Consolidation: subsidiary member

At what time does a wholly-owned subsidiary company become eligible to be a member of a consolidated group if the shares in the wholly-owned subsidiary company were purchased under a contract?

In accordance with section 703-33 of the Income Tax Assessment Act 1997 (ITAA 1997), the time when the wholly-owned subsidiary became eligible to be a member of the consolidated group is when the buyer becomes entitled to be registered as the holder of the shares in the wholly-owned subsidiary. This is the time when the seller and the buyer have done everything required under the contract to transfer ownership to the buyer.

An Australian resident head company and its wholly-owned resident subsidiary companies, subsidiary A and subsidiary B, are intending to consolidate.

The Australian resident head company entered into a purchase contract for subsidiary C and would like to form a consolidated group with the 3 subsidiaries from the date of entering into the purchase contract.

The purchase contract stated that the share transfer would take effect from the date the contract was made and the contract was subject to satisfaction or waiver of conditions.

The contract was not completed for several months.

The Australian resident company and the seller of the shares dealt with each other at arms length and were not associates.

The criteria for eligibility to be a subsidiary member of a consolidated group are contained in item 2 of the table in subsection 703-15(2) of the ITAA 1997. To be a member of a consolidated group, a subsidiary company must be: - taxed at a rate equal to the general company tax rate - not excluded from being a member of a consolidated group - an Australian resident, but not a prescribed dual resident, and - a wholly-owned subsidiary of the head company

The definition of a 'wholly-owned subsidiary' is contained in subsection 703-30(1) of the ITAA 1997. A subsidiary entity is wholly-owned by the holding entity if all the membership interests in that subsidiary are beneficially owned by the holding entity, or its wholly-owned subsidiaries, or a combination of the holding entity and its wholly-owned subsidiaries.

However, after enactment of subsection 703-30 of the ITAA 1997 it was subsequently recognised that the transfer time of beneficial ownership was not a settled judicial concept. There was a perceived significant risk that vendor and purchaser may arrive at different conclusions as to the precise time when beneficial ownership changes.

In order to overcome this difficulty section 703-33 of the ITAA 1997 was enacted to provide an objective basis for determining this transfer time. Section 703-33 of the ITAA 1997 applies to determine the transfer time only where section 703-30(1) of the ITAA 1997 applies.

Section 703-33 of the ITAA 1997 specifies that for the purposes of subsection 703-30(1) of the ITAA 1997 a change in beneficial ownership takes place at the 'transfer time'. 'Transfer time' is defined in paragraph 703-33(1)(a) of the ITAA 1997 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 of the ITAA 1997 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 'arms length', and the seller and buyer were not 'associates'.

'Entitlement to be registered' refers to the ownership rights that give rise to the entitlement of a buyer of shares in a company to be registered as holder of those shares in the company's register of members. This entitlement commences when the seller and buyer have done everything required under the contract to transfer ownership to the buyer. The mere signing of a contract to purchase the shares in a company is not considered sufficient to give rise to entitlement to be registered.

The rules for registering a transfer of a company's shares are set out in the company's constitution. A copy of the relevant clauses in subsidiary C's constitution do not give any authority for the transfer of the shares at a date earlier than when the change in ownership is entitled to be registered.

Although the terms of the share sale agreement state that the share transfer was to take effect from the date the contract was made and the contract was subject to satisfaction or waiver of conditions, the contract was not completed and the buyer was not entitled to be registered as holder of those shares in the company's register of members until the contract was settled some months later.

Accordingly, subsidiary C will become a wholly-owned subsidiary for the purposes of subsection 703-30(1) of the ITAA 1997 at the time when the buyer becomes entitled to be registered as the holder of the shares in the company. This date being the date of settlement of the Agreement.