Taxation Determination

TD 2005/43

Income tax: consolidation: cost setting: are the tax costs of assets of a subsidiary member of a consolidated or MEC group set if some of the subsidiary member's membership interests are directly held by entities outside the group?

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FOI status:

may be released

Preamble

1. No. The tax costs of assets of a subsidiary member of a consolidated or MEC (multiple entry consolidated) group are not set if some of the subsidiary member's membership interests are directly held by entities outside the group, subject to the operation of sections 703-35 and 719-30 of the Income Tax Assessment Act 1997 (ITAA 1997) concerning employee shares.

2. In a consolidated group, if the maximum of 1% membership interests that can be held as employee shares are disregarded (refer section 703-35 of the ITAA 1997), the only type of subsidiary member that can have some or all of its membership interests directly held by entities outside the consolidated group is a transitional foreign-held subsidiary (TFHS). The two types of subsidiary members of a MEC group, again disregarding employee shares (refer section 719-30 of the ITAA 1997), whose membership interests can be directly held, wholly or partly, by entities outside the MEC group are eligible tier-1 companies and TFHSs. These types of subsidiary members retain the existing tax values of their assets when they become members of a consolidated or MEC group.

3. Under section 701C-30 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), a TFHS of a consolidated or MEC group is treated as part of the head company of the group rather than as a separate entity for the purposes of the tax cost setting provisions in section 701-10, Subdivision 705-A and Subdivision 705-B of the ITAA 1997. Because the tax costs of assets of a head company are not set (subsection 701-10(4) of the ITAA 1997), the tax costs of a TFHS's assets are not set when it becomes a member of a consolidated or MEC group.

4. Similarly, by reason of the modified application of the tax cost setting rules effected by subsection 719-160(2) of the ITAA 1997, the tax costs of assets of an entity that is an eligible tier-1 company are not set when the entity becomes a member of a MEC group. An eligible tier-1 company is treated as part of the head company of the MEC group rather than as a separate entity for the purposes of the tax cost setting provisions in section 701-10, Subdivision 705-A and Subdivision 705-B of the ITAA 1997.

Note: Whereas a pre-existing MEC group may expand via the addition of new eligible tier-1 companies (see subsection 719-5(4) of the ITAA 1997), subsection 701C-10(8) of the IT(TP)A 1997 effectively prevents an entity joining an existing consolidated or MEC group as a TFHS of the group subsequent to the formation of the group.

Example

5. In the diagram below, the MEC group comprises Head Co, A Co, B Co, C Co, D Co, Sub Co A, Sub Co B and Sub Co C.

6. Head Co, A Co and B Co are eligible tier-1 companies of the top company as defined by section 719-15 of the ITAA 1997. A Co is partly owned by the top company and partly owned by B Co, a member of the MEC group.

7. C Co and D Co are TFHSs as defined by section 701C-20 of the IT(TP)A 1997. D Co is partly owned by C Co, a member of the MEC group. Sub Co C, a wholly-owned subsidiary of C Co is a transitional foreign-held indirect subsidiary (TFHIS) as defined by section 701C-20 of the IT(TP)A 1997.

8. The tax costs of the assets of Head Co will not be set; they retain their existing tax values. Under section 719-160 of the ITAA 1997, the tax costs of assets of A Co and B Co are also not set because they are treated as part of Head Co for the purposes of the operation of the tax cost setting provisions.

9. Similarly, the tax costs of the assets of C Co and D Co will not be set because as they are TFHSs, they are treated as part of the head company under section 701C-30 of the IT(TP)A 1997 for the purposes of the operation of the tax cost setting provisions.

10. The table below summarises the operation of the cost setting rules for the different types of members of the MEC group on the assumption that Sub Co A, Sub Co B and Sub Co C are not chosen transitional entities under section 701-5 of the IT(TP)A 1997.

Date of effect

11. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
19 October 2005

Previously issued as TD 2005/D11

References

ATO references:
NO 2004/12070

Related Rulings/Determinations:

TR 92/20

Subject References:
consolidated groups
consolidation
eligible tier-1 company
head company
MEC group
subsidiary member of a consolidated group
subsidiary member of a MEC group
tax cost setting rules
transitional foreign-held indirect subsidiaries
transitional foreign-held subsidiaries

Legislative References:
TAA 1953 Pt IVAAA
ITAA 1997 701-10
ITAA 1997 701-10(4)
ITAA 1997 703-35
ITAA 1997 Subdiv 705-A
ITAA 1997 Subdiv 705-B
ITAA 1997 719-5(4)
ITAA 1997 719-15
ITAA 1997 719-30
ITAA 1997 719-160
ITAA 1997 719-160(2)
IT(TP)A 1997 701-5
IT(TP)A 1997 701C-10(8)
IT(TP)A 1997 701C-20
IT(TP)A 1997 701C-30