Income tax: consolidation: will a subsidiary company that is deregistered cease to be a member of a consolidated group with the consequence that it is treated as a leaving entity for the purposes of Division 711 of the Income Tax Assessment Act 1997?

Yes. Upon deregistration, a company will cease to satisfy the requirements for subsidiary membership of a consolidated group and will be treated as a 'leaving entity' for the purposes of applying Division 711 of the Income Tax Assessment Act 1997 (ITAA 1997).

This Determination applies both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.

The process of deregistration of a company is governed by Chapter 5A of the Corporations Act 2001 . The legal effect of deregistration is that the company ceases to exist (section 601AD of Chapter 5A of the Corporations Act 2001 ).

Item 2 of subsection 703-15(2) of the ITAA 1997 describes the conditions under which a company will be a subsidiary member of a consolidated group. A company that has been deregistered cannot continue to meet the requirements of item 2 because the company ceased to exist from that time. Accordingly, upon deregistration the company ceases to be a member of the consolidated group. [1]

Section 701-15 of the ITAA 1997 is concerned with setting a tax cost for membership interests in an entity that ceases to be a subsidiary member of a consolidated group. Section 701-15 links to the application of section 701-60 and Division 711 of the ITAA 1997.

Although the heading of section 701-15 of the ITAA 1997 refers to an entity that 'leaves group', which might otherwise imply a continuing existence of the entity, the provision itself is expressed to apply to an entity that 'ceases to be a subsidiary member of the group'. The note to subsection 701-15(1) confirms that the provision applies generally to circumstances under which the entity 'ceases to satisfy the requirements to be a subsidiary member'.

Under subsection 701-15(3) of the ITAA 1997, the tax cost of each membership interest in an entity that ceases to be a subsidiary member of the consolidated group is set just before the cessation time at the interest's tax cost setting amount (TCSA). The TCSA is worked out in accordance with section 701-60 of the ITAA 1997.

Item 2 of the table in section 701-60 of the ITAA 1997 requires the TCSA to be calculated under section 711-15 or 711-55 (within Division 711) of the ITAA 1997 if the tax cost of an asset is set by section 701-15. A TCSA for membership interests will therefore be calculated under Division 711 when a company is deregistered and thereby ceases to be a subsidiary member of a consolidated group.

Subsection 711-5(1) of the ITAA 1997 confirms this outcome by providing that Division 711 of the ITAA 1997 has effect if an entity ceases to be a subsidiary member of a consolidated group at a particular time. It defines such an entity as a 'leaving entity' and the relevant time as the 'leaving time'.

Accordingly, for the purposes of Division 711 of the ITAA 1997, a subsidiary company that is deregistered and has ceased to be a member of a consolidated group, will be regarded as a 'leaving entity' at the time of deregistration.