ATO Interpretative Decision
ATO ID 2010/141
Income Tax
Consolidation: MEC group - non eligible tier-1 company subsidiary member of a MEC group becoming an eligible tier-1 company member of that same MEC groupFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does a 'non-eligible tier-1 company' subsidiary member of a MEC (multiple entry consolidated) group cease to be a member of the group, if, at a particular time, the membership interests in it are transferred to a foreign resident member of the same wholly-owned group, so that it becomes an eligible tier-1 company of the top company and a member of the MEC group at that time?
Decision
No. A 'non-eligible tier-1 company' subsidiary member of a MEC group will not cease to be a member of the group, if, at a particular time, membership interests in it are transferred to a foreign resident member of the same wholly-owned group, and at that time it becomes an eligible tier-1 company of the top company and a member of the MEC group.
Facts
TCo, FCo, ACo, BCo and SubCo are members of a wholly-owned group.
ACo and BCo are eligible tier-1 companies of top company TCo.
FCo is a foreign resident company and is a wholly-owned subsidiary of TCo.
SubCo is a wholly-owned subsidiary of BCo.
ACo and BCo have chosen to form a MEC group. ACo is the provisional head company (PHC) of the MEC group.
SubCo is a 'non-eligible tier-1 company' subsidiary member of the MEC group.
As part of a global restructure, BCo disposes of all its membership interests in SubCo to FCo, at a particular time. As a consequence of the disposal, SubCo becomes a wholly-owned subsidiary of FCo and qualifies as an eligible tier-1 company of TCo at the same time.
ACo, as the PHC of the MEC group makes a written choice under paragraph 719-5(4)(c) of the Income Tax Assessment Act 1997 (ITAA 1997), for SubCo to become an eligible tier-1 company member of the MEC group with effect from the time SubCo became an eligible tier-1 company of TCo. ACo notifies the Commissioner in the approved form as required by section 719-77 of the ITAA 1997.
Reasons for Decision
At any particular time the members of MEC group, formed by a choice under section 719-50 of the ITAA 1997, will consist of the potential MEC group derived from those eligible tier-1 companies that were a party to the choice under section 719-50 and which continue to be eligible tier-1 companies of the top company at that particular time (subsection 719-5(2) of the ITAA 1997).
The members of the potential MEC group comprise of the eligible tier-1 companies from which that potential MEC group is derived, and any of their wholly owned subsidiaries, which would satisfy the membership requirements prescribed in subsection 719-10(1) of the ITAA 1997.
An entity will be a 'non-eligible tier-1 company' subsidiary member of a potential MEC group at a particular time, if it satisfies the requirements in the table in subsection 719-10(1) of the ITAA 1997 or is an entity (transitional foreign-held subsidiary) that meets the requirements in sections 701C-10 and 701C-15 of the Income Tax (Transitional Provisions) Act 1997.
An entity, other than a transitional foreign-held subsidiary, that is a 'non-eligible tier-1 company' subsidiary member of a potential MEC group will cease to be a member of the potential MEC group at the time it fails to satisfy the requirements in the table in subsection 719-10(1) of the ITAA 1997. At that same time, the 'non-eligible tier-1 company' subsidiary member will also cease to be a member of the MEC group derived from that potential MEC group (subsection 719-5(2) of the ITAA 1997).
Column 3 of the table in subsection 719-10(1) of the ITAA 1997 requires that the 'non-eligible tier-1 company' subsidiary member be a wholly-owned subsidiary of one or more eligible tier-1 companies.
When the membership interests in SubCo stop being wholly owned by BCo, it stops being a wholly-owned subsidiary of an eligible tier-1 company and fails to satisfy the ownership requirements in Column 3 of the table in subsection 719-10(1) of the ITAA 1997. Therefore, at that time, SubCo will cease to be a member of the potential MEC group and the MEC group.
At that same time, SubCo qualifies as an eligible tier-1 company of the top company, TCo.
For a company to be an eligible tier-1 company at a particular time, it must satisfy the requirements in section 719-15 of the ITAA 1997 and paragraph 719-20(1)(b) of the ITAA 1997.
When a company becomes an eligible tier-1 company of the top company of an existing MEC group, the PHC of the MEC group may make a written choice that the new eligible tier-1 company is to become a member of the group with effect from the time at which the company became an eligible tier-1 company of the top company (subsection 719-5(4) of the ITAA 1997).
SubCo, by satisfying the requirements in section 719-15 of the ITAA 1997 and paragraph 719-20(1)(b) of the ITAA 1997, qualifies as an eligible tier-1 company of the top company, TCo, at the same time it stopped being a member of the potential MEC group and the MEC group. ACo, as the PHC of the MEC group, makes a written choice under subparagraph 719-5(4)(c)(ii) of the ITAA 1997, for SubCo to become a member of the MEC group from the time SubCo became an eligible tier-1 company.
As SubCo becomes an eligible tier-1 company member of the MEC group at the same time it stopped being a 'non-eligible tier-1 company' subsidiary member of the same group, there was no moment in time that SubCo was not a member of the MEC group.
The sequence of events around the transfer of the membership interests in SubCo to FCo, and ACo making the choice in subparagraph 719-5(4)(c)(ii) of the ITAA 1997 for SubCo to become a member as an eligible tier-1 company and notifying the Commissioner of this choice under section 719-77 of the ITAA 1997, prevent SubCo being regarded as ceasing to be a subsidiary member of the MEC group at any particular time.
Date of decision: 26 July 2010Year of income: Substituted accounting period year ended 31 March 2011
Legislative References:
Income Tax Assessment Act 1997
subsection 719-5(2)
subsection 719-5(4)
paragraph 719-5(4)(c)
subparagraph 719-5(4)(c)(ii)
subsection 719-10(1)
section 719-15
section 719-25
section 719-77
ATO ID 2006/170
ATO ID 2006/171
Keywords
Choice to form
Consolidation - multiple entry consolidated group
Eligible tier-1 company
Member of a group
Potential MEC group
Provisional head company
Subsidiary member of a MEC group
Top company
Wholly owned subsidiary
ISSN: 1445-2782