Edited version of private advice

Authorisation Number: 1051785832223

Date of advice: 3 December 2020

Ruling

Subject: Consolidatable group

Question

Is Company X part of a consolidatable group under section 703-10 of the Income Tax Assessment Act 1997 (ITAA 1997), where a discretionary trust (the trust) is the head entity and Company X and Company Y are the subsidiary members?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company X is a service entity which employs and pays wages.

Company X bills the operating entity Company Y which is the main contractor for all projects and is the entity that generates external revenue.

Company X has been the testing entity for the Jobkeeper payment program and met the initial decline in turnover test in March 20XX.

Company Y has recently picked up a labour hire project, meaning that Company X's labour charge to Company Y will increase. Company X foresees problems meeting the new Jobkeeper extension eligibility because of the increased labour charge to Company Y.

Company X only bills to Company Y and has no external clients.

Company Y is experiencing a substantial decline in turnover compared to 12 months ago due to projects being delayed because of the Covid-19 uncertainties.

This labour based project is the only project Company Y could secure at the moment and is only generating a small margin.

Company X and Company Y are wholly owned subsidiaries of a discretionary trust (the Trust).

Company X and Company Y are not the sole beneficiaries of the Trust.

Company Z is the corporate trustee of the Trust and the non-beneficial holder of 100% of the shares in Company X and Company Y.

Company Z does not lodge income tax returns of its own.

Company X and Company Y have the same shareholders and directors but are not currently consolidated for tax or ASIC purposes.

Company X, Company Y and the Trust are not part of any other consolidated or consolidatable groups.

Company X and Company Y do not have any wholly owned subsidiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 703-10

Income Tax Assessment Act 1997 - Paragraph 703-15(2)(a)

Income Tax Assessment Act 1997 - Paragraph 703-15(2)(b)

Income Tax Assessment Act 1997 - Section 703-20

Income Tax Assessment Act 1997 - Section 703-25

Income Tax Assessment Act 1997 - Section 703-50

Income Tax Assessment Act 1997 - Section 713-130

Reasons for decision

Section 703-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a consolidatable group consists of a single head company and all the subsidiary members of the group.

Head company

Paragraph 703-15(2)(a) of the ITAA 1997 states that an entity is a head company if all the requirements in item 1 of the table are met. The requirements are that:

(1)  the entity must be a company (but not one covered by section 703-20) that has all or some of its taxable income taxed at a rate that is or equals the corporate tax rate

(2)  the entity must be an Australian resident (but not a prescribed dual resident), and

(3)  the entity must not be a wholly-owned subsidiary of another entity that meets the requirements above, or, if it does, it must not be a subsidiary of a consolidatable or consolidated group.

The Trust is not a company, therefore the first requirement is not met.

As all the requirements must be met, the Trust cannot be the head company under paragraph 703-15(2)(a) of the ITAA 1997.

Section 713-130 of the ITAA 1997 allows a public trading trust to make a choice under section 703-50 of the ITAA 1997 to consolidate a consolidatable group, as if the trust were a company, provided certain conditions are met.

The Trust is not a public trading trust, therefore section 713-130 of the ITAA 1997 has no application in this case.

Subsidiary member

Paragraph 703-15(2)(b) of the ITAA 1997 states that an entity is a subsidiary member of a consolidatable group if all the requirements in item 2 of the table are met in relation to the entity. The requirements are that:

(1)  the entity must be a company, trust or partnership (but not one covered by section 703-20 of the ITAA 1997)

(2)  a trust must comply with the residency requirements in section 703-25 of the ITAA 1997, and

(3)  the entity must be a wholly-owned subsidiary of the head company of the group.

In this case, all of the above requirements are not satisfied because the third requirement is not met. Even though Company X and Company Y are wholly owned by the Trust, because the Trust cannot be the head company of the group, Company X and Company Y do not meet the requirement of being a wholly-owned subsidiary of the head company of the group.

Conclusion

A consolidatable group must consist of a head company and all wholly-owned subsidiaries of the head company.

The trust cannot be the head company of the group because it is a discretionary trust and not a company. It follows therefore that Company X and Company Y are not wholly-owned subsidiaries of the head company of the group.

Accordingly, Company X is not part of a consolidatable group, comprising the Trust as the head entity and Company X and Company Y as the subsidiary members, under section 703-10 of the ITAA 1997.