Issue
Are transactions between a branch of a subsidiary member of an Australian consolidated group in another country, and another subsidiary member of the consolidated group, recognised for income tax purposes under the single entity rule in subsection 701-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Under the single entity rule in section 701-1 of the ITAA 1997, transactions between the foreign branch of the subsidiary member and other members of the consolidated group are not recognised for income tax purposes.
Facts
Company A and Company B are Australian resident companies that are subsidiary members of a consolidated group.
Company B has a branch in a foreign country.
Company A enters into various transactions with Company B through the branch of Company B in the foreign country.
Reasons for Decision
Subsection 701-1(1) of the ITAA 1997 provides that an entity that is a subsidiary member of the head company of a consolidated group, is taken to be a part of the head company for the period during which it is a member for working out the tax liability or loss of the head company. This is known as the single entity rule.
The consequences of the single entity rule are that the assets and liabilities of subsidiary members are treated for income tax purposes as assets and liabilities of the head company. Transactions in relation to those assets and liabilities are treated as those of the head company. Transactions between members of a consolidated group are not recognised for income tax purposes. Those transactions between group members do not result in assessable income or allowable deductions.
As the branch of Company B in the foreign country is not a separate legal entity from Company B, transactions between the foreign branch of Company B and Company A are not recognised for income tax purposes. Note : This ATO ID considers the single entity rule in subsection 701-1(1) of the ITAA 1997. It does not consider laws dealing with international taxation nor any interaction of those laws with the single entity rule.