Edited version of your private ruling

Authorisation Number: 1012552649280

Ruling

Subject: Acquisition of a consolidated group by another consolidated group

Question 1

Will A Co (as head company of the A Co income tax consolidated group) be required to prepare an income tax return pursuant to section 701-30 (as modified by section 705-180) for the non-membership period from 1 July 20XX to the day before the date on which the transfer of shares in A Co from C Co to B Co is completed?

Answer

Yes.

Question 2

Does the Commissioner agree that Division 711 will not apply to the A Co income tax consolidated group upon joining the B Co income tax consolidated group and as a result:

· Calculations of the allocable cost amount pursuant to the steps in the table in subsection 711-20(1) will not be required; and

· CGT event L5 will not happen pursuant to subsection 104-520(1)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

During the year ending 30 June 20XX

Relevant facts and circumstances

Background

1. A Co is the head company of the A Co income tax consoliated group.

2. B Co is the head company of the B Co income tax consolidated group.

3. B Co currently owns 60% of the shares in A Co.

4. C Co currently owns 40% of the shares in A co.

5. C Co proposes to transfer its shares in A Co to B Co.

6. After the proposed transfer A Co will be wholly-owned by B Co.

Assumptions

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-520

Income Tax Assessment Act 1997 Section 701-1

Income Tax Assessment Act 1997 Section 701-30

Income Tax Assessment Act 1997 Section 703-15

Income Tax Assessment Act 1997 Section 703-30

Income Tax Assessment Act 1997 Section 703-50

Income Tax Assessment Act 1997 Section 705-180

Income Tax Assessment Act 1997 Subdivision 705-A

Income Tax Assessment Act 1997 Subdivision 705-C

Income Tax Assessment Act 1997 Section 711-20

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997, unless otherwise stated.

Question 1

Section 701-30 sets out the rules for determining the taxable income of an entity that has not been a subsidiary member of an income tax consolidated group for the whole of an income year. Subsection 701(3) effectively operates to create a notional income year so that an entity can calculate its taxable income, income tax payable and loss as if the start and end of the non-membership period were the start and end of the notional taxable income year.

Subdivision 705-C modifies the application of the consolidation rules in Division 701 and Subdivision 705-A.

Pursuant to subsection 705-175(1), Subdivision 705-C applies where:

"… all of the members of a consolidated group (the acquired group) become members of another consolidated group (the acquiring group) at a particular time (the acquisition time) as a result of the acquisition of membership interests in the head company of the acquired group."

Pursuant to subsection 705-175(1), Subdivision 705-C will apply as a result of B Co acquiring all the shares in A Co.

Subsection 705-180(3) modifies the operation of the above subsection by providing that:

"If the acquired group only exists for part of the year of income year, section 701-30 (about an entity not being a subsidiary member of a group for a whole income year) applies in relation to the acquired group for the head company core purposes in the same way as it applies to work out the taxable income, tax payable on that taxable income and loss fo each *sort for an entity for a non-membership period."

By operation of the above provisions, only A Co (as the head company of the A Co group and not its subsidiary members) will be required to determine its taxable income, income tax payable and any income loss for the period in which it is not a member of the B Co group for the relevant income year. In this respect, A Co will be required to lodge a full year income tax return but include only the notional taxable income or loss attributable to the non-membership period.

Non-membership period for A Co

A Co and its Australian owned-subsidiaries will:

· become subsidiary members of the B Co group pursuant to subsection 703-15(2) on completion of the share transfer from C Co to B Co (by operation of section 703-33); and

· be taken to be subsidiary members of the B Co group for the whole of the day of joining the B Co group, starting at midnight (for head company and entity core purposes under section 701-1),

The non-membership period for the purposes of section 701-30 will start on 1 July 20XX and end immediately before midnight on the day before the date on which the share transfer from C Co to B Co is completed. This will be at the time the transfer of the shares in A Co will be entered into the members register by the Directors of A Co. The register should indicate the date of transfer as being the same date as indicated on the transfer instrument.

Accordingly, A Co (as the head company of the A Co group) will be required to prepare an income tax return pursuant to section 701-30 (as modified by section 705-180) for the abovementioned non-membership period.

Question 2

When an entity ceases to be a subsidiary member of a consolidated group, the tax cost of membership interests in that entity would ordinarily be set under section 701-15 (and section 701-50), if relevant) at an amount worked out through section 701-60 in accordance with Division 711.

However, where Subdivision 705-C applies, subsection 705-180(1) effectively operates to prevent the operation of certain provisions in Division 701 that would ordinarily apply when an entity ceases to be a subsidiary member of a consolidated group. Thus, calculations of the allocable cost amount pursuant to the steps in the table in subsection 711-20(1) will not be required where subsection 705-180(1) applies.

As stated in the reasons for decision for Question 1 above, Subdivision 705-C will apply as a result of B Co acquiring all the shares in A Co. As a result, Division 711 will not apply to A Co and its Australian wholly-owned subsidiaries upon joining the B Co group. Specifically, calculations of the allocable cost amount by A Co and its subsidiaries pursuant to the steps in the table in subsection 711-20 will not be required.

CGT event L5

Pursuant to subsection 104-520(1), CGT event L5 happens if:

"(a) an entity ceases to be a subsidiary member of a consolidated group or a MEC group; and

(b) in working out the group's allocable cost amount for the entity, the amount remaining after applying step 4 of the table in section 711-20 is negative."

In Taxation Determination TD 2006/38, the Commissioner held that Division 711 cannot apply for the purpose of the core rules in Division 701 in circumstances where an entity ceases to be a subsidiary member of an acquired consolidated group where Subdivision 705-C applies. Paragraphs 1 and 2 of TD 2006/38 state:

" 1. ... where Subdivision 705-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies because membership interests in the head company of a consolidated group are acquired by another consolidated group, subsection 705-180(1) of the ITAA 1997 precludes the operation of sections 701-15, 701-50 and 701-60 of the ITAA 1997. Consequently, the provisions in Division 711 of the ITAA 1997, directed at establishing the tax cost setting amounts for membership interests in leaving entities for the purposes of the core rules in Division 701 of the ITAA 1997, do not apply upon an entity ceasing to be a subsidiary member of the acquired consolidated group.

2. In these circumstances, the allocable cost amount (ACA) for a leaving entity that ceases to be a subsidiary member of the acquired consolidated group is not worked out in accordance with the steps in the table in section 711-20 of the ITAA 1997. Consequently section 104-520 of the ITAA 1997 (CGT event L5) does not apply."

The Commissioner's views as expressed in TD 2006/38 would apply equally to the head company of a consolidated group when it is acquired by another consolidated group. Paragraphs 1.16 of the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002 states:

"When an existing consolidated group (the acquiring group) acquires another existing consolidated group (the acquired group) the entities in the acquired group become subsidiary members of the acquiring group. The cost setting amount for the assets is worked out on the basis that, the head company of the acquired consolidated group is treated as a single entity that becomes a member of a consolidated group. This allows the rules for the basic case of a single entity that becomes a subsidiary member of an existing consolidated group to apply as though the head company of the joining group were the only entity becoming a subsidiary member of the group." [Emphasis added]

As Division 711 will not apply to A Co and its Australian wholly-owned subsidiaries upon joining the B Co group (as a result of B Co acquiring all of the shares in A co), the conditions under section 104-520(1) will not be satisfied and CGT event L5 will not happen.