The Board of Taxation's review of the consolidation regime

Chapter 2: Overview and reflections of the Board on the consolidation regime

Recommendation 2.1

The Board noted that the consolidation regime has delivered substantial improvements to the corporate tax system, but recommends that the Government:

• implement a more systematic approach for addressing and resolving issues arising in the operation of the consolidation regime; and
• evaluate the state of the consolidation regime within five years of the implementation of the recommendations in this report to assess the extent to which problems and issues continue to arise that may point to the need to address on-going structural problems with the regime.

The Government agrees to this recommendation in principle.

The Government will continue to consult with the business community to resolve issues arising from the operation of the consolidation regime.

Chapter 3: Policy framework for the consolidation regime

Recommendation 3.1

The Board recommends that the core rules in the consolidation regime should be modified to:

• give formal recognition to the primacy of the business acquisition approach in relation to the treatment of assets transferred to a consolidated group from a joining entity;
• retain the entry history rule, but as an exception to the business acquisition approach; and
• include high-level principles which specify the general circumstances where the business acquisition approach or the entry history rule should apply.

The Board recommends that this modification to the consolidation core rules should not, by itself, result in any changes to:

• the current operation of the consolidation rules; or
• the current treatment of assets or liabilities under the consolidation regime.

The Board also recommends that the current exceptions to the business acquisition approach in the consolidation provisions should be rationalised and moved into a single location within the consolidation core rules.

The Government agrees to this recommendation in principle, subject to legislative priorities.

Chapter 4: Operation of the single entity rule

Recommendation 4.1

The Board recommends that the ending/creation model be applied to ensure that the tax costs of intra-group assets (apart from membership interests) acquired or disposed of by consolidated groups, whether directly or indirectly, are appropriately recognised.

Some exceptions to the ending/creation model may be needed and should be considered on a case by case basis.

The Board also recommends that the intra-group liability adjustment should apply to liabilities and other similar types of obligations owed by a member of the old group to the leaving entity, regardless of whether or not the liability is recognised for accounting purposes.

The Government agrees to this recommendation in principle, subject to legislative priorities and fiscal constraints.

Recommendation 4.2

The Board recommends that integrity rules should be designed to address any double benefit which arises when an encumbered asset, whose market value has been reduced due to the intra-group creation of rights over the encumbered asset, is sold by a consolidated group, whether directly or indirectly.

The Government agrees to this recommendation.

This recommendation has been adopted as part of the Protecting the Corporate Tax Base from Erosion and Loopholes Package.

Recommendation 4.3

The Board recommends that, as a guiding principle, the effect of the single entity rule should be extended when a provision in the income tax law applies to a transaction between a consolidated group and a third party that is either a shareholder of the head company of the group, a liquidator appointed to a member of the group or a third party that is an associate of the group. However, the application of this principle in specific cases should be assessed on a case by case basis.

The Government agrees to this recommendation in principle, subject to legislative priorities and fiscal constraints.

Chapter 5: Interaction between the consolidation regime and other parts of the income tax law

Recommendation 5.1

The Board recommends that the issues relating to the determination of the amount of a trust’s net income that is assessed to each beneficiary and/or trustee when the trust is a member of a consolidated group for part of an income year be considered as part of the rewrite of the trust income tax provisions.

The Government agrees with this recommendation, and will consider consolidation interactions as part of the rewrite of the trust provisions in the income tax law.

Recommendation 5.2

The Board recommends that, subject to the outcomes of the Board’s review of the treatment of liabilities under the consolidation regime, a consolidated group’s tax liability in relation to the net income of a trust’s non-membership period should be included in the calculation of the allocable cost amount of a trust that joins a consolidated group part way through an income year.

The Government agrees with this recommendation in principle, and will further consider the issue during the implementation of Recommendation 2.1 of the Board’s 2013 Report. 

Recommendation 5.3

The Board recommends that the tax law be clarified so that, for the purposes of applying the consolidation provisions:

• a trustee, in its capacity of trustee of a trust that is a member of a consolidated group, will be treated as a member of the same consolidated group as the trust; and
• a change in trustee will not result in a trust joining or leaving a consolidated group.

The Government agrees to this recommendation in principle, subject to legislative priorities and fiscal constraints.

Recommendation 5.4

The Board recommends that:

• a trust should qualify as a member of a consolidated group only if all members including beneficiaries, unit holders or objects of the trust, are also members of the consolidated group; and
• the treatment of debt beneficiaries of the trust should be reviewed in the context of the rewrite of the trust provisions.

The Government agrees to this recommendation in principle, subject to legislative priorities and fiscal constraints.

Recommendation 5.5

The Board recommends that there should be no change to the foreign hybrid rules. However, the Government should continue to monitor whether any integrity risks may arise.

The Government agrees to this recommendation.

Treasury and the ATO will continue to monitor the operation of the foreign hybrid rules for consolidated groups.

Recommendation 5.6

The Board recommends that where the membership interests in an entity that are transferred to a consolidated group are not regarded as taxable Australian property under the non-resident CGT rules, the consolidation tax cost setting rules should only apply to the transferred membership interests if:

• there has been change in the underlying majority beneficial ownership of the membership interests in the entity; or
• there has not been a change in the underlying majority beneficial ownership of the membership interests in the entity, but the membership interests in the entity were recently acquired by the foreign entity (or the foreign group); and
  • membership interests in an entity will be recently acquired if they have been majority owned by the foreign entity (or the foreign group) for less than 12 months.

The Government agrees to this recommendation.

This recommendation has been adopted as part of the Protecting the Corporate Tax Base from Erosion and Loopholes Package.

Recommendation 5.7

The Board recommends that the Government should continue to monitor the interaction between Australia’s double tax agreements and the tax consolidation rules.

The Government agrees to this recommendation. 

Treasury and the ATO will continue to monitor the interaction between Australia’s double tax agreements and the tax consolidation rules.

Chapter 6: Operation of the consolidation regime for small business corporate groups

Recommendation 6.1

The Board recommends that:

• ongoing simplified formation rules should be available for wholly-owned corporate groups that have an aggregated turnover of less than $50 million in the prior income year;
• a simplified formation rules election should be available for eligible groups forming a consolidated group, under which:
  • the existing tax costs of assets should be retained for all subsidiary members of the consolidated group which is formed;
  • the simplified loss utilisation rule should apply to COT transfer losses from all entities in the consolidated group which is formed;
    • a five year utilisation should period apply for COT transfer losses under the simplified loss utilisation rule;
  • the business acquisition approach should not apply to any assets which have their tax cost retained under this election; and
• the Government should investigate whether rules should be introduced to enable small to medium sized corporate groups to apply a ‘stick approach’ to long-term majority owned subsidiaries when they become wholly-owned by a consolidated group after the formation time.

The Government will consider this issue further, as legislative priorities and fiscal constraints allow.

Recommendation 6.2

The Board recommends that, given the unsuitability of the consolidation regime for micro-enterprise groups (with less than $2 million aggregated turnover), the Government should investigate whether alternative tax grouping rules should be introduced for these micro enterprise groups.

The Government will consider this issue further, as legislative priorities and fiscal constraints allow.

Recommendation 6.3

The Board recommends that:

• the small business simplified formation rules set out in Recommendation 6.1 should be made available as transitional simplified formation rules for all wholly-owned corporate groups which elect to form a consolidated group within a set time period;
• the transitional simplified formation rules should be available for consolidated groups which form in the income year immediately following the income year in which the measures are enacted, but should only be available to those groups which are eligible to form a consolidated group at the date of any announcement of this proposal;
• the formation concession should also be extended either to entities in which these groups have a greater than 80 per cent interest at the date of announcement, or to entities within a family group that are majority owned by any member of the family group at the date of the announcement; and
• the transitional simplified formation rules should not apply to foreign owned corporate groups that elect to form MEC groups.

The Government will consider this issue further, as legislative priorities and fiscal constraints allow.

Chapter 2: Liabilities held by an entity that joins a consolidated group

Recommendation 2.1

The Board recommends that the income tax law be amended so that:

1. where an entity that has deductible liabilities is acquired by a consolidated group, the head company includes the amount at step 2 of the entry tax cost setting rules for those deductible liabilities in assessable income at the following times:
   • where the deductible liability is a current liability for accounting purposes, the assessable income is brought to account over the 12 month period following the joining time; and
   • where the deductible liability is a non-current liability for accounting purposes, the assessable income is brought to account over the 48 month period following the joining time;
2. integrity rules be considered where a subsidiary exits with group with a non-current liability, or a group is liquidated, within the 48 month period; and
3. in the case of an entity that is acquired progressively, the assessable amount reflects the acquired component of the deductible liabilities included at step 2 of the entry tax cost setting rules using a shortcut method to work out the acquired component.

The Government agrees to this recommendation.

This recommendation has been adopted as part of the Protecting the Corporate Tax Base from Erosion and Loopholes Package.

Chapter 3: Deferred tax liabilities

Recommendation 3.1

The Board recommends that the income tax law be amended so that adjustments relating to deferred tax liabilities in the entry and exit tax cost setting rules are removed from those rules.

The Government agrees to this recommendation in principle, and will further consider the issue during the implementation of Recommendation 2.1 of the Board’s 2013 Report.

Chapter 4: Adjustments to the value of liabilities under the tax cost setting rules

Recommendation 4.1

The Board recommends that the income tax law be amended so that the adjustment which applies if the head company’s accounting value of a liability is different to the joining entity’s accounting value of the liability (the subsection 705-70(1A) adjustment) is removed from the entry tax cost setting process.

The Government agrees to this recommendation in principle, and will further consider the issue during the implementation of Recommendation 2.1 of the Board’s 2013 Report.

Recommendation 4.2

The Board recommends that the income tax law be amended so that the adjustment for unrealised gains and losses on liabilities (the section 705-80 adjustment) is removed from the entry tax cost setting process in full acquisition cases. In addition, in the case of the adjustment for unrealised gains and losses that have accrued to the head company before the joining time, further consideration should be given as to whether the section 705-80 adjustment mechanism can be replaced with a mechanism that reduces the amount at step 2 of the allocable cost amount by the owned amount of the deductible liability.

The Government agrees to this recommendation in principle, and will further consider the issue during the implementation of Recommendation 2.1 of the Board’s 2013 Report.  

Chapter 5: Assets and liabilities recognised on different bases

Recommendation 5.1

The Board recommends that the income tax law be amended so that, in principle:

• where an anomalous outcome arises because an asset is recognised under the consolidation tax cost setting rules and a related liability is not an accounting liability, the related liability should be recognised for tax cost setting purposes to the extent that is necessary to address the anomaly; and
• where an anomalous outcome arises because an asset is not recognised under the consolidation tax cost setting rules and a related liability is an accounting liability, the related liability should not be recognised for tax cost setting purposes to the extent that is necessary to address the anomaly.

The Government agrees to this recommendation in principle, subject to legislative priorities and fiscal constraints.

Chapter 6: Tax cost setting for goodwill

Recommendation 6.1

The Board recommends that:

1. no changes be made to the tax cost setting rules in relation to the treatment of goodwill of a joining entity; and
2. the 2012 changes to the income tax law which restrict the application of the tax cost setting rules to assets that are recognised for taxation purposes be monitored before any further changes are made to the tax cost setting rules in relation to goodwill.

The Government agrees to this recommendation.

Treasury and the ATO will continue to monitor the 2012 changes to the income tax law which restrict the application of the tax cost setting rules to assets that are recognised for taxation purposes.

Chapter 7: CGT issues

Recommendation 7.1

The Board recommends that, if the Government does not agree to Recommendation 6.1 in the Board’s 2012 Consolidation Report, further consideration be given to how systemic rules relating to the interaction of the CGT rollover rules and the consolidation regime could be implemented.

The Government will consider this issue further, as legislative priorities and fiscal constraints allow.

Recommendation 7.2

The Board recommends that the income tax law be amended so that, where a new holding company is interposed over an existing tax consolidated group under a restructure, the old tax consolidated group is taken to continue to exist with the new holding company being taken to be the new head company of the old group without any exit or entry tax cost setting calculations being required.

The Government agrees to this recommendation in principle, subject to legislative priorities and fiscal constraints.

Recommendation 7.3

The Board recommends that no changes be made to the operation of the MEC group pooling rules to address concerns that arise when an eligible tier-1 company leaves a MEC group with assets that were rolled over prior to being brought into the group by a joining entity.

The Government notes the Board's recommendation.

Recommendation 7.4

The Board recommends that the income tax law be amended to rectify the duplication of capital gains and capital losses made on the disposal of rolled over assets when a subsidiary member that is not an eligible tier-1 entity leaves a MEC group. Any change should only relate to disposals that are subject to an exit tax cost setting calculation.

The Government agrees to this recommendation in principle. 

The Government will consider this recommendation further in the context of the review of MEC groups that is being undertaken as part of the Protecting the Corporate Tax Base from Erosion and Loopholes Package.

Recommendation 7.5

The Board recommends that the Government should continue to monitor situations where a head company of a consolidated group that is owned by a non-resident leaves the group.

The Government agrees to this recommendation.

Treasury and the ATO will continue to monitor situations where a head company of a consolidated group that is owned by a non-resident leaves the group.