12 October 2007

Improving the Integrity of the Tax Consolidation Regime

The Minister for Revenue and Assistant Treasurer, Peter Dutton, announced today that the Government will modify the tax consolidation regime to ensure that, when an entity joins a consolidated group or multiple entry consolidated group (MEC group) following a capital gains tax (CGT) rollover affecting the membership interests of the joining entity, the tax cost setting rules do not apply to uplift the tax costs of the joining entity’s assets.

Under a CGT scrip for scrip rollover, the acquiring entity acquires all of the target entity’s membership interests and receives a market value cost base. If the target entity then joins the acquiring entity’s consolidated group, the tax cost setting rules push down the market value cost base of the membership interests in the target entity to the underlying assets of that entity, resulting in an equivalent uplift in the tax costs of that entity’s assets.

If the consolidated group immediately sold those underlying assets for their market value, the group would not make a taxable gain because the price would not exceed the reset tax costs. In effect the capital gain that would have been realised on the assets, is inappropriately reduced by the amount of the uplift in the tax costs of the assets.

“The amendments will improve the integrity of the tax consolidation regime by preventing companies from obtaining an inappropriate uplift in the tax costs of their assets by joining a consolidated group or MEC group following a CGT rollover affecting the membership interests of the joining entity”, Mr Dutton said.

The amendments will apply to entities that join a consolidated group or MEC group after today.

The business community will be consulted on the development of legislation to give effect to these changes.