Edited version of private advice

Authorisation Number: 1012642781260

Ruling

Subject: Single Entity Rule

Question 1

Is a dividend payment from A Co to B Co assessable to the D Co under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), section 230-15 of the ITAA 1997, or section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Is the return of capital from A Co to B Co assessable to the D Co under section 6-5 of the ITAA 1997, section 230-15 of the ITAA 1997, or section 44 of the ITAA 1936?

Answer

No.

Question 3

Is the return of capital from A Co to B Co a capital gain for D Co under Part 3-1 of the ITAA 1997 or Part 3-3 of the ITAA 1997?

Answer

No.

Question 4

Are the following transactions assessable to the D Co under section 6-5 of the ITAA 1997, section 230-15 of the ITAA 1997, or section 44 of the ITAA 1936?

(a) Repayment of a loan by C Co to A Co;

(b) The settlement of liabilities by A Co with other members of the consolidated tax group?

Answer

No.

Question 5

Do the following transactions give rise to capital gains for D Co under Part 3-1 of the ITAA 1997 or Part 3-3 of the ITAA 1997?

(a) Repayment of a loan by C Co to A Co;

(b) The settlement of liabilities by A Co with other members of the consolidated tax group?

Answer

No.

Question 6

Does D Co make a capital gain or loss upon the deregistration of A Co under section 104-25 of the ITAA 1997?

Answer

No.

Relevant facts and circumstances

1. A Co, B Co and C Co, joined D Co's tax consolidated group (D Co TCG) in the income year ending December 2011.

2. B Co owns 100% of the ordinary shares in A Co.

3. Currently, the only asset of A Co is an interest-bearing loan to C Co.

4. A Co will be deregistered. Prior to A Co's deregistration:

(a) C Co will fully repay the outstanding loan it owes to A Co;

(b) A Co will settle all outstanding intra group liabilities, such as payables to B Co and contribution tax liability payable to the head company, D Co; and

(c) A Co will repatriate remaining funds as follows:

i. A dividend to the extent of A Co's retained profits balance as at the transaction date debited against and paid out of current year and retained profits; and

ii. A capital return amount debited against and paid out of A Co's share capital account, leaving $X of assets in A Co .

5. A Co has no inherited deductions in accordance with subsection 711-20(1) of the ITAA 1997.

6. D Co TCG will receive proceeds of $X upon the deregistration of A Co.

7. A Co's share capital account only contains ordinary shares. A Co has no tainted share capital account within the meaning of section 197-50 of the ITAA 1997.

Assumption

The head company will not incur any incidental costs in relation to the deregistration of A Co.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 230-15

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 section 701-15

Income Tax Assessment Act 1997 Division 711

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Subsection 701-1(1) of the ITAA 1997 states the single entity rule (SER):

If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period.

A Co and B Co are wholly owned subsidiary members of the D Co TCG and therefore under section 701-1 of the ITAA 1997, they are taken to be part of the head company for tax purposes. The application of the SER is stated in paragraph 8 of Taxation Ruling TR 2004/11 (TR 2004/11):

8. As a consequence, the SER has the effect that:

(a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group;

(c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and

(d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

The dividend payment from A Co to B Co is from one part of the tax consolidated group to another. Therefore, pursuant to the SER defined in section 701-1 of the ITAA 1997, the payment of dividend is considered to be an intra-group dealing and therefore, this transaction is not assessable to D Co under section 6-5 of the ITAA 1997, section 230-15 of the ITAA 1997, or section 44 of the ITAA 1936.

Questions 2 and 3

Assessable Income

Pursuant to the SER, A Co and B Co are taken to be part of D Co, and the return of capital from A Co to B Co is considered an intra-group dealing for income tax purposes. Therefore, the return of capital is not assessable income for D Co under section 6-5 of the ITAA 1997, section 230-15 of the ITAA 1997, or section 44 of the ITAA 1936.

Capital Gain

Since A Co and B Co are taken to be part of D Co under the SER, the return of capital is considered an intra-group dealing between members of a tax consolidated group and does not give rise to a capital gain. Therefore, D Co does not make a capital gain under Part 3-1 of the ITAA 1997 or Part 3-3 of the ITAA 1997 as a result of the return of capital.

Questions 4 and 5

Repayment of loan

The repayment of the loan from C Co to A Co is considered an intra-group transaction hence, are not recognised for income tax purposes, under section 701-1 of the ITAA 1997. Therefore, the repayment of the loan from C Co to A Co is not assessable to D Co under section 6-5 of the ITAA 1997, section 230-15 of the ITAA 1997 or section 44 of the ITAA 1936, nor does it give rise to a capital gain for D Co under Part 3-1 of the ITAA 1997 or Part 3-3 of the ITAA 1997.

Intercompany payables

Prior to deregistration of A Co, it will settle all outstanding liabilities comprising of payables to B Co, and a contribution tax liability payable to the head company, by repaying these amounts in full. Both these settlements are purely intra-group as they occur between subsidiaries and the head company of the same tax consolidated group.

Therefore, the settlement of these payables is not recognised for income tax purposes under section 701-1 of the ITAA 1997 and is therefore not assessable to D Co under section 6-5 of the ITAA 1997, section 230-15 of the ITAA 1997 or section 44 of the ITAA 1936, nor does it give rise to a capital gain for D Co under Part 3-1 of the ITAA 1997 or Part 3-3 of the ITAA 1997.

Question 6

Section 104-25 of the ITAA 1997 contains CGT event C2. B Co holds 100% of the ordinary shares in A Co, and upon deregistration of A Co, these shares will get cancelled and hence, cease to exist. A capital gain under CGT event C2 will arise for D Co if there is a difference between the proceeds from the cancellation of the shares and the cost base of the shares.

Capital proceeds

Subsection 116-20(1) of the ITAA 1997 states:

The capital proceeds from a CGT event are the total of:

(a) the money you have received, or are entitled to receive, in respect of the event happening; and

(b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

The head company will be receiving $X of proceeds from A Co upon deregistration. Therefore, the capital proceeds received from CGT event C2 is $X.

Cost base

Subsection 701-55(5) of the ITAA 1997 states the rules for setting the cost base of the shares:

If Part 3-1 or 3-3 is to apply in relation to the asset, the expression means that the Part applies as if the asset's cost base or reduced cost base were increased or reduced so that the cost base or reduced cost base at the particular time equals the asset's tax cost setting amount.

In accordance with Tax Determination TD 2006/58, upon deregistration, A Co will cease to be a subsidiary member of the tax consolidated group and will be treated as a leaving entity for the purposes of applying Division 711 of the ITAA 1997.

Pursuant to section 711-15 of the ITAA 1997, the tax cost setting amount for the shares in A Co is the head company's allocable cost amount for A Co in accordance with section 711-20 of the ITAA 1997. Pursuant to section 711-20 of the ITAA 1997, the allocable cost amount of A Co is $X. Thus, the cost base of the shares in A Co is $X.

Capital gain or loss

Section 104-25 of the ITAA 1997 states:

You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Since the capital proceeds and the cost base equal $X, pursuant to section 104-25 of the ITAA 1997, the head company makes neither a capital gain nor a capital loss under Part 3-1 of the ITAA 1997 or Part 3-3 of the ITAA 1997 as a result of deregistration of A Co.