can also be replaced with the term 'complying superannuation/FSHA liabilities'.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

The head company of a consolidated group is treated as a life insurance company. The consolidated group includes two subsidiaries that are unit trusts. The first unit trust is held under the virtual PST of the head company. The underlying assets of this unit trust are segregated to support virtual PST life insurance policy liabilities. The underlying assets of the second unit trust are not segregated and form part of the ordinary assets of the head company. That unit trust can be said to be held under the 'ordinary component' of the head company.

(a): Will the issue of a single unit from the unit trust held under the virtual PST of the head company to the 'ordinary component' of the head company mean that the unit trust will no longer be eligible to be a subsidiary member of the consolidated group under section 713-510 of Income Tax Assessment Act 1997 (ITAA 1997)?
(b): Will the issue of a single unit from the unit trust currently held under the 'ordinary component' of the head company to the virtual PST of the head company mean that the unit trust will no longer be eligible to be a subsidiary member of the consolidated group under section 713-510 of ITAA 1997?

Decision

(a): Yes. The issue of a single unit from the unit trust held under the virtual PST of the head company to the 'ordinary component' of the head company will mean that the unit trust will no longer be eligible to be a subsidiary member of the consolidated group and therefore, the unit trust will cease to be a subsidiary member of the consolidated group.
(b): Yes. The issue of a single unit from the unit trust held under the 'ordinary component' of the head company will mean that the unit trust will no longer be eligible to be a subsidiary member of the consolidated group and therefore, the unit trust will cease to be a subsidiary member of the consolidated group.

Facts

Head Co is the head company of a consolidated group. Under subsection 713-505 of the ITAA 1997, Head Co is treated as a life insurance company for the purposes of applying the income tax law.

Investment policies are issued to trustees of superannuation funds and to ordinary (non-superannuation) policyholders. The assets supporting these policies are held through two subsidiary member unit trusts:

•: Trust V is held under the virtual PST. In accordance with Division 320 of the ITAA 1997, the underlying assets of this unit trust are segregated to support virtual PST life insurance policy liabilities, and
•: Trust O is held under the 'ordinary component'. The underlying assets of this unit trust are not segregated and form part of the ordinary assets of Head Co's life insurance business.

It is proposed to issue an additional unit from each unit trust to other 'component' of Head Co for market value, namely:

•: One unit will be issued by Trust V to the 'ordinary component' of Head Co;
•: One unit will be issued by Trust O to the virtual PST of Head Co.

Reasons for Decision

Section 713-510 of the ITAA 1997 modifies the membership rules contained in Division 703 of the ITAA 1997 where a consolidated group has a member that is a life insurance company.

Subsection 713-510(2) of the ITAA 1997 provides that:

an entity cannot continue to be a *subsidiary member of a *consolidated group of which a *life insurance company is a *member if:

(a)
the *life insurance company owns, either directly or indirectly through one or more interposed entities, all the *membership interests in the entity and, had the entity not been a subsidiary member of the group, either:

(i)
some, but not all of the membership interests described in subsection (3) (the key interests ) would be *virtual PST assets of the life insurance company; or

(ii)
some, but not all, of the key interests would be segregated exempt assets of the life insurance company; or

(b)
the life insurance company owns, either directly or indirectly through one or more interposed entities, only some of the membership interests in the entity and, had the entity not been a subsidiary member of the group, any of the key interests would be virtual PST assets or segregated exempt assets of the life insurance company.

* denotes a term defined in section 995-1 of the ITAA 1997.

In accordance with subsection 713-510(3) of the ITAA 1997:

the key interests are the *membership interests the *life insurance company owns directly in:

(a)
the entity; or

(b)
an interposed entity.

As a consequence of issuing the additional unit by Trust V and by Trust O, some, but not all of the key interests in each unit trust would be virtual PST assets.

Therefore, consistent with paragraph 713-510(2)(a) of the ITAA 1997, each trust cannot continue to be a subsidiary member of the consolidated group. The unit trusts will cease to be subsidiary members of the consolidated group.

Date of decision: 30 March 2006

Year of income: Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   Division 320
   Division 703
   section 713-505
   section 713-510
   subsection 713-510(2)
   paragraph 713-510(2)(a)
   subsection 713-510(3)

Keywords
Consolidation
Consolidation - membership
Life insurance company
Virtual pooled superannuation trusts
Complying superannuation/FSHA asset pool
Complying superannuation/FSHA asset
Complying superannuation/FSHA liabilities
Complying superannuation/FSHA life insurance policy

Siebel/TDMS Reference Number: 4965171

Business Line: Public Groups and International

Date of publication: 7 April 2006

ISSN: 1445-2782

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