Making business easier

Making it easier for Australian companies to do business is the aim of an initiative announced today by the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan.

Senator Coonan said that draft legislation and explanatory material on consolidation, including a business guide, released today for public comment would enable parent companies to lodge one group tax return on behalf of wholly owned subsidiaries.

"The Treasury estimates that new consolidated tax arrangements will save Australian businesses around $1 billion over three years," Senator Coonan said.

"The new tax arrangements will make it easier for companies to do business. Consolidation will encourage greater commercial flexibility within group businesses, for example by allowing pooling of losses and credits and the tax free transfer of assets within a group."

"It's about freeing up Australian companies to pursue businesses opportunities and become more competitive without the straightjacket of old-fashioned and inflexible tax rules."

The initiative will apply to subsidiaries that are companies, partnerships or trusts and is due to commence from 1 July 2002.

Senator Coonan said the consolidation public consultation process would showcase the Australian Tax Office (ATO) new, open consultative approach that gave taxpayers a greater say in the design of tax laws.

"The consultation process is a first step in giving taxpayers a greater say in the development of tax law. It is designed to re-invigorate the ATO's relationship with the community and assist them to develop modern administrative and compliance systems that recognise the needs and experiences of taxpayers."

"As part of this process the ATO will be holding public forums to discuss consolidation around Australia in capital cities and regional centres in February and March."

"I'm looking forward to hearing more from Australian businesses, both large and small, about how this important business tax initiative will assist them to streamline their tax affairs."

"The ATO also expects to hold a trial run of the new consolidation system in May at a major tax expo in Melbourne. It will be an interactive trial that will enable businesses to seek advice by phone, over the internet or in person, view ATO draft forms, information products and electronic registration processes."

Senator Coonan said the proposal to tax wholly owned groups as single entities had a lengthy history, with a previous draft released for consultation by the Treasurer in December 2000.

"The ATO has taken into account the suggestions of businesses involved in the earlier consultation process and gone back to the drawing board to produce this revised package of materials."

"The ATO's intention is to now open up the proposal to wider community input and enable businesses to contribute to the design of the proposal."

Senator Coonan said consolidation was another important plank in the Howard Government's efforts to modernise and streamline the business taxation system.

"Consolidation is an important addition to the raft of measures, including cutting the company tax rate to 30 per cent and reducing capital gains tax for individuals, already delivered by the Howard Government."

Attached are commonly asked questions about the consolidation proposal and a schedule for public forums to be held around the country.

The draft legislation and associated material can be found at in the business tax reform section at www.taxreform.ato.gov.au or by contacting the Tax Reform Hotline on telephone 13 24 78. To register attendance for a public forum call 1800 286 734. Submissions can also be made in writing to Mr Mark Jackson, First assistant Commissioner, Consolidation Project, 2 Constitution Ave, Canberra, ACT 2601 by close of business 15 March 2002.

ATTACHMENT A

COMMONLY ASKED QUESTIONS

Q. What does the change to `consolidation' mean?

A. The Government is introducing consolidated taxation of business groups - that is taxing wholly-owned groups as single entities.

Q. Why has the Government introduced the measure?

A. The measure is a further step in implementing the Government's policy of improving the competitiveness and efficiency of Australian business while addressing high compliance costs. At the same time, the consolidation measure promotes equity by improving the integrity of the tax system.

Q. When does the measure take effect?

A. From 1 July 2002.

Q. When do I elect to consolidate the group?

A. A consolidated group will be able to elect to consolidate up until the time the group lodges their first consolidated income tax return at the end of the year.

Q. Is the measure compulsory for business?

A. Participation in the measure is optional. The head company of a consolidatable group chooses for itself and all its eligible wholly-owned Australian subsidiaries to be treated as a consolidated group for income tax purposes. However, once the decision to consolidate is made it generally remains in effect until the head company ceases to be a head company.

Q. Are the consolidation rules changing or replacing other provisions?

A. From 1 July 2002 businesses will not have the option of continuing with the existing group provisions - they must consolidate if they want access to any form of single entity treatment.

Q. Who is eligible to form a consolidated group?

A. A consolidated group can be formed by a single, Australian-resident head company and all its eligible wholly-owned Australian subsidiaries. The subsidiaries may be companies, partnerships or trusts.

Q. What if the group is foreign-owned?

A. A foreign-owned group of Australian resident subsidiaries that do not have a single Australian-resident head company may also be able to consolidate by forming a multiple entry consolidated (MEC) group. One of the eligible Australian-resident subsidiary companies will be nominated as the head company.

Q. Who will the consolidation rules affect?

A. The entry to and the implementation of the consolidated regime has no application to individual taxpayers. Consolidation can apply to any suitably structured business regardless of size. The majority of Australian small businesses use straightforward business structures and are, therefore, unlikely to be affected by the consolidation provisions. If a small business has more than one entity in its business structure (for example, two companies) and meets the consolidation requirements, it will be eligible to consolidate. Small businesses will be able to utilise the Simplified Tax System and, if eligible, consolidate if they choose.

Q. What is the likely effect on business?

A. Where a group decides to consolidate and is treated as a single entity for income tax purposes the taxing of the group as a single tax entity will:

• allow pooling of losses and credits, which will simplify obligations and deliver cost savings for consolidated groups;
• eliminate many complex provisions applying to intra-group transactions; and,
• reduce impediments to group restructuring, for example, allowing assets to be moved between group entities without triggering a capital gain or loss and without the need to meet formal roll-over requirements.

  The head company pays the tax liability on behalf of the whole group. However, consolidation does not affect other obligations such as GST, FBT and PAYG withholding.

Q.

What significant changes are being made to the consolidation measure?

A. Entities that form a consolidated group will now be able to elect to enter consolidation up until the time they lodge their first consolidated tax return at the end of the year.

- Under the December 2000 exposure draft, groups were required to notify the Commissioner within 28 days of a consolidation event. The change will generally allow taxpayers close to 18 months longer to decide whether to consolidate with effect from 1 July 2002 and to make the necessary arrangements.

• Groups with Substituted Accounting Periods (SAPs) that elect to consolidate from the start of the company's first income year that commences after 1 July 2002 will retain access to existing grouping provisions until that time.

- This change will enable groups with SAPs to consolidate from the start of their new income year without loss of existing grouping concessions for the intervening period. The alternative of consolidating from 1 July (part way through the SAPs income year) would generally involve significant additional compliance costs.

• Wholly-owned Australian resident subsidiaries will be eligible to join a consolidated group despite a non-resident entity being interposed between the subsidiary and the remaining members of the group.

- This will benefit an Australian group that acquires an offshore group which has an existing Australian resident subsidiary. The change will enable the Australian resident entities to form a single consolidated group, without the need for costly restructures.

• Non-resident owned groups that do not have a single resident head company will be allowed to form consolidated groups on an ongoing basis.

- The Ralph Review recommended a transitional measure to allow existing non-resident owned groups to consolidate without a single Australian resident head company. The change will allow these types of consolidated groups to be formed on an ongoing basis.

• A non-operating holding company will be able to be interposed between the head company of a consolidated group and its shareholders without triggering a deconsolidation.

- This change is intended to remove an obstacle to group restructuring. In the absence of this change, the interposition of a non-operating head company would effectively mean the formation of a new consolidated group - with significant administrative costs.

• Loss transfers will continue to be available for foreign bank branches, consistent with the current tests for transferability of losses and the principles underlying the consolidation regime.

- Australian branches of foreign banks are currently able to transfer losses with resident wholly-owned subsidiaries. Foreign bank branches are not eligible to form a consolidated group (as they are legally part of a non-resident entity). It is therefore appropriate that they retain access to separate loss transfer provisions.

- Loss transfers will, however, not be provided where the foreign bank has more than one resident subsidiary and those subsidiaries do not form a consolidated group.

• Both fixed and non-fixed trusts will be eligible to be subsidiary members of a consolidated group where they are wholly owned by the group, but will not be eligible to be the head company.

- Allowing trusts to consolidate will remove the need to restructures to remove wholly-owned trusts from between entities that could otherwise consolidate.

- Trusts are ineligible to be the head entity of a consolidated group because they are not corporate taxpayers, rather, they are taxed as flow-through vehicles.

• Cooperatives that are not concessionally taxed under Division 9 of Part III of the Income Tax Assessment Act 1936 will also be eligible to be part of a consolidated group.

- The December 2000 exposure draft indicated that cooperative companies would not be eligible to consolidate because they benefit from concessional treatment for repayments of certain government loans. Consolidation would require this concessional treatment to be either extended to the whole group, or lost.

- The previous exclusion of cooperatives from consolidation was criticised on the basis that not all cooperatives are eligible for the concessional treatment.

What other changes have been made to the exposure draft legislation?

The rules contained in the exposure draft have been redrafted to take into account technical matters included in submissions following the release of the previous exposure draft. Those rules have also been restructured and streamlined to improve their presentation.

ATTACHMENT B

CONSOLIDATION FEEDBACK FORUMS

The forums are being undertaken specifically to gather views from businesses and their representatives about the release material. We are particularly keen to see small business well represented in the forums. All sessions are 9.30am to 12.30pm.

It is important that people register for the sessions. You can do this by:

• ringing 1800 286 734; or
• logging onto www.taxseminars.com.au