ATO Interpretative Decision

ATO ID 2006/145

Income tax

Consolidation: Special conversion event - cessation of consolidated group
FOI status: may be released
Status of this decision: Decision Current
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 consolidated group cease to exist when a special conversion event happens under section 719-40 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to it?

Decision

Yes. A consolidated group will cease to exist when a special conversion event happens under section 719-40 of the ITAA 1997 in relation to it, because paragraph 703-5(2)(b) of the ITAA 1997 applies in relation to the head company of the consolidated group when it becomes a member of a multiple entry consolidated (MEC) group.

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.

The MEC group comes into existence on 1 January 2004 and comprises the potential MEC group derived from H Co and its wholly-owned subsidiaries, and the other eligible tier-1 companies, A Co and B Co. H Co is the provisional head company of the MEC group.

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

When a MEC group comes into existence under paragraph 719-5(1)(b) of the ITAA 1997 due to a special conversion event happening under section 719-40 of the ITAA 1997, the company that was the head company of the consolidated group becomes a member of the MEC group. Paragraph 703-5(2)(b) of the ITAA 1997 provides that the consolidated group ceases to exist when the head company of the consolidated group becomes a member of a MEC group. The members of the MEC group comprise the head company and the wholly-owned subsidiary members of the former consolidated group - generally, the eligible tier-1 companies and their subsidiaries.

Paragraph 703-5(2)(b) of the ITAA 1997 is not restricted in its application to cases where the head company becomes a member of an existing MEC group.

Note: Under Subdivision 719-BA of the ITAA 1997, when a consolidated group ceases to exist because of a special conversion event, provisions in Part 3-90 of the ITAA 1997 that ordinarily apply when an entity leaves a consolidated 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 703-5(2)(b)
   paragraph 719-5(1)(b)
   section 719-40
   paragraph 719-40(1)(e)
   section 719-78
   Subdivision 719-BA

Related ATO Interpretative Decisions
ATO ID 2006/146
ATO ID 2006/147
ATO ID 2006/148

Keywords
Cessation
Cessation event
Consolidation
Consolidation - multiple entry consolidated group
Eligible tier-1 company
New eligible tier-1 members of a MEC group
Notifiable event
Potential MEC group
Provisional head company
Special conversion event
Subsidiary member of a MEC group
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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