Issue
Does a consolidatable group exist where a subsidiary member holds some membership interests in the head company?
Decision
Yes. A consolidatable group exists where a subsidiary member holds some membership interests in the head company, provided that the other conditions in subsection 703-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997) are also satisfied.
Facts
A Co is a private company that intends to be the head company of a consolidated group. B Co is a private company that holds approximately 40% of the shares in A Co.
A Co enters into an arrangement whereby it issues shares in itself to the shareholder of B Co as consideration for the acquisition of all B Co's shares. Consequently, B Co becomes a wholly-owned subsidiary of A Co. However, B Co will still retain its shareholding in A Co until such time as this shareholding is redeemed by A Co.
After B Co becomes a wholly-owned subsidiary of A Co, but prior to the share buy-back by A Co of the shares that B Co holds in A Co, A Co chooses to form a consolidated group pursuant to section 703-50 of the ITAA 1997.
Reasons for Decision
A consolidated group comes into existence when a head company makes a choice to consolidate a consolidatable group. Under section 703-10 of the ITAA 1997, a consolidatable group consists of a single Australian resident head company and at least one wholly-owned resident subsidiary member (which may be a company, trust or partnership). Section 703-20 of the ITAA 1997 prevents certain types of entities from being a head company or subsidiary member of a consolidatable or consolidated group and section 703-25 of the ITAA 1997 provides specific Australian resident requirements for trusts.
The criteria for eligibility to be a head company of a consolidated group are contained in item 1 of the table in subsection 703-15(2) of the ITAA 1997. To be a head company, the entity must: • be a company that has all or some of its taxable income taxed at a rate equal to the general company tax rate; • be an Australian resident, but not a prescribed dual resident; • not be excluded from being a member of a consolidatable or consolidated group; and • not be a wholly-owned subsidiary member of a consolidated group or a group that is eligible to consolidate.
On the basis that A Co meets the criteria contained in item 1 of the table in subsection 703-15(2) of the ITAA 1997, it is eligible to be the head company.
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 subsidiary member, the entity must: • be a company, trust or partnership, and must not be an entity that is excluded from being a member of a consolidated group; • have some of its taxable income taxed at a rate equal to the general company tax rate, if a company; • be an Australian resident, but not a prescribed dual resident; and • be a wholly-owned subsidiary of the head company.
The definition of a 'wholly-owned subsidiary' is contained in section 703-30 of the ITAA 1997. A subsidiary entity is wholly-owned by the head company if all the membership interests in that subsidiary are beneficially owned by the head company or its wholly-owned subsidiaries, or a combination of the head company and its wholly-owned subsidiaries.
The term membership interest refers to all the interests and rights that you have in a company, partnership or trust by virtue of which you are a member.
B Co meets the above criteria. It is taxed at the company tax rate; it is not one of the excluded entities listed in section 703-20 of the ITAA 1997; it is an Australian resident and all of its membership interests will be owned by A Co.
Since A Co is eligible to be the head company of a consolidatable group and B Co is eligible to be a subsidiary member, together they constitute a consolidatable group and are therefore eligible to form a consolidated group under section 703-50 of the ITAA 1997.