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Ruling
Acquisition of E2
Question 1
Will the Entity 1 (E1) be 'entitled to acquire' (pursuant to section 322 of the ITAA 1936) shares in the Entity 2 (E2) when the scheme becomes effective?
Answer: Yes
Question 2
Pursuant to section 109-5 of the ITAA 1997, does E1 acquire E2 shares on the Implementation Date?
Answer: Yes
Question 3
Will E2 and its Australian resident wholly-owned entities subsidiaries become 'subsidiary members' of E1 tax consolidated group under subsection 703-15(2) of the ITAA 1997 on the Implementation Date by virtue of section 703-30 of the ITAA 1997?
Answer: Yes
Question 4
Will E2 and its Australian resident wholly-owned subsidiaries be taken to be subsidiary members of E1 tax consolidated group for the whole of the day of joining for Head Company and entity core provisions under section 701-1 of the ITAA 1997?
Answer: Yes
Question 5
Under subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of E2 shares acquired by E1 equal to the market value of the total consideration paid?
Answer: Yes
Question 6
Will section 705-185 of the ITAA 1997 have application to E1 in relation to its acquisition of all of the membership interest in E2?
Answer: Yes
Question 7
Will the amounts determined under question 5, be included in calculation of Step 1 of allocable cost amount, pursuant to subsection 705-65(1) of the ITAA 1997 when E2 and its consolidated group joins E1 consolidated group?
Answer: Yes
This ruling applies for the following periods:
Year ending 30 June 2012
The scheme commences on:
During the income year ended 30 June 2012
Relevant facts and circumstances
As part of a reorganisation, E1 will acquire all membership interest of E2.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 317
Income Tax Assessment Act 1936 section 322
Income Tax Assessment Act 1936 section 350
Income Tax Assessment Act 1997 section 109-5
Income Tax Assessment Act 1997 section 109-5(2)
Income Tax Assessment Act 1997 subsection 110-25 (2)
Income Tax Assessment Act 1997 section 701-1
Income Tax Assessment Act 1997 section 701-1(2)
Income Tax Assessment Act 1997 section 701-1(3)
Income Tax Assessment Act 1997 section 703-15
Income Tax Assessment Act 1997 section 703-15(2)
Income Tax Assessment Act 1997 section 703-30
Income Tax Assessment Act 1997 section 703-50
Income Tax Assessment Act 1997 section 703-50(1)
Income Tax Assessment Act 1997 Subdivision 705-A
Income Tax Assessment Act 1997 section 705-10(3)
Income Tax Assessment Act 1997 subsection 705-65(1)
Income Tax Assessment Act 1997 Subdivision 705-C
Income Tax Assessment Act 1997 subdivision 705-185
Income Tax Assessment Act 1997 section 705-185(1)
Income Tax Assessment Act 1997 subsection 713-140(5)
Income Tax Assessment Act 1997 section 960-135
Reasons for decision
Question 1
Will the Entity 1 (E1) be 'entitled to acquire' (pursuant to section 322 of the ITAA 1936) shares in the Entity 2 (E2) when the scheme becomes effective?
Detailed reasoning
For the purposes of Part X, an entity's direct control interest in a company is determined by reference to tests set out in section 350 of the ITAA 1936. Pursuant to subsection 350(1) of the ITAA 1936; the direct control interest that an entity holds in a company includes interests that the entity is entitled to acquire.
Section 317 of the ITAA 1936 provides that the term 'entitled to acquire' has the meaning given by section 322 of the ITAA 1936.
Section 322 of the ITAA 1936 states:
For the purposes of this Part, an entity is entitled to acquire anything that the entity is absolutely or contingently entitled to acquire, whether because of any constituent document of a company, the exercise of any right or option or for any other reason.
Contingent entitlement is not defined in the Act. However, paragraph 14 of the Taxation ruling 2002/3 (TR 2002/3) states:
"The ordinary meanings of 'entitled' cover 'entitled in interest' and 'entitled in possession': The Will of Borger [1912] VLR 310 at 313. The Oxford Dictionary defines entitlement as 'a rightful claim (to a thing)...' To have a contingent entitlement, one must first have an entitlement. Therefore, a contingent entitlement is an existing entitlement (a rightful claim) which is contingent on an event that may or may not happen: per Nourse J in IRC v. Sir John Aird's Settlement [1982] 2 All ER 929 at 940."
Based on the facts, E1 will be 'entitled to acquire' shares in E2 when the scheme becomes effective.
Question 2
Pursuant to section 109-5 of the ITAA 1997, does E1 acquire E2 shares on the Implementation Date?
Detailed reasoning
Where an entity disposes of a CGT asset, an entity acquires the CGT asset at the time when the disposal contract is entered into or, if no contract is entered into, when the entity stops being the asset's owner (item 1 of the table in subsection 109-5(2) of the ITAA 1997).
Based on the facts, E1 will acquire shares in E2 on the Implementation Date.
Question 3
Will E2 and its Australian resident wholly-owned entities subsidiaries become 'subsidiary members' of E1 tax consolidated group under subsection 703-15(2) of the ITAA 1997 on the Implementation Date by virtue of section 703-30 of the ITAA 1997?
Detailed reasoning
Based on the facts, E2 and its wholly-owned subsidiaries will become 'subsidiary members' of the E1 consolidated group under subsection 703-15(2) of the ITAA 1997 on the Implementation Date by virtue of section 703-30 of the ITAA 1997.
Question 4
Will E2 and its Australian resident wholly-owned subsidiaries be taken to be subsidiary members of E1 tax consolidated group for the whole of the day of joining for Head Company and entity core provisions under section 701-1 of the ITAA 1997?
Detailed reasoning
Based on the facts, E2 and its wholly-owned subsidiaries will be taken to be 'subsidiary members' of the E1 tax consolidated group for the whole of the day of joining for Head Company and entity core provisions under section 701-1 of the ITAA 1997.
Question 5
Under subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of E2 shares acquired by E1 equal to the market value of the total consideration paid?
Detailed reasoning
Subsections 110-25(2) of the ITAA 1997 states that the first element of the cost base of a CGT asset is the total of:
· the money paid, or are required to be paid, in respect of acquiring the CGT asset; and
· the market value of any other property given or required to be given in respect of acquiring the CGT asset.
Based on the facts, the first element of the cost base of E2 shares acquired by E1 will be equal to the market value of the total consideration paid at the time of the acquisition.
Question 6
Will section 705-185 of the ITAA 1997 have application to E1 in relation to its acquisition of all of the membership interest in E2?
Detailed reasoning
Subdivision 705-C of the ITAA 1997 modifies Division 701 of the ITAA 1997 (the core rules) and Subdivision 705-A of the ITAA 1997 (tax cost setting amount for assets where a single entity joins a consolidated group) when an existing consolidated group acquires another consolidated group. The modifications acknowledge that the group being acquired is treated as a single entity for tax purposes.
Subsection 705-185(1) of the ITAA 1997, provides that Subdivision 705-A of the ITAA 1997 has effect as if:
· the only entity that is joining the acquiring group is the head company of the acquired group, and
· the subsidiary members of the acquired group are treated as parts of the head company of that group.
As stated at C2-1-40 in the Consolidation Reference Manual:
Specifically, the head company of the acquired group is treated, with some modification, as a single joining entity. It is the only entity that joins the acquiring group. The subsidiary members of the acquired group are treated as parts of its head company, with their assets being treated as the head company's assets, which have their tax cost set at the acquisition time. Intra-group assets, liabilities and membership interests are ignored.
As E2 tax consolidated group will join E1 tax consolidated group, section 705-185 of the ITAA 1997 will apply to E1.
Question 7
Will the amounts determined under question 5, be included in calculation of Step 1 of allocable cost amount, pursuant to subsection 705-65(1) of the ITAA 1997 when E2 and its consolidated group joins E1 consolidated group?
Detailed reasoning
Step 1 of the joined group's allocable cost amount for the joining entity is determined under section 705-65 of the ITAA 1997.
Subsection 705-65(1), provides that the Step 1 amount is broadly the sum of each membership interest that the members of the joined group hold in the joining entity at the joining time.
Relevantly, item 1 of the table in subsection 705-65(1) provides that if the market value of the membership interest is equal to or greater than its cost base, the amount that is to be included in the calculation of Step 1 is equal to the cost base of that membership interest.
Based on the facts, the first element of the cost base will be included in calculating Step 1 allocable cost amount when E2 joins E1 consolidated group.
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