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Tax Alert: Tax consolidation changes moving ahead

Following the Board of Taxation’s release of their post-implementation review of the tax consolidation rules in 2013, the Federal Government has released draft legislation to implement a number of the Board’s recommendations.

What is tax consolidation?

Tax consolidation is a collection of rules allowing “wholly-owned groups” to elect to be treated as one single taxpayer, with all inter-entity transactions ignored for income tax purposes. Also, the group would only be required to lodge one tax return, thereby potentially simplifying the tax return process and reducing compliance costs.

Tax consolidation opportunities

A key concept within the rules is the statutory calculation of an allocable cost amount (ACA). The ACA is linked to the market value of the shares of the company entering the consolidated group, and is allocated to depreciable assets, stock and Capital Gains Tax Assets in proportion to their respective market values. The amount allocated becomes the new cost base of each asset for tax purposes (meaning that in circumstances where the process causes tax cost bases to be uplifted, there will be an opportunity for significant tax benefits).

Since its introduction in 2001, the rules have been constantly changing.

Why has this announcement been made?

The changes within the current draft legislation are largely technical in nature and have been under consideration since the Board of Taxation released their report in April 2013. The draft legislation has been introduced to “restore integrity” to the provisions by amending six anomalies that arise in calculating the ACA when an entity enters or exits a tax consolidated group.

What are the changes?

The proposed changes are:

  1. The deductible liabilities measure excludes deductible liabilities (for example, employee provisions) from the calculation of an entry ACA, effective from 1 July 2016. This is a significant change to the calculation of the ACA and will likely result in reduced amounts available to allocate against reset cost base assets, which in turn could lead to step-downs in the tax cost base of these assets.
  2. The deferred tax liabilities measure disregards deferred tax liabilities from the calculation of both the entry and exit ACAs, effective from the date of introduction of the amending legislation. Again, this could reduce the tax cost base of reset cost base assets.
  3. The securitised assets measure excludes liabilities related to securitised assets from both the entry and exit ACAs. The application date of this measure depends on the type of entity.
  4. The churning measure modifies the entry ACA calculation for certain assets held by foreign residents and applies from 14 May 2013.
  5. The Taxation of Financial Arrangements (TOFA) measure provides for a tax cost setting amount to apply to an intra-group Division 230 financial arrangement that emerges as a result of an entity exiting the consolidated group, with effect from 14 May 2013.
  6. The value shifting measure ensures that the value of intra-group assets are not excluded from the exit ACA calculation where the asset holding entity leaves the group with a corresponding liability owed to it from the old group, effective from 14 May 2013.

What does this mean now?

As the legislation is currently in draft form for discussion it is still subject to change; however, it is unlikely that any changes will be significant.

What’s next?

If you have recently entered into the tax consolidation regime, or are considering forming or leaving a tax consolidated group, please contact your Fordham Partner for a discussion on how these changes might impact your situation.

Download: Tax Alert-Tax consolidation changes-October 2017

This publication has been prepared by Fordham Business Advisors Pty Ltd (Fordham) and Perpetual Trustee Company Limited ABN 42 000 001 007, AFSL 236643 (PTCo). Fordham is part of the Perpetual Limited Group. Perpetual Private advice and services are provided by PTCo. This information is believed to be accurate at the time of compilation and is provided in good faith. However, it contains general information only and is not intended to provide you with advice or take into account your personal objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.