Edited version of your written advice

Authorisation Number: 1012999128215

Date of advice: 26 April 2016

Ruling

Subject: Clarifying the beneficial ownership for consolidation membership purposes

Question

Will Company Y be a wholly-owned subsidiary of Company X under subsection 703-30(1) upon completion of the Sale Agreement, including payment of the outstanding purchase price?

Answer

Yes

This ruling applies for the following period:

The year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

• On aa September bbbb, Company X entered into a Share Sale Agreement to acquire all of the issued share capital of Company Y for $XM.

• Shortly after aa September bbbb, X paid Y of the purchase price except for $X.

• Under clause 11.1.1 of the Sale Agreement, at the date of the Agreement, the vendors are the owners of the shares.

• Under clause 11.1.3 of the Sale Agreement, on the completion date, the purchaser shall acquire the full beneficial legal ownership of the shares free and clear of any Encumbrances or interest of any person.

• Completion of the contract under the Sale Agreement can occur as agreed between the parties.

• As at xx Dec xxxx, the parties agreed to extend the completion date to 1 July 20XX as there were outstanding completion steps which had not occurred. It is also proposed that the outstanding purchase price be paid on or prior 1 July 20XX.

• Following the payment of the outstanding purchase price, X will have the right to receive all dividends, and capital payments in respect of the share capital. X will also have the right to attend shareholder meetings and exercise voting rights in respect of share capital as proxy for Company Y and compel completion.

• X and Y are associates as per section 318 of the ITAA1936.

• The directors of X and Y wish to form a tax consolidated group where X is the head company and Y is its subsidiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 703-30

Income Tax Assessment Act 1997 Section 703-33

Reasons for decision

The definition of 'wholly-owned subsidiary' is contained in subsection 703-30(1). An entity (the subsidiary entity) is a wholly-owned subsidiary of another entity (the holding entity) if all the membership interests in the subsidiary entity are beneficially owned by the holding entity or its wholly-owned subsidiaries, or a combination of the holding entity and its wholly-owned subsidiaries.

According to section 960-135, in the case of a company, a membership interest is each interest by virtue of which a person is a member or stockholder of the company. Therefore, a share is a membership interest as it represents membership or stockholding in the company.

The expression 'beneficial ownership' is not defined for Australian income tax purposes, and it accordingly bears its ordinary legal meaning. In broad terms it means ownership for one's own benefit, not for the benefit of others (J Sainsbury plc v. O'Connor (Inspector of Taxes) [1991] 1 WLR 963). The meaning of 'beneficial ownership' 'is to be constructed in context and must reflect the purposes of the section in which it occurs'.

Section 703-33 provides a timing overlay to section 703-30 in certain circumstances. It specifies that for the purposes of subsection 703-30(1) a change in beneficial ownership takes place at the 'transfer time'. 'Transfer time' is defined in paragraph 703-33(1)(a) as being the time when the seller stops being 'entitled to be registered' as the holder of the shares in the company and the buyer becomes entitled to be registered as the holder of the shares in the company.

Section 703-33 basically applies where shares in a company are sold under a contract, the beneficial owner changes as a result of the contract; the seller and buyer dealt at 'arm's length', and the seller and buyer were not 'associates'.

In the present case, since X and Y are associates during the period starting when the contract was entered into and ending at the transfer time referred to in paragraph 703-33(1)(d), the beneficial ownership timing rule set out in section 703-33 cannot be applied. Thus, the eligibility criteria in subsection 703-30(1) must be satisfied and the time of the change in membership status will be when beneficial ownership changed. This will be determined according to the particular facts and circumstances. (see paragraph 12.19 of the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures Bill (No. 2) 2002).

Based on the facts and documents provided, Y will be a wholly-owned subsidiary of X upon completion of the Sale Agreement, including payment of the outstanding purchase price.

Y sold all its issued share capital to X by entering into an enforceable Sale Agreement on aa September bbbb. Under the Sale Agreement, the beneficial ownership of the shares will remain with Y until the completion of the share sale, at which time it will pass to X. The share sale completion and transfer will happen on or prior to 1 July 20XX as agreed between the parties.

Furthermore, clause 11.1.3 of the Sale Agreement that relates to the passing of ownership interests has the effect that the legal and beneficial ownership of Y shares will pass on the completion date. Therefore, when the outstanding purchase price is paid, Y will cease to be the legal and beneficial owner of its shares and X will became the legal and beneficial owner of all the shares in Y.

For the avoidance of doubt, this ruling is silent on whether Y is currently a wholly-owned subsidiary of X (ie, before the outstanding purchase price is paid). This ruling merely confirms that Y will be a wholly-owned subsidiary of X upon completion of the Sale Agreement.