Edited version of private ruling

Authorisation Number: 1011430296326

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Ruling

Subject: Consolidation

Questions 1

Can Company X and Company Y form a consolidated group?

No

Question 2

Can Company X and Company Y form a multiple entry consolidated group?

Yes

Question 3

Will Company Y have the same accounting period as Company X?

Yes

Question 4

Will only part of the income from a particular source be assessable income of the multiple entry consolidated group.

Yes

This ruling applies for the following period/s:

The Substituted Accounting Period for the 30 June 2010 financial year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The shares in both Company X and Company Y are 100% owned directly by Company Z a non-resident of Australia.

Company Z is not a wholly owned subsidiary of another company.

Company X is a resident of Australia and not a prescribed dual resident.

It has an early balancing substituted accounting period.

Company Y is a resident of Australia and not a prescribed dual resident.

Company Y carries on a particular business.

Both companies and any multiple entry consolidated group they form are required to lodge income tax returns for the Substituted Accounting Period for the 30 June 2010 financial year.

The companies intend for Company X to be the provisional head company of the multiple entry consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 18

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 703-10

Income Tax Assessment Act 1997 Section 703-15

Income Tax Assessment Act 1997 Section 703-20

Income Tax Assessment Act 1997 Section 719-5

Income Tax Assessment Act 1997 Section 719-10

Income Tax Assessment Act 1997 Section 719-15

Income Tax Assessment Act 1997 Section 719-20

Summary

The companies can form a multiple entry consolidated (MEC) group as they meet all of the requirements to form such a group if all the eligible tier-1 companies jointly make the choice in writing and notify the Commissioner in the approved form on or before lodgement of the head company's income tax return for the Substituted Accounting Period for the 30 June 2010 financial year.

As the companies have the same overseas parent and Company X has already been granted a Substituted Accounting Period in line with the parent company, Company Y will be granted the same accounting period.

Only a part of the income from the particular business will be assessable income of the multiple entry consolidated group.

Detailed reasoning

Consolidation

To consolidate, there must be a consolidatable group consisting of an Australian-resident head company and at least one eligible resident subsidiary - a company, trust or partnership - wholly-owned by the head company (section 703-10 of the ITAA 1997).

There is no Australian-resident head company in this case so there cannot be a consolidatable group, and therefore a consolidated group.

However, a foreign-owned group of Australian-resident subsidiaries that do not have a single resident head company may instead be able to consolidate by forming a MEC group (section 719-5 of the ITAA 1997).

A foreign-owned group of Australian entities may be able to consolidate despite not having a single Australian head company. The resulting group, known as a MEC group, is treated as a single entity. The types of entities eligible to be members of a MEC group are determined by section 719-10 of the ITAA 1997.

The MEC group rules enable foreign-owned groups with multiple entry points of investment into Australia to get the benefits of consolidation. The membership of a MEC group is determined by reference to the ultimate foreign parent company, referred to as the 'top company'. The Australian resident companies that constitute the top company's first tier of investment into Australia are referred to as 'tier-1' companies. If a tier-1 company satisfies all the requirements to be a member of a MEC group, it is known as an 'eligible tier-1 company'.

A company will be a top company if it meets the requirements set out in item 1 of the table in subsection 719-20(1) of the ITAA 1997 (see paragraph 719-20(1)(a) of the ITAA 1997):

· The company must be a foreign resident

· The company must not be a *wholly-owned subsidiary of another company (other than a company that is a *prescribed dual resident, or a company that is an Australian resident that fails to meet a condition in column 2 of item 2 of the table)

A company will be a tier-1 company of a top company if it meets the requirements set out in item 2 of the table in subsection 719-20(1) ITAA 1997 (see paragraph 719-20(1)(b) ITAA 1997):

· The company must have all or some of its taxable income (if any) taxed at a rate that is or equals the *corporate tax rate apart from this Part

· The company must not be covered by an item in the table in section 703-20

· The company must be an Australian resident (but not a *prescribed dual resident)

· The company:

o (a) must be a *wholly-owned subsidiary of the *top company; and

o (b) must not be a wholly-owned subsidiary of a company that is an Australian resident (other than a company that fails to meet a condition in column 2 or 3 of the table)

* denotes a term defined in ITAA 1997

An eligible tier-1 company of a top company is a tier-1 company of the top company that meets the requirements of section 719-15 of the ITAA 1997. Subsection 719-15(2) of the ITAA 1997 has a negative test so a tier-1 company is not an eligible tier-1 company if:

(a) there are one or more entities interposed between the tier-1 company and the ^*top company; and

(b) the conditions in subsection (3) are satisfied in relation to at least one of those interposed entities.

Broadly, the membership of a potential MEC group consists of one or more eligible tier-1 companies of a top company and all their wholly-owned subsidiaries that meet the requirements of subsection 719-10(1) of the ITAA 1997. Generally, an entity cannot be a member of a potential MEC group unless entities interposed between it and the eligible tier-1 companies of the group are also members.

A MEC group may be formed in one of two ways:

· as a result of two or more eligible tier-1 companies of the top company making a choice to consolidate the potential MEC group derived from them, or

· as a result of a consolidated group converting to a MEC group when certain conditions are satisfied.

If a choice is made to form a MEC group, all eligible tier-1 companies must jointly nominate one of themselves to be the provisional head company of the group. However, only an eligible tier-1 company that does not have any of its membership interests owned by another member of the MEC group can be nominated to be the provisional head company of a MEC group. The remaining members of the MEC group are subsidiary members of the group.

The required choice, including the appointment of the provisional head company, must be made before the income tax return (for the group) for the relevant period is lodged.

Application to this case.

Company X meets the requirements to be a head company however Company Y is not a subsidiary of Company X so there is no consolidatable group (paragraph 703-15(2)(b) ITAA 1997 and section 703-10 ITAA 1997).

Company Z is a top company as it meets the requirements of section 719-20 ITAA 1997 because it is a foreign company and is not a wholly-owned subsidiary of another company.

Company X and Company Y

· have some of their income subject to the corporate rate of tax

· are not entities covered by the section 703-20 of the ITAA 1997 exclusion

· are Australian residents and not prescribed dual residents

· are wholly-owned subsidiaries of Company Z with no entities interposed between them that are Australian residents

Therefore, Company X and Company Y are tier-1 companies of Company Z.

Further, as there are no interposed entities as described in subsection 719-15(3) of the ITAA 1997 between either Company X or Company Y and Company Z they are eligible tier-1 companies.

Therefore, Company X and Company Y can form a MEC group with Company X as the provisional head company.

Substituted Accounting Period

The Commissioner will accept an accounting period change, pursuant to section 18 of the ITAA 1936, for Company Y so that it has the same accounting period as Company X.

Therefore Company Y will have an early balance day accounting period.

Treatment of particular business income

Because of the operation of a certain agreement only a part of the income from the particular business is assessable income of the multiple entry consolidated group.