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Ruling

Subject: Income Tax: Consolidation: loss utilisation

Working out the available fraction for a bundle of losses at the initial transfer time, where a single entity acquires a consolidated group then makes a choice to form a new consolidated group.

Question 1

Does section 707-330 of the Income Tax Assessment Act 1997 (ITAA 1997) apply when working out the available fraction at the initial transfer time for the bundle of group losses transferred from Existing Co Pty Ltd (EG Co) to Single Co Pty Ltd (Single Co) under Subdivision 707-A of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Existing Co Pty Ltd (EG Co) is the head company of a consolidated group (EG Co Group) that has incurred tax losses (group losses) since its formation.

On 1 July 2010 all the membership interests became owned by Single Co Pty Ltd (Single Co). Single Co became entitled to be registered as the holder of all the shares in EG Co from the start of that day.

Prior to the acquisition of EG Co there was no consolidatable group existed of which Single Co would be eligible to be the head company.

Single Co made a choice to form a consolidated group (the Single Co Group) effective from 1 July 2010, which included all EG Co's wholly owned subsidiaries.

EG Co's unutilised group losses were transferred to Single Co under Subdivision 707-A of the ITAA 1997 at the joining time of 1 July 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 703-5

Income Tax Assessment Act 1997 Section 703-10

Income Tax Assessment Act 1997 Section 703-15

Income Tax Assessment Act 1997 Section 703-33

Income Tax Assessment Act 1997 Section 703-50

Income Tax Assessment Act 1997 Subdivision 705-A

Income Tax Assessment Act 1997 Subdivision 705-B

Income Tax Assessment Act 1997 Subdivision 705-C

Income Tax Assessment Act 1997 Section 705-175

Income Tax Assessment Act 1997 Subsection 705-175(1)

Income Tax Assessment Act 1997 Subdivision 707-A

Income Tax Assessment Act 1997 Section 707-115

Income Tax Assessment Act 1997 Section 707-120

Income Tax Assessment Act 1997 Section 707-305

Income Tax Assessment Act 1997 Subsection 707-305(1)

Income Tax Assessment Act 1997 Subsection 707-305(2)

Income Tax Assessment Act 1997 Subsection 707-305(3)

Income Tax Assessment Act 1997 Section 707-330

Income Tax Assessment Act 1997 Subsection 707-330(1)

Income Tax Assessment Act 1997 Paragraph 707-330(1)(a)

Income Tax Assessment Act 1997 Paragraph 707-330(1)(b)

Income Tax Assessment Act 1997 Paragraph 707-330(1)(c)

Income Tax Assessment Act 1997 Subsection 707-330(2)

Income Tax Assessment Act 1997 Division 711.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Detailed reasoning

General discussion of the law

Subdivision 705-C

Subdivision 705-C of the ITAA 1997 applies in determining the tax cost setting amount for assets where a consolidated group is acquired by another consolidated group and modifies the operation of the tax cost setting rules in Subdivision 705-A of the ITAA 1997.

Subdivision 705-C of the ITAA 1997 applies if all the members of a consolidated group (the acquired group) become members of another consolidated group (the acquiring group) as a result of the acquisition of membership interests in the head company of the acquired group.

ATO Interpretative Decision ATO ID 2009/160 states that Subdivision 705-C of the ITAA 1997 does not apply where a single entity, that is not a member of a consolidated group, acquires all the membership interests in the head company of a consolidated group and immediately makes a choice to form a consolidated group. The acquiring group must be an existing consolidated group.

When a consolidated group is acquired by an unconsolidated company, Division 711 of the ITAA 1997 will apply to set the tax cost of the membership interests in the subsidiary members of the old group and Subdivision 705-B of the ITAA 1997 will apply when the company forms a new consolidated group. The fact that there may be no gap in time between cessation of the old group and formation of the new group does not preclude the operation of the exit and entry tax cost setting process under Division 711 of the ITAA 1997 and Subdivision 705-B of the ITAA 1997 respectively.

Restricting section 707-330 of the ITAA 1997 to circumstances where a consolidated group is acquired by another consolidated group would be consistent with the thrust of Subdivision 705-C of the ITAA 1997.

However, there are significant differences in the wording of subsection 705-175(1) of the ITAA 1997, as to when Subdivision 705-C of the ITAA 1997 applies, and subsection 707-330(1) of the ITAA 1997, as to when section 707-330 applies of the ITAA 1997.

Object of Subdivision 707-C

Section 707-330 of the ITAA 1997 is contained in Subdivision 707-C of the ITAA 1997 which is about the amount of transferred losses that can be utilised. Subsection 707-305(1) of the ITAA 1997 states that the main object of Subdivision 707-C of the ITAA 1997 is to limit, in a way that gives effect to the principles in subsections 707-305(2) and (3) of the ITAA 1997, the amount of losses transferred under Subdivision 707-A of the ITAA 1997 that can be utilised.

The principle in subsection 707-305(3) of the ITAA 1997 is that the amount of a transferred loss that the transferee can utilise is to reflect the amount of the loss that the transferor could have utilised had it not become a member of the transferee's consolidated group at the time of the transfer.

The time of the transfer is the joining time per section 707-120 of the ITAA 1997. The joining time is when the entity becomes a member of a consolidated group per section 707-115 of the ITAA 1997.

The principle in subsection 707-305(3) of the ITAA 1997 means that utilisation of the losses transferred from EG Co to the Single Co should be determined on the basis that EG Co had not joined the consolidated group.

There are two events, which take effect at the joining time of 1 July 2010, which result in the acquired entity becoming a subsidiary member of the consolidated group, namely the acquisition of membership interests in EG Co and the formation of the Single Co consolidated group. If those events had not occurred, EG Co would have remained as the head company of the EG Co consolidated group and utilisation of its group losses determined on the basis of a continuing consolidated group.

The principle in subsection 707-305(3) of the ITAA 1997 would not be met if section 707-330 of the ITAA 1997 does not apply to the facts of this case. In the absence of section 707-330 of the ITAA 1997, EG Co as a stand-alone entity would be treated as the real loss-maker for purposes of working out the available fraction because the single entity rule ceases to apply at the joining time when there is a deconsolidation of the EG Co consolidated group.

Section 707-330

Section 707-330 of the ITAA 1997 modifies how the available fraction for a bundle of losses is determined in certain circumstances.

SECTION 707-330 Losses transferred from former head company

707-330(1)

This section has effect for working out the *available fraction for a *bundle of losses if:

(a) an entity (the ex-head company) becomes a *subsidiary member of a *consolidated group (the bigger group) at a time (the joining time); and

(b) just before the joining time the ex-head company was the *head company of another consolidated group (the old group); and

(c) at the joining time the losses are transferred under Subdivision 707-A from the ex-head company to the head company of the bigger group.

707-330(2)

Work out the ex-head company's *modified market value or *market value as if each *member of the bigger group that had been a *subsidiary member of the old group just before the joining time were a part of the ex-head company, and not a separate member of the bigger group, when the transfer occurred.

707-330(3)

Also, work out the ex-head company's *modified market value as if each *subsidiary member of the old group had been a part of the ex-head company while it was a subsidiary member of the old group.

The EM indicates that section 707-330 of the ITAA 1997 was drafted with a group takeover scenario (i.e. where an existing consolidated group acquires another consolidated group) in mind.

However, the EM does not specifically state that section 707-330 of the ITAA 1997 is restricted to the acquisition of one consolidated group by another consolidated group. Nor does the EM indicate that section 707-330 has application where a consolidated group is acquired by a single company which immediately forms a new consolidated group.

Paragraph 707-330(1)(a)

There could be two interpretations for paragraph 707-330(1)(a) of the ITAA 1997 in regard to the bigger group:

(i) the bigger group only needs to be in existence at the joining time.

(ii) the bigger group must be in existence prior to the joining time.

The first interpretation is consistent with a literal reading of paragraph 707-330(1)(a) of the ITAA 1997 and gives effect to the principle in subsection 707-305(3) of the ITAA 1997 in circumstances where a single company acquires a consolidated group and immediately forms a new consolidated group.

This is contrasted to the approach in ATO ID 2009/160 which gives effect to the intended scope of Subdivision 705-C of the ITAA 1997 where the words 'become members of another consolidated group' indicate that there must be an existing consolidated group as the acquiring entity for purposes of subsection 705-175(1) of the ITAA 1997 in determining that Subdivision 705-C of the ITAA 1997 does not apply where the acquirer is a stand-alone entity.

However, it is considered that the objects of section 707-330 of the ITAA 1997 are achieved upon a plain reading of the words.

Application of the law

Single Co meets the requirements to be a head company under subdivision 703-15(2) of the ITAA 1997 except that it does not have any wholly owned subsidiaries prior to the time of acquiring EG Co.

Single Co acquired all the membership interests in EG Co on 1 July 2010 by way of share transfer (the acquisition time). Consequently, EG Co no longer satisfies all the requirements under subsection 703-15(2) of the ITAA 1997 and ceases to be eligible to be the head company of a consolidated group on that day. Further, subsection 703-5(2) of the ITAA 1997 applies so that EG Co Consolidated Group ceases to exist on that day.

Single Co made a choice to form a consolidated group on and after 1 July 2010 under section 703-50 of the ITAA 1997.

The cessation of the EG Co consolidated group coincides with the time of formation (joining time) of the Single Co consolidated group.

The acquisition of EG Co by Single Co results in the commencement of a consolidatable group headed by Single Co. A consolidated group is immediately formed which will have effect from the time on 1 July 2010 when EG Co became a wholly-owned subsidiary of Single Co.

There is no gap in time between cessation of the EG Co consolidated group and formation of the Single Co consolidated group, which accords with Taxation Determination TD 2006/74.

The facts of Single Co's circumstances differ to that where there is a deconsolidation of a consolidated group and the former head company and its subsidiaries later join another group.

Having regard to the facts, it is considered that just before the joining time EG Co was 'the head company of another consolidated group' in accordance with paragraph 707-330(1)(b) of the ITAA 1997.

Also, it is considered the pre-conditions under paragraphs 707-330(1)(a) and (c) of the ITAA 1997 are satisfied.

Therefore, section 707-330 of the ITAA 1997 will apply in determining the modified market value of EG Co at the joining time of 1 July 2010 and in working out the available fraction at the initial transfer time for the bundle of group losses transferred from EG Co to Single Co under Subdivision 707-A of the ITAA 1997.