Consolidation: Special conversion event - MEC group coming into existence

Does a multiple entry consolidated (MEC) group come into existence under paragraph 719-5(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) when a special conversion event happens under section 719-40 of the ITAA 1997?

Yes. A MEC group comes into existence under paragraph 719-5(1)(b) of the ITAA 1997 when a special conversion event happens under section 719-40 of the ITAA 1997.

H Co, an Australian resident, is the head company of a consolidated group and is an eligible tier-1 company of the top company, X Co. On 1 January 2004, X Co acquires all of the membership interests in two other Australian resident companies, A Co and B Co, in a way that they both become eligible tier-1 companies of X Co at the same time. A Co and B Co are not members of a MEC group just before being acquired by X Co. Immediately after the acquisition, neither A Co nor B Co beneficially owns any membership interests in H Co, nor does any other member of the potential MEC group.

H Co makes the choice in writing under paragraph 719-40(1)(e) of the ITAA 1997 specifying A Co and B Co have become eligible tier-1 companies and stating that a MEC group is to come into existence as a result of A Co and B Co becoming eligible tier-1 companies of X Co.

H Co, when lodging its income tax return for the 2003-2004 income year in October 2004, informs the Commissioner the details of the choice, in the approved form, as required by section 719-78 of the ITAA 1997. Note: Changes in relation to making a choice (paragraph 719-40(1)(e) of the ITAA 1997) for a special conversion event and notifying the Commissioner of the special conversion event in the approved form (section 719-78 of the ITAA 1997) were introduced by Tax Laws Amendment (2010 Measures No.1) Act 2010 (Act No. 56 of 2010). The changes apply from 1 July 2002, unless a choice to apply the changes from 10 February 2010 is made, within the prescribed time, by the head company of the group.

Section 719-40 of the ITAA 1997 provides that a special conversion event happens at a particular time to a potential MEC group (a potential MEC group has the meaning given by section 719-10 of the ITAA 1997) derived from an eligible tier-1 company of a top company, if the eligible tier-1 company is the head company of a consolidated group, and the conditions set out in section 719-40 are satisfied. Because the conditions in section 719-40 are satisfied, a special conversion event happens at the time A Co and B Co become eligible tier-1 companies of the top company. Therefore, a MEC group comes into existence when the special conversion event happened on 1 January 2004: see paragraph 719-5(1)(b) of the ITAA 1997.

Subject to subsection 719-5(4) of the ITAA 1997, subsection 719-5(3) of the ITAA 1997 says a MEC group that results from a special conversion event consists of the potential MEC group derived from time to time from whichever one or more of the following companies that continue to be eligible tier-1 companies of the top company: • the company that was the head company of the former consolidated group, and • companies that become eligible tier-1 companies of the top company at the time of the event. Note: Under Subdivision 719-BA of the ITAA 1997, when a MEC group comes into existence because of a special conversion event, provisions in Part 3-90 of the ITAA 1997 that ordinarily apply when an entity joins a MEC group will not apply. Subdivision 719-BA applies for special conversion events that happen on or after 27 October 2006 or from 1 July 2002, if the head company makes a choice in writing within the prescribed time.