Assistant Treasurer Mal Brough today announced changes to further improve the tax treatment of consolidating companies.
One of the initiatives will allow the pre-capital gains tax status of shares in companies to be maintained at the same percentage when they enter and exit consolidation. Integrity measures will prevent value from being shifted into entities with pre-CGT shares and between different classes of shares.
For example, if 90 per cent of a company's shares were pre-CGT before the company joins a group, 90 per cent of its shares will be pre-CGT when it leaves the group.
"The change will remove a barrier to small and medium-sized companies entering into a consolidated group," Mr Brough said.
Consolidation involves subsidiary companies grouping together under a parent company.
Companies that joined a consolidated group or multiple entry group on or after July 1, 2002, can elect to take advantage of this change.
In further enhancements to the tax consolidation regime, the law has been clarified on various aspects of the tax cost setting rules with effect from July 1, 2002. Further details can be found in the attachments to this media release.
"These changes will reduce compliance costs for business," Mr Brough said.
"They further demonstrate the Government's preparedness to listen and respond to the view of the business community through open and constructive engagement."
The business community will continue to be consulted on the development of legislation to implement these changes.
CLARIFICATION OF THE CONSOLIDATION TAX COST SETTING RULES
The consolidation tax cost setting rules will be modified to ensure that they operate as intended and to clarify interactions with other parts of the income tax law.
First, the interaction between the tax cost setting rules and the loss integrity rules will be clarified to ensure that no double reduction of the allocable cost amount for a joining entity arises where:
- a reduction in the cost base and/or reduced cost base of membership interests or debt interests is made because of a loss of a joining entity; and
- the loss is taken into account in another step of the allocable cost amount of the joining entity or for another member of the consolidated group or MEC group.
Second, technical corrections to the tax cost setting rules will ensure that, if a deferred capital gain or loss arose prior to consolidation, the joining entity's allocable cost amount will be adjusted to ensure that the deferred gain or loss is not permanently deferred.
Third, a modification will be made to ensure that the tax cost of a joining entity's assets determined under the tax cost setting rules is used by the head company of a consolidated group or MEC group for the purpose of applying all other provisions in the income tax law. In addition, the head company will be taken to have incurred expenditure to acquire a joining entity's assets equal to their tax cost setting amount at the joining time.
Finally, rights to future income (such as work-in-progress amounts and unbilled revenue) held by a joining entity will be treated as retained cost base assets provided that those rights accrued to the head company. The tax cost setting amount will be equal to the terminating value of those rights. In addition, the head company will be taken to have incurred expenditure to acquire the rights at the joining time.
The deemed acquisition of assets at the joining time under these last two changes will not override the entry history rule other than in respect of a cost being incurred for the acquisition of the assets at the joining time.
Operation of debt forgiveness rules, limited recourse debt rules and CGT event L5 when an entity leaves a consolidated group
The commercial debt forgiveness and limited recourse debt rules will be modified to ensure that, where a debt has been forgiven, the forgiven amount can be applied against losses transferred from an entity that has losses with a nil available fraction. This change will apply only if the debts being forgiven are the same as or are reasonably connected with the debts held by the joining entity at the joining time.
In addition, if at the time a leaving entity joined the consolidated group or MEC group losses with a nil available fraction were transferred from the entity, the capital gain arising under CGT event L5 will be reduced by the lesser of:
- the value of the losses transferred;
- the difference between the value of the leaving entity's liabilities and the market value of its assets at the joining time; and
- the difference between the value of the leaving entity's liabilities and the market value of its assets at the leaving time.
This change will apply only if the liabilities of the leaving entity are the same as or are reasonably connected with the liabilities held by the joining entity at the joining time.
INTRA-GROUP TRANSACTIONS OF LIFE INSURANCE COMPANIES
The mechanism for working out the taxable income of consolidated groups and MEC groups with members that are life insurance companies will be modified.
The existing mechanism for taxing life insurance companies will continue to apply to transactions between the different pools of assets within the life insurance company member of the group.
However, for transactions involving other members of the group, the mechanism will be modified so that intra-group transactions are recognised for the purposes of determining the amount of a head company's complying superannuation class of taxable income and the amount of non-assessable non-exempt income derived in respect of immediate annuity business.
In addition, membership interests held with relevant subsidiary members of the group will continue to be recognised for the purposes of determining the value of a head company's virtual pooled superannuation trust assets and segregated exempt assets.
INTERACTION WITH THE DEMERGER RULES
The tax cost setting integrity measure that causes certain CGT roll-overs to be ignored for tax cost setting purposes will be modified to improve the interaction between the demerger rules and the consolidation rules. The integrity measure will not apply to a consolidated group or MEC group that forms after a demerger, provided that the company with the rolled-over asset does not join the same consolidated group or MEC group as the company that originally held the asset.