The taxation landscape for wholly owned corporate groups has now irrevocably changed as a result of the operation of the new consolidation regime, the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, said today.
The new consolidation regime, which involves taxing wholly-owned corporate groups as a single entity, is one of the most significant and far-reaching changes to the taxation of corporate groups in decades. It will deliver improved commercial flexibility, reduce on-going compliance costs and address concerns about the integrity of the tax system.
"It is important for groups that have not already decided to consolidate to be aware that the existing grouping provisions for wholly-owned groups end today for most companies. After today, existing intra-group loss transfers, capital gains tax asset rollover relief and dividend rebates will generally no longer be available," Senator Coonan said.
"For most corporate taxpayers, the new consolidation regime replaces these grouping concessions. If corporate groups wish to retain the benefits of any form of single entity treatment after today then they must consolidate."
"As the new consolidation regime represents a major structural reform to the taxation of corporate groups, the Government has actively consulted with business on both design and implementation issues. While the consolidation legislation provides most companies with what they need to assess and effect the transition to consolidation, ongoing consultation has identified certain consolidation issues requiring finetuning or further clarification."
To assist business in managing the transition to consolidation, the Federal Government has provided information on how it intends to resolve a number of outstanding issues including refinements to the consolidation cost setting rules and clarifying certain interactions with international tax rules (see Attachment A).
"Clarifying how the Government intends to resolve these issues will assist business in managing the transition to consolidation, particularly those groups that will soon be preparing their first consolidated tax return," Senator Coonan said.
"It will provide additional certainty to corporate groups finalising their calculations to form a consolidated group and assist publicly listed companies in finalising relevant disclosures in their published financial statements".
The amendments will be introduced as soon as practicable.
Further information from the Australian Taxation Office regarding the implementation of consolidation, including critical decision dates, is also available ( see Attachment B).
Issue |
The current situation... |
...is inappropriate because... |
...therefore, the following amendment is proposed. |
Cost setting rules -finance leases |
The existing consolidation cost setting rules do not contain special rules for assets and liabilities under a finance lease (recognised in accordance with the accounting standards). |
Where the income tax law provides that the lessor of an asset (that is subject to a finance lease in accordance with the accounting standards) is entitled to deductions for decline in value of the asset, the cost setting rules do not ensure that assets of the lessor and lessee are allocated an appropriate cost for tax purposes. |
The cost setting rules will be amended to ensure that:
in allocating cost to the assets of the lessee, any lease liability is not a liability for the purposes of working out the allocable cost amount, and cost is not allocated to any rights to use the leased asset (that otherwise may be an asset for the purposes of the cost setting rules). |
MEC groups - consistent income tax treatment |
Not all of the income tax laws that apply to head companies of consolidated groups apply to head companies of MEC groups. |
Head companies of MEC groups should be subject to the same income tax treatment as head companies of consolidated groups, subject to any modifications required to take into account the different characteristics of MEC groups. |
Amendments will ensure that the income tax law that applies to head companies of consolidated groups will apply to head companies of MEC groups, subject to any modifications required to take into account the different characteristics of MEC groups. This will ensure consistent treatment of consolidated and MEC groups, including access to the transitional cost setting rules. |
Cost setting rules - depreciating assets where the prime cost method is used |
An unintended outcome may arise where:
In these cases, a deduction for decline in value may be available to the head company using an effective life equal to the period of the asset's effective life the joining entity was using that had not elapsed as at the joining time. |
The intended policy, as reflected in paragraph 701-55(2)(d) of the ITAA 1997, is that in all cases where a depreciating asset receives a cost uplift under the cost setting rules, and the prime cost method was used immediately before the joining time, the head company must re-determine the effective life for the asset at the joining time. This is because the effective life used by the joining entity may no longer be appropriate where the cost of the asset has been uplifted under the cost setting rules. |
Amendments will remove the unintended outcome to ensure that in all cases where a depreciating asset receives a cost uplift under the cost setting rules, and the prime cost method was used immediately before the joining time, the head company must re-determine the effective life for the asset at the joining time. |
Foreign Dividend Account (FDA) grouping rules |
If a wholly-owned group consolidates, the old FDA grouping rules cease to apply from the consolidation day. The grouping rules will otherwise cease to operate from 1 July 2003. A member of a wholly-owned group that does not become a member of a consolidated group before 1 July 2003 is able to transfer FDA credits where it can pay unfranked dividends to members of the consolidated group. |
The old FDA grouping rules should not apply to any member of a wholly-owned group where part of the wholly-owned group has consolidated. An FDA credit transfer could only occur where dividends were paid before 1 July 2003. |
Amendments will ensure that the provisions that enable transfers of FDA credits among related company members will not apply where any part of the wholly-owned group has consolidated. |
Foreign tax credit rules |
The head company can only use excess foreign tax credits at the end of its income year from subsidiary members that joined the group before the beginning of that income year. |
Members of a wholly-owned group that form a consolidated group from the start of the head company's income year have been members of the consolidated group for a whole income year. This means the head company should be able to use excess foreign tax credits of those subsidiary members at the end of the first income year of the consolidated group. |
Amendments to the excess foreign tax credit transfer provision will allow the head company to use excess foreign tax credits at the end of the first consolidation year. The minor change will ensure the head company can use the excess foreign tax credits of entities that are subsidiary members of a consolidated group at the start of the head company's income year. |
Cost setting rules - over-depreciation adjustment |
Unfranked profits that are taken into account in working out the allocable cost amount during the transitional period are not appropriately taken into account in working out the adjustment to the cost of certain `over-depreciated' assets. |
Unfranked profits should be taken to be unfranked dividends that have been paid for the purposes of working out the adjustment. |
Amendments will ensure that the requirement that unfranked dividends have been paid is met where unfranked profits are included in working out the allocable cost amount during the transitional period. |
Cost setting rules - preserving an asset's entitlement to accelerated depreciation |
The existing consolidation cost setting rules require that, for an entity to be entitled to accelerated depreciation for an asset, the asset must have been continuously owned from a certain time. |
Accelerated depreciation should be allowed for assets which have been transferred using roll-over relief and where a entity holding an asset that was entitled to accelerated depreciation leaves a consolidated group and then later joins another consolidated group. |
Amendments will ensure that accelerated depreciation is available for an asset of an entity that joins a consolidated group provided that there has not been a disposal for which roll-over relief was not provided. |
Cost setting rules - maintaining a pre-CGT asset's cost base following a roll-over |
The existing tax law does not deem the recipient of a rolled-over pre-CGT asset to have inherited the originator's cost base. Therefore the CGT rules may operate to provide that the cost base is either the consideration paid or market value. |
The cost base of the rolled-over asset may influence the amount that is used under the consolidation cost setting rules for resetting the cost for assets of a subsidiary member of a consolidated group. |
Amendments will ensure that the cost base for a pre-CGT asset that is rolled-over is the same as the originator's cost base for the purposes of the consolidation cost setting rules. |
Life insurance companies - cost setting rules on leaving a consolidated group |
The consolidation cost setting rules are modified for life companies that join a consolidated group. These modifications do not apply when life companies leave a consolidated group. |
Distortions will arise by the application of different cost setting rules to joining and leaving life companies. |
The cost setting rules will be amended so that the modifications to those rules that apply when a life company joins a consolidated group will also apply when a life company leaves a consolidated group. |
Insurance companies - reinsurance elections |
A resident insurance company (either a general insurance company or a life company) that reinsures with a non-resident is generally denied a deduction for premiums paid to the reinsurer and is not taxed on reinsurance recoveries received. In addition, the reinsurer is not taxed on the premiums it receives. The resident insurer can elect to reverse this outcome. Such an election (a subsection 148(2) election) is irrevocable and applies in respect of all subsequent years. |
Consolidation causes a conflict for the head company in relation to subsection 148(2) elections if:
each has taken a different approach to their relevant reinsurance arrangements (that is, where one insurance company has made an election and the other has not). |
Amendments will revoke any subsection 148(2) election made by an insurance company that joins a consolidated group where a conflict arises as a result of the insurance company joining the group. In these situations the head company will be allowed to make a fresh election. |
Research and development (R&D) tax offset |
Separate grouping provisions apply in determining a company's eligibility for the R&D offset. A company is only eligible for the R&D offset if its `R&D group turnover' and the aggregate R&D amount of the company and taxpayers with which it is grouped do not exceed certain thresholds. These tests interact with the consolidation 'entry history' and 'exit history' rules when a company joins or leaves a consolidated group part-way through an income year. |
A subsidiary member of a consolidated group is not recognised as a taxpayer in its own right. This may prevent the R&D grouping provisions from applying during a period that a company was a subsidiary member of a consolidated group. When a company joins a consolidated group having already been grouped with the head company for R&D purposes, its turnover and R&D aggregate for the pre-consolidation part of the year may be double counted in working out the head company's eligibility for the offset. |
A company that has exited a consolidated group will be grouped appropriately for R&D purposes with other entities for that part of the year during which it was a member of the consolidated group. When an entity joins a consolidated group having already been part of the same R&D group, its turnover and R&D aggregate will not be double counted in determining the head company's eligibility for the R&D offset. |
Consolidation and inter-entity loss multiplication rules: notice requirements |
Companies that dispose of a controlling stake in a loss company must send a statutory notice to associates that had a relevant interest in the company. The information in the notice helps the associates determine the cost base of their interests in the loss company. Failure to give the notice is a criminal offence. Usually, notices must be given within 6 months of the change of control (the alteration time). However, there was a general extension of the deadline until 24 April 2003 where the alteration time happened before 23 October 2002. |
The information in the notice is usually unnecessary where the loss company and the associate subsequently form part of the same consolidated group. Given the compliance costs and the risk of criminal penalties, it is inappropriate to require the notice in these circumstances. |
The notice requirement will not apply where:
The Commissioner of Taxation will also have a discretion to waive the notice requirement or extend the notice period in appropriate circumstances. |
CONSOLIDATION - DECISION DATES ARE CRITICAL
End of Grouping provisions
Corporate groups need to be aware that the existing grouping provisions for wholly-owned groups end on 30 June 2003 for most taxpayers (but this date varies for those with a substituted accounting period).
These provisions allow, among other things, intra-group loss transfers, capital gains tax (CGT) asset rollover relief and, in some circumstances, dividend rebates. Once the grouping provisions end, corporate groups must consolidate if they want access to the benefits of any form of single entity treatment for income tax.
In line with the end of the grouping provisions, CGT rollover relief for asset transfers within a wholly-owned group is also generally no longer available after 30 June 2003.
Consolidation allows wholly-owned corporate groups to operate as a single entity for income tax purposes from 1 July 2002.
Groups must notify the Tax Office of their decision to consolidate, but they don't have to do this until they lodge their first consolidated income tax return (eg, a group consolidating on 1 July 2002 must notify by the time it lodges its 2002-03 return). However, structures must be in place and market valuations may be required as at the date of consolidation.
Transitional concessions
Certain transitional concessions for the treatment of assets, losses and foreign tax credits are available to groups that consolidate by 30 June 2004. However, to use the transitional option in relation to the assets of a particular subsidiary, it must be wholly owned on or before 30 June 2003 (and once wholly owned after 1 July 2002 it must remain so until the group consolidates).
Notification of decision to consolidate
You should check the information carefully before lodging your notification with the ATO. In particular, ensure that the date of consolidation is correct before lodging and that the members are eligible to be subsidiary members. Once notified, the decision to consolidate cannot be revoked and the chosen date cannot be amended.
Lodgment Deferral Arrangements
In recognition that the head companies of early balancing groups have a compressed lead time for the compilation of their first "consolidated" income tax return, the Commissioner has decided to grant lodgment concessions for those Consolidated groups who are December, January and February balancers.
The table below indicates the revised lodgment dates for head companies affected by these arrangements.
Balance date |
Payment due date |
Normal lodgment due date and lodgment date for non-consolidated income tax returns |
Concessional lodgment due date for Head Company income tax returns only |
Early & late December |
1 June 2003 |
15 July 2003 |
29 August 2003 |
Early January |
1 July 2003 |
15 August 2003 |
19 September 2003 |
Early February |
1 August 2003 |
15 September 2003 |
10 October 2003 |
Early March |
1 September 2003 |
15 October 2003 |
15 October 2003 |
The lodgment concession does not extend to the group's subsidiary member entities, only the head company. The joining subsidiary members still have to lodge their income tax returns, whether for a full or part-year, by the original (not the deferred) lodgment date.
Both head companies and joining subsidiary members are still required to make payment by the original payment due date.
Groups affected by the concession are encouraged to notify the Commissioner of their choice to consolidate on or before the normal lodgment due date (eg. 15 July 2003 for early December balancers) to assist with streamlining the Tax Office's administrative arrangements.
More information on lodgement and notification issues in relation to Consolidation can be found on the Tax Office's web site - www.ato.gov.au.