MEC groups have been the subject of recent focus, as a result of some suggesting that they enjoy tax benefits that are not otherwise available to consolidated groups. One example that can raise eyebrows involves groups restructuring from a consolidated group to an MEC group, to take advantage of a capital gains tax (CGT) exemption upon an exit from Australia, where the majority of the underlying business assets are not interests in Australian real property.
To address these concerns, the government has announced that it will amend the law with effect from 1 July 2014 to ensure the tax treatment of MEC groups is the same as consolidated groups. At this stage, it is unclear what actual amendments will be made and there is the potential for any amendment to adversely affect foreign multinationals, perhaps unintentionally. For example, a foreign vendor MEC group selling an Australian business may wish to sell one of its eligible tier 1 entities as this may be the simplest way to execute the transaction from both the vendor and purchaser’s perspective as it does not involve the remaining Australian group. This is particularly where, historically, the businesses have operated separately.
Given the uncertainty as to the future direction of MEC groups it will be critical to carefully consider proposed transactions and fully document the positions taken. This is to minimise the risk of those positions being challenged by the Australian Taxation Office (ATO), and to allow taxpayers to ascertain what impact the future proposed amendments will have.