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Edited version of your private ruling
Authorisation Number: 1012444214066
Ruling
Subject: Consolidation: tax cost setting amounts of membership interests in leaving entities
Question 1
Despite the cessation of the head company of the consolidated group not resulting in a direct change in ownership of the membership interests in linked subsidiary members (a company and a Trust) can section 701-50 and section 711-55 apply such that the membership interests in the linked subsidiary members are given a tax cost?
Answer
Yes.
Question 2
If it is determined that sections 701-50 and 711-55 cannot apply, is the linked entity able to work out the tax cost setting amount for its membership interest in the Trust? If so, under which provision(s)?
Answer
Not applicable.
Relevant facts and circumstances
The applicant was the head company of a tax consolidated group (the group).
All the subsidiary members of the group were directly owned by the applicant except for the Trust which was wholly owned by another subsidiary member (the linked entities).
The applicant became a wholly owned subsidiary of an Australian resident private company (the private company).
As a result of the applicant becoming a wholly owned subsidiary of the private company, it ceased to be eligible to be a head company and as a consequence its consolidated group ceased to exist.
The private company did not consolidate.
Relevant legislative provisions
Income Tax Assessment Act 1997, section 701-15
Income Tax Assessment Act 1997, subsection 701-15(1)
Income Tax Assessment Act 1997, subsection 701-15(3)
Income Tax Assessment Act 1997, section 701-50
Income Tax Assessment Act 1997, section 701-60
Income Tax Assessment Act 1997, paragraph 703-5(2)(a)
Income Tax Assessment Act 1997, paragraph 703-15(2)(a)
Income Tax Assessment Act 1997, section 703-60
Income Tax Assessment Act 1997, subsection 703-60(1)
Income Tax Assessment Act 1997, Division 711
Income Tax Assessment Act 1997, section 711-55
Reasons for decision
All legislative references are to the Income Tax Assessment Act 1997.
The applicant became a wholly owned subsidiary of the private company and ceased to be a head company because the requirements in paragraph 703-15(2)(a) were not being met, and the consolidated group ceased to exist pursuant to paragraph 703-5(2)(a), as follows:
The consolidated group continues to exist until the *head company of the group:
(a) ceases to be a head company; or ….
With the cessation of the applicant as a head company and thereby the consolidated group ceasing to exist, the subsidiary members of the group ceased to be subsidiary members, (specifically in relation to this ruling, the linked entities) pursuant to subsection 701-15(1), note (b):
(b) the head company ceases to satisfy the requirements to be a head company (thereby bringing the group to an end).
Division 711 applies to work out the tax cost of the membership interests in a leaving entity and section 711-55 prescribes the method to use when linked entities leave a group.
Linked entities can leave a group when an event happens to one of them (an entity higher in the chain) or an event happens to all of them at the same time. The 'event' contemplated in section 711-55 can be one of the above.
Section 703-60 describes events affecting consolidated groups and the specific event which is applicable to the subject subsidiary members, the company and the Trust, is item 2 in the table in subsection 703-60(1):
· An entity ceases to be a *subsidiary member of a *consolidated group.
As a result of the head company, ceasing to exist, all its subsidiary members including the linked entities, in this context comprising the company and the Trust, cease to be members of the group. Therefore an event described in item 2 in the table in section 703-60 happens to them. Thus, the linked entities are leaving entities for the purposes of section 701-15 and the tax cost of their membership interests are set under subsection 701-15(3).
The tax cost setting amounts for membership interests in leaving linked entities are worked out under section 711-55, as directed by table item 2 in section 701-60.
Therefore, section 711-55 applies to work out the tax cost setting amounts of the membership interests in the linked entities.