Further details of the proposed consolidation amendments referred to in Media
Release C014/2003 issued by Senator Coonan on 6 March 2003 are outlined
below. A list of consolidation issues raised as part of the consultation process
but not adopted by Government is also attached.
Treatment of foreign losses transferred on consolidation
The Government will address an unintended outcome in the existing consolidation legislation to ensure that foreign losses transferred to a consolidated group can benefit from the '3-year' transitional concession for continuity of ownership test (COT) losses. This will be achieved by aligning the recoupment tests for foreign losses with the tests for other losses in the Income Tax Assessment Act 1997.
Interaction with General Value Shifting Regime
To minimise compliance costs on the transition to consolidation, certain value shifts in the 2002-03 income year that involve services will be excluded from the operation of Division 727 of the general value shifting regime. Division 727 deals with indirect value shifts where services are provided for inadequate consideration between related entities not dealing at arm's length. Value shifts affected by this transitional rule will be those where at least 95% of the benefits provided by a losing entity comprise services as defined in Division 727. Protection against inappropriate exploitation of this transitional rule will be provided by the general anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936. The Government expects that the ATO will pay particular attention to revenue risks in relation to service value shifts during this transitional period.
Suggestions raised in submissions that have not been adopted
Membership rules
- Increase the limit on employee shareholdings in subsidiary companies of a consolidated group
- Allow an Australian branch of a foreign bank to be included in a consolidated group
- Ignore minority shares held to satisfy the laws of a foreign country in determining whether Australian subsidiaries are wholly-owned by a foreign parent.
Grouping rules
- Provide an alternative set of consolidation provisions for family groups
- Maintain the grouping rules permanently for small and medium sized groups
- Allow loss transfers on an ongoing basis between separate foreign owned groups
- Allow an extension of the grouping rules beyond 1 July 2003 for groups with a substituted accounting period where those groups consolidate on a day other than the first day of their income year or choose not to consolidate.
Cost setting rules
- Provide further alternatives to those already provided for correcting errors made in calculating the allocable cost amount and emergent differences in the amounts of liabilities taken into account for allocable cost amount purposes
- Allow a company entering consolidation outside the transitional period to elect to retain its existing asset values
- Retain accelerated depreciation for assets that have their cost reset by consolidation
- Allow an increase in a joining entity's allocable cost amount for the retained earnings of 100% owned offshore investments
- Provide a 'floor' on the amount of allocable cost amount that can be allocated to revenue assets.
Loss rules
- Allow continuity of ownership test (COT) losses incurred after 21 September 1999 to be used by a consolidated group over three years
- Provide a separate available fraction or concessional rules for capital losses transferred to a consolidated group
- Provide concessional rules for trust losses transferred to a consolidated group
- Replace the 'capital injection' rules or provide further exceptions to the rules.