Uncertainty around the operation of the 'consolidation rights to future income and residual tax cost setting rules' has prompted the Assistant Treasurer, Bill Shorten, to commission the Board of Taxation (the Board) to review the rules and clarify their scope.
The consolidation regime was amended last year to introduce the rights to future income rules and modify the residual tax cost setting rules.
The Board raised concerns with the Assistant Treasurer that, due to uncertainty in the scope of application of the rights to future income rules, tax deductibility may be argued for types of assets that were not contemplated when the rules were introduced. This could result in the rules having a substantially greater revenue impact than anticipated.
"The Government is committed to maintaining the integrity, equity and fairness of the tax system. I thank the Board for bringing these concerns to my attention and have asked it to urgently review the rights to future income and residual tax cost setting rules," Mr Shorten said.
The Board will report to the Assistant Treasurer by 31 May 2011, before completing its post‑implementation review of aspects of the consolidation regime.
As part of the review, the Board will consider whether, given the amendments that were made last year applied from 1 July 2002, any changes to the rights to future income and residual tax cost setting rules arising from the review should also apply from that date.
The Terms of Reference for the Board's review are attached.
30 March 2011
Terms of referenceReview into the consolidation rights to future income and residual tax cost setting rules
Amendments to clarify and improve the operation of the consolidation regime were passed in June 2010 (as part of Tax Laws Amendment (2010 Measures No. 1) Act 2010). Many of these amendments applied from 1 July 2002 (that is, from the start of the consolidation regime).
As a result of the amendments, if an entity that joins a consolidated group holds an asset that is a right to future income, then the tax cost allocated to the asset is deductible over the life of the relevant contract or 10 years (whichever is lesser).
In addition, if the joining entity holds an asset that is not taxed under a specific regime (mainly revenue assets), then the residual tax cost setting rule applies so that the tax cost allocated to the asset (rather than the original cost) is used when a taxing point subsequently arises in relation to the asset.
There is some evidence that the rights to future income and residual tax cost setting rules may have a substantially greater revenue impact than anticipated.
Scope of review
The Board of Taxation is requested to:
- Examine the operation of the rights to future income and residual tax cost setting rules (the rules) with a view to clarifying their scope
- Propose changes to limit the scope of the rules, if necessary, and advise on the date of effect of those proposed changes (including whether they should apply retrospectively).
In undertaking the review, the Board should consider:
- The taxation outcomes that arise when assets of the type that are covered by the rules are acquired directly by a company as part of a business acquisition outside of the consolidation regime
- Whether there are any circumstances in which these tax outcomes should be different if these assets are held by a company that joins a consolidated group;
- If a difference in tax outcomes is warranted, the appropriate basis for recognising the tax costs of any assets that should be treated differently on entry into a consolidated group; and
- The revenue impact of any changes to the rules it proposes.
In conducting the review, the Board is to seek public submissions and consult widely.
The Board should produce a final report by 31 May 2011.