Minister for Revenue and Assistant Treasurer Senator Helen Coonan announced that legislation was introduced into Parliament today to implement further components of the new consolidation regime, along with other measures which concern value shifting in controlled groups, demerger tax relief and additions to the new simplified imputation system.
"This bill reflects the continuing commitment of the Government to business tax reform and the goal of delivering a modern, competitive and fair tax system," Senator Coonan said.
"The measures will also produce overall economic benefits, by providing businesses with greater flexibility in their corporate restructuring.
"The consolidation component of this legislation includes the important second stage measures in the progressive introduction of the consolidation regime into Parliament, and builds on those introduced on 16 May 2002."
The consolidation measures include:
- cost setting rules for the formation of a consolidated group, and associated transitional measures to reduce the compliance costs in forming a consolidated group;
- measures that deal with international aspects of consolidation, including treatment of foreign tax credits and attribution accounts in consolidated groups; and
- an integrity measure to prevent manipulation of the asset cost base setting rules by certain asset transfers occurring after 16 May 2002.
Action will also be taken to ensure that the asset cost base setting rules do not provide unintended tax benefits to groups during transition to consolidation.
Measures will be included in the Spring consolidation bill to deal with situations where an entity joins a consolidated group and the group had majority ownership of the entity as at 27 June 2002.
In this situation, the joining entity's trading stock will be treated as a retained cost base asset and depreciation deductions denied for internally generated assets existing at 27 June 2002.
Groups will also be prevented from obtaining a tax benefit as a result of an increase in the cost base of formerly pre-CGT assets that are held on revenue account.
Further details on these planned integrity measures are provided at Attachment A.
Attachment B provides a summary of the consolidation modules still to be introduced.
The other business tax reform initiatives introduced today include:
- a general value shifting regime that will apply mainly to interests in controlled company and trust groups to prevent manipulation of tax rules by shifting taxable value between related parties;
- amendments to the existing loss integrity measures to allow assets to be valued globally rather than individually when calculating unrealised losses and thereby reduce compliance costs;
- demerger tax relief at the investor and entity level to apply where a corporate or trust group is split into two or more entities; and
- consequential amendments to the current exempting and former exempting company provisions of the imputation system.
The Government is also announcing a change to the simplified imputation system to assist business move to the new system and details of the transitional arrangements applying on commencement of the regime. These changes are detailed in Attachment C.
"All of the tax reform measures introduced in this bill have been the subject of on-going consultation with the business community to ensure the measures are responsive to the needs of business," Senator Coonan said
The hotline number for tax technical Consolidation queries is 1300 130 282. In the case of the other tax reform measures queries may be directed to the Business Tax Reform Hotline on 13 24 78.
More information about all the measures contained in this Bill is available on the ATO tax reform website: www.taxreform.ato.gov.au.
ATTACHMENT A
MEASURES TO ADDRESS CONSOLIDATION REVENUE RISKS
TRADING STOCK
Where joining entities that were majority owned (directly or indirectly through interposed entities) as at 27 June 2002 by the company that became the head company of the group joined, trading stock of the joining entities will be treated as a retained cost base asset of the joined group.
Background
Under the general rules for consolidation, trading stock will be a reset cost
base asset. The Government is concerned that groups will choose to reset costs
for asset where this could result in a significant increase in the tax value
of trading stock.
The measure only applies to entities that were majority owned as at 27 June
2002 because, where a majority interest in the entity was acquired after that
date, the cost to revenue from the increased tax value for the trading stock
will have been substantially offset by the higher market value of trading stock
being reflected in the sale proceeds of vendors of that majority interest.
INTERNALLY GENERATED ASSETS
A group will not be able claim depreciation deductions for the internally generated assets of an entity that was majority owned (directly or indirectly through interposed entities) as at 27 June 2002 to the extent that the internally generated assets existed at that date.
This rule will continue to apply in relation to the affected assets where the assets are disposed of by the group either directly or through the disposal of an entity to a buyer that either controls or is controlled by the consolidated group or where the consolidated group and the buyer are under common control.
Background
Entities may have assets for which they would have been entitled to deductions for depreciation except that the entity has no cost for the assets because the costs incurred in creating the assets were allowable deductions i.e. deducted as costs of carrying on a business. (It is expected that this may occur to a greater degree with intangible assets than with tangible assets.)
Nevertheless, in the absence of any provision to the contrary, such assets would have a market value and would be accorded a cost that would be depreciable upon the entity becoming a member of a consolidated group.
The costs for these assets would still be reset upon the entity becoming a member of a consolidated group and these costs would be allowable where the group disposed of such an asset, either directly or by disposing of an entity. The change will limit the cost of consolidation to the revenue by denying a group deductions for depreciation in a particular circumstance where it would not be allowed under the existing law. Another factor in relation to this measure is that internally generated assets, unlike assets for which a joining entity would have a cost that is only deductible through depreciation, cannot be subject to the rules for over-depreciated assets.
The measure only applies to entities that were majority owned as at 27 June 2002 because, like the measure for trading stock, where a majority interest in the entity was acquired after that date, the cost to revenue from increased deductions for (in this case) depreciation will have been substantially offset by the market value of the internally generated assets being reflected in the sale proceeds of vendors of that majority interest. The measure does not apply to internally generated assets to the extent that those assets were created after 27 June 2002 because to do so would discourage the creation of such assets in those entities.
MEMBERSHIP INTERESTS THAT WERE FORMERLY PRE-CGT ASSETS
Where a change in majority ownership had the effect of increasing the cost base of membership interests, assets that are dealt with on revenue account, including claiming deductions for depreciation, will be accorded reset costs that remove the effect of the change in majority ownership on the cost bases of membership interests. The difference between the cost bases so determined and the cost bases that would have been determined in the absence of this adjustment, will be allowed to the consolidated group as a capital loss over five years.
The rule in the preceding paragraph will not apply in relation to membership interests that have been acquired after having ceased to be pre-CGT assets because of a change in majority ownership of a company except where the buyer or seller of the membership interests controls the other or where both are under common control.
As well as applying where membership interests have ceased to be pre-CGT assets because of a change in majority ownership of a company, this measure will apply where pre-CGT membership interests are disposed of after 16 May 2002, the loss of pre-CGT status has the effect of increasing the cost base of the membership interests and the buyer or seller of the membership interests controls the other or both are under common control. In this case, where the entity to which the membership interests apply becomes a member of a consolidated group of which the buyer of its membership interests is a member, the reset costs for its revenue assets will be determined as though the cost base for the membership interests had not been changed by the acquisition. As where cost bases for membership interests are changed by a change in majority ownership, the difference between the cost bases determined in accordance with this measure and the cost bases that would have been determined in its absence, will be allowed to the consolidated group as a capital loss over five years.
Background
Where an entity ceases to have the same majority ownership as it had on 20 September 1985, any assets of the entity that were pre-CGT assets cease to be pre-CGT assets and are accorded CGT cost bases equal to their market values at the time of change in majority ownership. The change in the cost bases of the assets does not apply where the assets are dealt with on revenue account, whether as trading stock, in deductions for depreciation or otherwise.
Nevertheless, where the former pre-CGT assets are membership interests in an entity that becomes a subsidiary member of a consolidated group, in the absence of any provision to the contrary, the change in the cost bases of the membership interests would be reflected in the reset costs for the assets of the entity, including for depreciation and where those assets are otherwise dealt with on revenue account. This would allow the group to obtain increased tax deductions for revenue assets where the loss of pre-CGT status affected the cost for those assets indirectly, through loss of pre-CGT status for membership interests, rather than directly through loss of pre-CGT status for the revenue assets themselves.
These measures limit the impact that restatement of the cost base for membership interests at market value following loss of pre-CGT status could have through the asset cost resetting rules for consolidation and deductions on revenue account. They do this by converting what would otherwise be increased deductions on revenue account into capital losses that become available over five years.
The measure relating to the acquisition of membership interests that were pre-CGT membership interests of the seller applies from 16 May 2002 because it is from that date, the date of introduction of the first tranche of the consolidation legislation into the Parliament, that groups would be likely to undertake transactions between controlled entities that would have the effect of increasing cost bases for membership interests (that would be transferred to cost bases for assets on entry into consolidation).
ATTACHMENT B
CONSOLIDATION: LAW MODULES FOR INTRODUCTION AFTER JUNE 2002
| Module | Brief description |
| Aspects of cost setting rules |
Modifications to the general cost setting rules where:
Rules for making subsequent corrections arising from errors or changes in amounts for liabilities. |
| Losses |
Amendments to 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. The imputation system will be amended to ensure that companies do not waste current year losses against franked dividends. |
| 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 - 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. |
| Offsetting of franking deficit tax for single entities and consolidated groups |
Rules will allow companies and consolidated groups to offset liabilities for franking deficit tax (FDT) against their company tax assessments. Under the proposed simplified imputation system, any FDT liability incurred by a company will be creditable against the company's subsequent income tax assessment. Consistent with the existing law, any amount of FDT not applied against company tax may be carried forward to later years and offset against subsequent assessments. In the case of consolidated groups, the head company of the group will be entitled to credit against its company tax assessment, FDT liabilities incurred either before or during the period of consolidation. Further, the head company will be entitled to offset unused pre-consolidation FDT liabilities incurred by subsidiary members. Special rules will also ensure that where there is a change in head companies during the life of a group, as may occur in the case of MEC groups, any FDT not previously applied by the former head company of the group, may be carried forward and applied by the replacement head company. |
| Application of exempting entity rules to consolidated groups |
Rules will be introduced relating to the application of the exempting entity rules to consolidated groups. These rules will allow for the pooling of exempting account surpluses of joining subsidiaries. The operation of the rules will be substantially similar to the franking credit pooling rules introduced in the New Business Tax System (Consolidation) Bill (No. 1) 2002 and will ensure that groups are able to pass on the benefit of pre-consolidation exempting credits of joining entities to eligible shareholders. In addition, further rules will be introduced to test whether or not a consolidated group is an exempting entity or a former exempting entity as the case may be. Broadly speaking, the tests will apply in a manner consistent with the exempting entity provisions introduced in this Bill. These rules will ensure that franking benefits arise for the group's shareholders only in appropriate circumstances. |
| Removal of grouping for thin capitalisation purposes and application of thin capitalisation rules to consolidated/MEC groups |
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. Rules are also necessary to ensure that Australian branches of foreign banks can continue to group with their wholly-owned subsidiaries for thin capitalisation purposes. |
| Offshore Banking Unit (OBU) 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. |
| Transitional foreign tax credit rules |
Additions to rules on removal of existing foreign tax credit transfer provisions. Additions to rules allowing head companies (with substituted accounting periods) to use excess foreign tax credits transferred to them in the transitional period. |
| MEC groups |
Modifications are required to aspects of the consolidation regime, including:
|
| MEC groups - change in head company | These provisions cover the treatment of tax attributes of a MEC group, such as franking credits and losses, where the head company ceases to be eligible to be the head company of the group. |
| MEC groups - Imposition Acts | Separate Imposition Acts are required to impose an income tax liability on the head company of a MEC group. |
| Group members held through one or more interposed non-resident entities |
Modifications are required to aspects of the consolidation regime and other measures including:
|
| 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. 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. |
| Administrative rules (where necessary) | To ensure the administration has appropriate powers to administer the regime. |
| Technical and consequential amendments |
Technical, consequential and/or minor changes may be necessary to ensure the modules of the consolidation regime mesh properly. Amendments may also be necessary to ensure the consolidation regime:
|
ATTACHMENT C
SIMPLIFIED IMPUTATION SYSTEM
The following changes to the simplified imputation system are being made to facilitate transition to the new regime.
ALIGNMENT OF FRANKING AND INCOME YEARS
The Government explained in the Explanatory Memorandum accompanying the New Business Tax System (Imputation) Bill 2002, which introduced the new Simplified Imputation System on 30 May, that special transitional provisions will be introduced at a later time to ease the initial impact of the proposal to align the franking and income years of companies. The effect of these rules will be to allow late balancing companies an extended transitional franking year (13 to 17 months) starting on 1 July 2002 and ending on the last day of their 2002-2003 income year.
To provide even greater flexibility to this proposal, the Government has decided to allow late balancing companies (and similar entities taxed like companies) the option of retaining their existing franking and income years or aligning their franking and income years. The option will, however, be subject to the following rules:
- The option will only be available to late balancing companies in existence at the start of 1 July 2002. It follows that late balancing companies formed after 1 July 2002 will have a franking and income year which is aligned.
- Although the option will be on-going, once the option to align is exercised, companies will not be able to reverse it.
- Where the option to align is exercised, the special transitional rules that provide an extended transitional franking year will also apply.
TRANSITIONAL PROVISIONS - CONVERSION OF FRANKING ACCOUNT BALANCES
The New Business Tax System (Imputation) Bill 2002 also introduced transitional rules to convert franking account surpluses of normal and late balancing companies into equivalent tax-paid franking account surpluses.
Further transitional rules will be introduced for early balancing companies that convert their franking account balances into equivalent tax-paid franking account balances. These rules will apply the same factors used by normal and late balancing companies to convert their franking account surpluses into equivalent tax-paid surpluses (30/70 in the case of the class C franking account). Consistent with the current tax laws, the act of conversion on 1 July 2002 by early balancing companies will not crystallise a liability to franking deficits tax if the account is in deficit at that time.