Consolidation: Special conversion event - application of section 701-10

When a special conversion event happens under section 719-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and a multiple entry consolidated (MEC) group comes into existence under paragraph 719-5(1)(b) of the ITAA 1997, does section 701-10 of the ITAA 1997 apply to set the tax cost to the head company of the assets of entities that were subsidiary members of the consolidated group in relation to the special conversion event, and then become subsidiary members, other than eligible tier-1 company members, of the MEC group?

Yes. When a special conversion event happens under section 719-40 of the ITAA 1997 and a MEC group comes into existence under paragraph 719-5(1)(b) of the ITAA 1997, section 701-10 of the ITAA 1997 will apply to set the tax cost of assets of subsidiary members of the consolidated group that become subsidiary members, other than eligible tier-1 company members, of the MEC group.

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 a 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 its choice, in the approved form, as required by section 719-78 of the ITAA 1997.

The MEC group comes into existence on 1 January 2004 and comprises the potential MEC group derived from H Co and its wholly-owned subsidiaries, and the other eligible tier-1 companies, A Co and B Co. H Co is the provisional head company of the MEC group. 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.

When an entity becomes a subsidiary member of a consolidated group or MEC group, the assets of the entity are taken to be the assets of the head company under the single entity rule in section 701-1 of the ITAA 1997, and the group's cost of acquiring the entity is treated as the head company's cost of acquiring the assets of the entity.

Entities that were subsidiary members of the former consolidated group become members of the MEC group, when the MEC group comes into existence. The tax cost of the assets of each of these entities is set by section 701-10 of the ITAA 1997. Item 1 of the table in section 701-60 of the ITAA 1997 says that where an asset's tax cost is set by section 701-10, the asset's tax cost setting amount is worked out in accordance with Division 705 of the ITAA 1997.