Issue
Where, in an income year, a cessation event happens to the provisional head company (PHC) of a multiple entry consolidated (MEC) group which came into existence as a result of a special conversion event (SCE) earlier in the same income year, can any eligible tier-1 company member of the group satisfy the requirements in paragraphs 719-65(3)(d) and 719-65(3)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) to be a replacement PHC?
Decision
No. The requirements in paragraphs 719-65(3)(d) and 719-65(3)(e) of the ITAA 1997 that the company appointed as the replacement PHC must have been a member of the MEC group since the start of the income year of the former PHC, cannot be met by any member of the MEC group. The earliest that any company becomes a member of the MEC group is when the SCE happens. No company could have been a member of the MEC group since the start of the former PHC's income year if the SCE happens later during that income year. Note: as no company qualifies to replace the former PHC, the MEC group will cease to exist.
Facts
On 1 July 2004, A Co and B Co are the head companies of two separate consolidated groups (CG1 and CG2 respectively).
CG1 and CG2 are both foreign-held groups, and are also potential MEC groups.
A Co is an eligible tier-1 company of the potential MEC group of which X Co is the top company.
B Co is an eligible tier-1 company of the potential MEC group of which Y Co is the top company.
Y Co also beneficially owns all of the membership interests in another eligible tier-1 company (C Co) which has no wholly-owned subsidiaries and is not a member of any consolidated or MEC group.
On 1 January 2005, X Co acquires Y Co and a special conversion event happens (all of the conditions in section 719-40 of the ITAA 1997, including the requirement to notify the Commissioner that a MEC group is to come into existence, are satisfied). A MEC group (MEC1) is formed. X Co is the top company of MEC1 and the members comprise eligible tier-1 companies A Co, B Co and C Co, and all of the former members of CG1 and CG2. A Co is the PHC (subsection 719-60(3) of the ITAA 1997).
On 1 February 2005, X Co sells A Co to an unrelated entity (a cessation event happens to A Co).
A Co's income year starts on 1 July.
Reasons for Decision
To qualify to be the PHC of a MEC group a company must be an eligible tier-1 company of the top company and have no membership interests in it beneficially held by another member of the group (subsection 719-65(1) of the ITAA 1997).
There are additional requirements to be met where a company is to be appointed to replace a former PHC to which a cessation event has happened. The requirements specify the period during which a company must have been a member of the MEC group.
Where the MEC group was formed as a result of a SCE, a company will not qualify to be a replacement PHC unless it has been a member of the MEC group at all times during the period beginning at the start of the income year of the former PHC in which the cessation event happened, and ending when the cessation event happened (paragraphs 719-65(3)(d) and 719-65(3)(e) of the ITAA 1997).
Unless a company has adopted a substituted accounting period (SAP) under section 18 of the Income Tax Assessment Act 1936 , an income year is a 12 month period which begins on 1 July (subsections 995-1(1) and 4-10(2) of the ITAA 1997). The relevant income year for the purposes of subsection 719-65(3) of the ITAA 1997 is the 12 month period which starts on 1 July and encompasses the cessation event.
Where the former PHC has adopted a SAP, the relevant income year for the purposes of subsection 719-65(3) of the ITAA 1997 is the 12 month period starting on the first day of the SAP and which encompasses the date on which the cessation event happened (subsection 4-10(2) of the ITAA 1997).
Where a former PHC has an income year starting on 1 July and during that year a SCE happens, no company could have been a member of the MEC group since 1 July, because no company could have been a member of the MEC group prior to the group being brought into existence when the SCE happened.
Similarly, where the former PHC has a SAP and a SCE happens during the income year that begins on a day other than 1 July, no company could have been a member of the MEC group since the start of that SAP.
B Co and C Co are both eligible tier-1 companies of X Co and no membership interests in B Co or C Co are held by any member of MEC1. The requirements of subsection 719-65(1) of the ITAA 1997 are therefore met.
However, the start of the income year of A Co in which the cessation event happens is 1 July 2004. Neither B Co, nor C Co, is eligible to be a replacement PHC unless either company has been a member of MEC1 since that time.
B Co and C Co have only been members of MEC1 since 1 January 2005, when the group came into existence. Therefore, neither company is eligible to be the replacement PHC of the MEC group at the time of A Co's cessation event.
As neither of the remaining eligible tier-1 companies is eligible to be a replacement PHC, the MEC1 group will cease to exist when the cessation event happens to A Co (subsection 719-5(7) of the ITAA 1997).