ATO Interpretative Decision
ATO ID 2009/65
Income Tax
Consolidations: single entity rule and payment of non-share dividendsFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
In the following situation:
- •
- a subsidiary member of a consolidated group has issued a non-share equity interest to an entity that is not a member of the consolidated group
- •
- a non-share dividend is paid to the holder of that non-share equity interest, and
- •
- the extent to which the non-share dividend is eligible to be a frankable distribution needs to be established
is it the available frankable profits, within the meaning of Subdivision 215-B of the Income Tax Assessment Act 1997 (ITAA 1997), of the subsidiary member (and not the head company of the consolidated group) that are considered?
Decision
Yes. Establishing the extent to which a non-share dividend is a frankable distribution does not constitute a core purpose to which the single entity rule (SER) in section 701-1 of the ITAA 1997 applies. As such, the available frankable profits of the subsidiary member (and not the head company) are considered when applying Subdivision 215-B of the ITAA 1997.
Facts
Sub Co is a subsidiary member of a consolidated group whose head company is Head Co.
Sub Co issues convertible notes to Third Party Co who is not a member of the consolidated group.
The convertible notes qualify as an equity interest under the debt/equity rules in Division 974 of the ITAA 1997.
The convertible notes are non-share equity interests in Sub Co as defined in subsection 995-1(1) of the ITAA 1997 as they represent an equity interest in Sub Co that is not solely a share.
Sub Co pays a non-share dividend to Third Party Co.
Reasons for Decision
(All legislative references are to the ITAA 1997).
Subdivision 215-B deals with determining whether non-share dividends are frankable distributions. Section 215-15 provides that non-share dividends can only be frankable to the extent there are 'available frankable profits' in the entity that pays the non-share dividend. The available frankable profits are determined by the formula provided in subsection 215-20(1). (An entity can anticipate future available frankable profits in working out the amount of available frankable profits - refer to section 215-25).
The consolidation regime in Part 3-90 allows a wholly-owned group of entities to be treated as a single entity for income tax purposes. The SER in section 701-1 is the central principle giving effect to this treatment.
The SER operates to treat subsidiary members of the consolidated group as parts of the head company of the group, rather than separate entities, while they are members of the group.
SER treatment only operates for the purposes outlined in subsections 701-1(2) and 701-1(3). These purposes are head company core purposes and entity core purposes which are stated to be:
- •
- working out the amount of the [head company or entity's] liability (if any) for income tax, and
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- working out the amount of the [head company or entity's] loss (if any).
Accordingly, on joining a consolidated group a subsidiary member loses its individual income tax identity and is treated as part of the head company for the purposes of working out the tax liability of the head company and the subsidiary member.
Taxation Ruling TR 2004/11 outlines the Tax Office view that the single entity principle operates in a manner to provide outcomes broadly reflecting a single company operating by divisions. Paragraph 4 of TR 2004/11 provides guidance in relation to the extent of core purposes:
- 4.
- The SER operates for the purposes set out in subsections 701-1(2) and (3) of the ITAA 1997 (the core purposes). These purposes are to work out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period. They include all matters relevant and incidental to those calculations. The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity.
Paragraph 12 of TR 2004/11 outlines that the SER does not affect the income tax position of an entity that is not a member of a consolidated group:
- 12.
- The SER ensures that the members of a consolidated group are treated as a single entity for the purpose of applying income tax laws to that group. The SER does not affect the application of those laws to an entity outside of the consolidated group. The income tax position of entities outside of the group will not be affected by the SER when they deal or transact with a member of a consolidated group.
In determining the extent to which the non-share distribution is a frankable distribution under Subdivision 215-B, it is necessary to decide whether it is the available profits of the head company or the available profits of the issuing subsidiary member that are examined. The answer depends on whether the determination of a frankable distribution is a matter relevant and/or incidental to determining the head company or subsidiary member's liability to income tax or loss (core purposes).
The payment of a frankable distribution does not impact on the income tax liability or loss calculated for either the issuing subsidiary member or the head company of the consolidated group. The receipt of a frankable distribution only affects the recipient's (who is not a member of the consolidated group) income tax position.
It follows that the non-share dividend paid to Third Party Co on the convertible notes will be eligible to be a frankable distribution to the extent of the available frankable profits of Sub Co (and not Head Co).
Date of decision: 3 July 2009Year of income: Year ended 30 June 2010
Legislative References:
Income Tax Assessment Act 1997
Part 3-6
Subdivision 215-A
Subdivision 215-B
section 215-1
section 215-15
subsection 215-20(1)
section 215-25
Part 3-90
Division 701
section 701-1
subsection 701-1(2)
subsection 701-1(3)
Subdivision 709-A
section 709-55
section 709-85
subsection 709-85(1)
section 960-135
Division 974
Subdivision 974-E
subsection 995-1(1)
Related Public Rulings (including Determinations)
Taxation Ruling TR 2004/11
ATO ID 2009/64
Keywords
Consolidated group
Distributions
Franked dividends
Franking accounts
Franking credits
Head company
Non-share equity interest
Single entity rule
Subsidiary member of a consolidated group
ISSN: 1445-2782