ATO Interpretative Decision

ATO ID 2010/4

Income Tax

Consolidation: multiple entry consolidated group - special conversion event
FOI status: may be released

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Can a special conversion event happen under section 719-40 of the Income Tax Assessment Act 1997 (ITAA 1997) to a potential MEC (multiple entry consolidated) group, which is also a consolidated group, when the head company of the consolidated group and another eligible tier-1 company (ET-1 company) of the same top company, which is not a member of any consolidated group or MEC group become ET-1 companies of another top company at the same time?

Decision

No. A special conversion event cannot happen to the potential MEC group when both the head company of the consolidated group and the other ET-1 company become ET-1 companies of another top company at the same time.

Facts

X Co and Y Co are both ET-1 companies of top company, TC1.

X Co is the head company of a consolidated group (the X Co consolidated group).

Y Co is not a member of any consolidated (or MEC) group.

All of the membership interests in X Co and Y Co are later acquired at the same time (the acquisition time) by a foreign resident company, TC2.

At the acquisition time, X Co and Y Co meet all of the requirements to be ET-1 companies of TC2, and TC2 meets all of the requirements to be the top company.

Reasons for Decision

Section 719-40 of the ITAA 1997 states that a special conversion event (SCE) happens when the set of requirements in that section are met.

The opening words of section 719-40 of the ITAA 1997 provide that a SCE will happen at a particular time to a potential MEC group derived from an ET-1 company of a top company.

Subsection 719-40(1) of the ITAA 1997 identifies the ET-1 company and the top company of the potential MEC group to which the SCE happens, and the time at which the SCE happens.

Paragraph 719-40(1)(b) of the ITAA 1997 requires that the ET-1 company identified in the opening words of subsection 719-40(1) must also be the head company of a consolidated group immediately before the time at which the SCE happens.

Paragraph 719-40(1)(c) of the ITAA 1997 requires that, at that time (the particular time at which the SCE happens), one or more other companies become ET-1 companies of the top company. The time at which the other company, or companies, become ET-1 companies of the top company, is therefore the particular time at which the SCE happens.

To meet the requirements in the opening words of subsection 719-40(1) of the ITAA 1997 and paragraphs 719-40(1)(b) and 719-40(1)(c) of the ITAA 1997, the head company of the consolidated group must be an ET-1 company of the top company at and immediately before the time of the SCE.

The head company (also the company identified in the opening words of section 719-40 of the ITAA 1997) of the consolidated group must, therefore, be an ET-1 company of the entity which is the top company at the time the SCE happens, immediately before one or more other companies become ET-1 companies of that top company.

This interpretation is supported by paragraph 4 18 of the Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, which states:

4.18 A special conversion event will happen if the head company of a consolidated group is an eligible tier-1 company of a top company and one or more other companies subsequently become eligible tier-1 companies of the same top company . [Schedule 1, item 2, paragraphs 719-40(1)(a) to (c)] (emphasis added)

The head company of the consolidated group, X Co, is not an ET-1 company of TC2 (the company which is the top company at the time when the SCE would otherwise happen) immediately before the time Y Co becomes an ET-1 company of TC2.

As the requirement in paragraph 719-40(1)(b) of the ITAA 1997 is not met, a SCE will not happen to the potential MEC group derived from X Co at the time X Co and Y Co become ET-1 companies of TC2 (the acquisition time).

Date of decision: 18 December 2009

Year of income: Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1997
   section 719-40
   subsection 719-40(1)
   paragraph 719-40(1)(b)
   paragraph 719-40(1)(c)

Other References:
Explanatory memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002

Keywords
Potential MEC group
Consolidated group
Consolidation - multiple entry consolidated group
Special conversion event
Eligible tier-1 company
Head company

Siebel/TDMS Reference Number: 6327304

Business Line: Consolidation Centre of Expertise

Date of publication: 8 January 2010

ISSN: 1445-2782

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).