Broadly, two or more Australian parent/sister companies (together with all wholly owned Australian subsidiaries) that are 100 percent owned by a foreign parent company may form an MEC group for Australian income tax purposes.
Some key benefits of MEC groups include:
- the ability for Australian group companies to join the income tax group when not wholly owned by a single Australian parent company e.g. post global acquisition
- the ability to separately own businesses through different Australian parent companies (referred to as an eligible tier-1 company or ET1), providing flexibility
- income tax grouping benefits, such as loss usage, increased thin capitalisation capacity and asset transfer within the MEC group being ignored.
Some key challenges for MEC groups include:
- making elections, such as a new ET1 joining the MEC tax group and changes in the provisional head company
- available fraction restrictions on MEC group tax losses when a new ET1 joins the MEC group
- possible retrospective tax changes announced in the May 2013 Budget where evidence is found of aggressive tax practices in relation to MEC groups, particularly where Australian capital gains tax is avoided on disposals and/or there is an uplift in Australian tax basis where there is no changes in the underlying beneficial ownership of assets.
MEC grouping options and implications are worth a second look.