The Government will today introduce legislation to implement the new consolidation regime. The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, also detailed a number of important measures to support the commencement of the consolidation regime from 1 July 2002. These measures include:
- extending the existing grouping rules for another 12 months until 1 July 2003; and
- amending the imputation system to ensure that companies do not waste current year losses against franked dividends.
Senator Coonan said the regime, which involves taxing wholly-owned corporate groups as a single entity, would deliver improved commercial flexibility.
"Consolidation will bring flexibility and reduced compliance costs for Australian businesses as well as addressing concerns about the integrity of our tax system," Senator Coonan said.
"The regime represents one of the most significant changes to the taxation of corporate groups since the mid 1970's.
"Because of the significance of the changes, the Howard Government has undertaken intensive public consultation since the release of the exposure draft in February this year.
"The legislation introduced today flows directly from that consultation process."
Senator Coonan said that through effective consultation at an early stage, the tax laws the Government delivers are more responsive to the needs of business.
"The co-design process undertaken on these important tax changes represents a further step forward in the partnership between Government, business and the community in having a workable tax framework," Senator Coonan said.
The decision to extend existing grouping rules for a further 12 months aligned with a 12 month extension to the transitional period during which concessional consolidation options apply will significantly smooth business transition to the new regime.
Senator Coonan said this decision also addressed calls by small business for more time to assess whether to enter the consolidation regime while at the same time ensuring that those businesses wanting to consolidate from 1 July 2002 remain able to do so.
"The components of legislation necessary for businesses to make a decision on whether to consolidate from 1 July 2002 will be introduced to Parliament progressively from today," Senator Coonan said.
Legislation to be introduced today contains most of the key elements of the regime.
A further Bill is planned for introduction in June 2002 containing additional rules, with a further Bill in the Spring sittings containing residual consolidation rules.
"An initiative of this magnitude is likely to require fine tuning over
the course of the next
12 months and I encourage business to continue to participate in consultative
groups to refine the administrative aspects of the regime," Senator Coonan
said.
"Consultation to date has raised a number of issues, some of which are still under consideration by Government and others which have led to changes to the legislation currently being drafted as a matter of priority."
A number of help facilities to support today's tranche of legislation are in place to assist business, including a draft Consolidation Reference Manual, which will be available from the ATO website www.taxreform.ato.gov.au from Monday afternoon, 20 May.
"This manual will provide practical guidance on the regime for corporate groups wishing to consolidate prospectively from 1 July 2002" Senator Coonan said.
The manual will also be available in hard copy from Monday 27 May by ringing 13 2478, although orders can be placed before then.
There is also a hotline to address tax technical Consolidation queries. The hotline number is 1300 130 282 and operators are available from 8.30am to 5pm (EST) on weekdays.
Further details of the two measures noted above are provided at Attachment A.
Details of amendments to be made to the February 2002 draft legislation and related tax law are outlined in Attachment B.
An outline of legislation scheduled for introduction to Parliament is provided at Attachment C.
ATTACHMENT A
FURTHER MEASURES TO SUPPORT THE INTRODUCTION OF CONSOLIDATION
Grouping rules for corporate groups will be retained for another 12 months
In order to better facilitate the transition to consolidation, the Government will maintain the existing set of grouping rules for another 12 months for all wholly-owned company groups that remain outside consolidation. That is, for non-consolidated groups, the existing grouping rules will now be removed with effect from 1 July 2003, or from the start of a group's first income year commencing after 1 July 2003 where the group's head company has a substituted accounting period and elects to consolidate from that date. Groups that consolidate on or from 1 July 2002 will cease to have access to the existing grouping rules from the date of consolidation.
The relevant grouping rules are:
- CGT rollover relief for asset transfers between companies that are part of the same wholly-owned group;
- Loss transfers between companies that are part of the same wholly-owned group;
- The inter-corporate dividend rebate for unfranked dividends paid between companies that are part of the same wholly-owned group;
- Transfers of excess foreign tax credits between companies that are part of the same wholly-owned group; and
- Grouping provisions in the thin capitalisation regime.
In addition, there will be a 12 month extension to the transitional period, during which concessional loss and cost base rules are available. These rules, which are designed to reduce compliance costs on entry to consolidation, will now be available to groups that consolidate before 1 July 2004. These concessions, while available to all groups, will particularly assist smaller groups to enter consolidation. Transitional concessions affecting the annual rate of use of certain company losses apply to groups that consolidate within the extended transitional period.
For groups that consolidate during the extended transitional period, the transitional rules for asset costs will be available in respect of subsidiary entities that join the group prior to 1 July 2003, with the exception of entities that exit the group after 1 July 2002 and then rejoin the same group.
No wastage of current year losses
The imputation system will be amended to ensure that companies do not waste current year losses against franked dividends. As franked dividends have already borne company tax it is not desirable to require current year losses to be offset against franked dividends in deriving taxable income. There are a number of ways to implement this measure and further announcement concerning the method of relief will be made following consultation with business.
ATTACHMENT B
OTHER CHANGES TO THE CONSOLIDATION
Agreed changes to the February Exposure Draft
- Modifying the membership rules to allow non-profit companies to be eligible head companies of a consolidated group and allowing companies subject to the mutuality principle and co-operatives taxed under Division 9 of the Income Tax Assessment Income Act 1997 (ITAA 1997) to be part of consolidated groups and or be a head company of a group.
- Amending the core rules to maintain the tax character of a subsidiary's assets or expenditure on entry or exit from consolidation.
- Modifying the `one in all in' rule for multiple entry consolidated groups (MEC) - tier 1 companies will be able to make an irrevocable election to consolidate with other tier 1 companies to form a MEC group. A tier-1 company electing not to consolidate under the MEC rules will be able to be the head company of its own consolidated group (where it has eligible subsidiaries) or remain unconsolidated.
- Modifying the PAYG system to provide that:
- Foreign tax credits transferred to a head company will be available to the head company at the end of its income year following the year of transfer, except where the entity with excess foreign tax credits joins the group on the first day of the head company's income year or was wholly-owned by the group prior to consolidating (and the group consolidates in the transitional period). The transfer entity will not be required to remain a member of the group for the full year in which the transfer takes place.
- Members pay separate instalments for the period from when a group is formed until the first group assessment occurs;
- an entity joining a mature group still pays an instalment for the quarter it joins and that an entity that exits a group is immediately liable to pay instalments; and
- the Commissioner will have a power to revise a head company's group instalment rate or instalment amount when the composition of a group changes.
Changes to related areas of the tax law that support the consolidation regime
- Allowing Australian branches of foreign banks to continue to be able to group with their wholly-owned subsidiaries for thin capitalisation purposes on a consistent basis with consolidation.
- Amending Divisions 165 and 166 of the ITAA 1997 in order to remove an anomaly that prevents companies from potentially using certain losses where they are unable to identify a precise date on which they failed the continuity of ownership test (COT).
- Amendments to the income tax law affecting life insurance companies will be made to ensure that losses incurred by life insurers are not reduced by exempt management fees; exempt income derived on segregated exempt assets; exempt income derived on the disposal of units in pooled superannuation trusts and exempt foreign branch income. These changes, which will apply with effect from 1 July 2000, will be relevant to all life insurance companies irrespective of whether they enter consolidation post 1 July 2002.
ATTACHMENT C
CONSOLIDATION LEGISLATION
LAW MODULES SCHEDULED FOR INTRODUCTION IN MID-MAY 2002
|
Module |
Brief description |
|
Overview |
Overview and objects of the measure. |
|
Core rules: - Restructured provisions |
Core principles of the consolidation regime, including the rule that a consolidated group is to be treated as a single entity for tax purposes. Main change from February 2002 Exposure Draft - replacement of the `clean slate rule' with a `retention of history' rule. |
|
Membership rules: ordinary groups |
An ordinary consolidated group consists of an Australian resident holding company and all of its resident wholly-owned subsidiaries (including companies, partnerships and trusts). Main changes from February 2002 Exposure Draft a) allow non-profit companies to be head companies; and b) allow companies that are subject to the mutuality principle to be members of a consolidated group. |
|
Membership rules: groups owned by non-residents (MEC groups) |
A MEC group is a special type of group that consists of eligible wholly-owned Australian resident subsidiaries (including companies, partnerships and trusts) that do not have a common Australian holding company but which are wholly-owned subsidiaries of a single non-resident holding company. Main change from February 2002 Exposure Draft Modify the `one in all in rule' for certain non-resident owned groups to provide such groups with more choice. |
|
Cost setting rules |
Streamlined provisions that:
(For the purposes of this information, these can be called the `general cost setting rules'). Main changes from February 2002 Exposure Draft Substantial changes arising as a consequence of the replacement of the `clean slate rule' with the `retention of history' rule (see `core rules' above). |
|
Rules for pooling of losses |
Streamlined provisions that:
Main changes from February 2002 Exposure Draft The rules governing the utilisation rate of transferred losses and the transitional concessions were not contained in the February 2002 Exposure Draft. |
|
Rules for pooling of franking credits |
Rules that ensure the head company of the group is able to utilise franking credits of subsidiary members that accrued prior to consolidation. The head company can use these franking credits to frank dividends that it pays to shareholders. Shareholders benefit from being allowed credit for income tax paid by subsidiaries before consolidation. |
|
PAYG Instalments |
- Application of the single entity rule for PAYG instalments purposes; - the due date for payment of instalments by a head company; - how head companies pay instalments, eg a head company cannot pay an annual instalment; - liability for instalments when entities enter and exit groups; - a Commissioner's power to work out a higher or lower instalment rate where there are changes in the membership of the group. Main changes from February 2002 Exposure Draft The PAYG instalment rules were not contained in the February 2002 Exposure Draft. |
|
Removal of asset rollovers and loss transfers for wholly-owned groups (except in relation to foreign bank branches) |
Removal of asset rollover and loss transfer provisions which provide benefits to wholly-owned groups. Consolidation is intended to replace these rules. Special rules apply to groups that have a head company with a substituted accounting period. The preservation of loss transfers for foreign bank branches will be subject to additional rules to be introduced later. Main changes from February 2002 Exposure Draft The removal of grouping rules was not contained in the February 2002 Exposure Draft. |
|
Liability in the event of default |
Joint and several liability of member entities will apply in the event of default by the head company unless certain exceptions apply. Main changes from February 2002 Exposure Draft The liability rules were not contained in the February 2002 Exposure Draft. |
LAW MODULES SCHEDULED FOR INTRODUCTION IN JUNE/AUGUST/SEPTEMBER 2002
|
Module |
Brief description |
|
Aspects of cost setting rules |
Transitional rules for the first years of the regime. Modifications to the general cost setting rules where: - an existing group forms a consolidated group; - a consolidated group joins another consolidated group; - an unconsolidated group joins a consolidated group; and - a trust becomes part of a consolidated group. Rules for making subsequent corrections arising from errors or changes in amounts for liabilities. |
|
Treatment of attribution accounts held in relation to interests in foreign entities |
Provisions to allow the transfer of attribution account surpluses that are required to claim exemptions for payments from foreign companies that essentially were previously taxed. |
|
Retention of loss transfers in relation to foreign bank branches |
Rules to limit the amount of certain losses that can be transferred from a foreign bank branch to a consolidated group (or from a consolidated group to a foreign bank branch) to ensure revenue neutrality. |
|
Membership rules - interposition of non-operating head company |
To ensure that, subject to certain conditions, a consolidated group can continue to exist even though a company that is eligible to be a head company is interposed between the existing head company of the group and its shareholders. |
|
Removal of grouping for thin capitalisation purposes |
Consolidation is intended to replace grouping rules which currently apply to wholly-owned groups (except in relation to foreign bank branches). Special rules apply to groups that have a head company with a substituted accounting period. |
|
Removal of grouping - inter-corporate dividend rebate |
Removal of the section 46 rebate in the ITAA 1936 which currently applies to wholly-owned groups. Consolidation removes the need for this rebate for unfranked dividends. Special rules apply to groups that have a head company with a substituted accounting period. |
|
Transfer and pooling of foreign tax credits |
To deal with foreign tax credits when a consolidated group is formed and when a company joins a group. |
|
Offshore Banking Unit regime |
Ensure the appropriate operation of the OBU regime for the head company of a consolidated group. |
|
Transfer of balances of foreign dividend accounts |
Introduce provisions that will allow the transfer of foreign dividend account balances to the head company when a consolidated group is formed and when a company joins a group. |
|
MEC groups |
Changes required to the:
|
|
MEC groups - change in head company |
These provisions ensure that the tax attributes of a MEC group, such as franking credits and losses, are transferred to a replacement head company in a MEC group where the previous head company leaves the group. |
|
Life insurance |
These provisions ensure that existing provisions in the income tax law that apply specifically to life companies apply appropriately to consolidated groups that have life company members. Rules about the valuation of assets and liabilities of life companies that join or leave a consolidated group. |
|
PAYG instalments - further consequential amendments arising from other measures in this Bill |
For example, rules for groups that include a life insurance company; interposition of a head company. |
|
Administrative rules (where necessary) |
To ensure the administration has appropriate powers to administer the regime. |
|
Technical changes to ensure proper meshing between various modules within the measure |
Technical and/or minor changes may be necessary to ensure the cohesion of the legislative package. |
|
MEC groups - Imposition Acts |
Separate Imposition Acts are required to impose an income tax liability on the head company of a MEC group. |
|
Consequential changes |
Technical amendments to the existing tax legislation. |