Consolidation: treatment of transactions of an offshore branch of a subsidiary member of a consolidated group with other members of the group under the single entity rule

Is the offshore branch of a subsidiary member of a consolidated group treated as if it were a branch of the head company of that group for the purposes of determining the income tax liability (or loss) of that head company.

Yes. For the purposes of determining the head company's income tax liability (or loss), the single entity rule (SER) in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) applies so that the offshore branch of a subsidiary member of a consolidated group is treated as if it were a branch of the head company of that consolidated group.

Sub Co is an Australian resident company that is a subsidiary member of a consolidated group whose head company is Head Co.

Sub Co has a permanent establishment in a foreign country through which it carries on its business in that country (branch operations).

Head Co enters into an agreement with Sub Co in relation to its branch operations.

The offshore branch of an Australian resident entity comprises the operations carried on at or through a permanent establishment of that entity in another country.

The SER in section 701-1 of the ITAA 1997 provides that, for head company core purposes and entity core purposes (as defined in subsections 701-1(2) and 701-1(3) of the ITAA 1997 respectively), a subsidiary member of a consolidated group is taken to be part of the head company for the period during which it is a member of the group.

Taxation Ruling TR 2004/11 at paragraph 8 provides that::

As a consequence, the SER has the effect that: (a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company; (b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group; (c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation...; and (d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

Further, the taxation ruling at paragraph 35 provides: In summary, the SER ensures that the income tax laws will apply to a consolidated group on the basis that the group is a single entity with all of the actions and transactions undertaken by the subsidiary members of the group being imputed to the head company...

Therefore, for the purposes of determining Head Co's income tax liability (or loss), the offshore branch of Sub Co is treated as if it were an offshore branch of Head Co.

Accordingly, the determination of the income and expenses of Head Co that are attributable to the branch operations for the purpose of determining Head Co's income tax liability (or loss) will involve determining the income derived and costs incurred by Head Co, which will include relevant income derived and costs incurred by Sub Co, in the course of the branch's operations.