New Tax Consolidation Regime - Time for Action
by Philip Diviny
Australia's new Tax Consolidation Regime is set to apply from 1 July 2002 following the release of the New Business Tax System (Consolidation) Bill 2002 on 7 February 2002. The regime which will enable all the members of a 100% owned corporate group to be treated as one taxpayer for income tax purposes, demands careful attention by all eligible taxpayers prior to the 1 July start date. The introduction of consolidations should reduce compliance costs for taxpayers in the longer term but will require substantial resources in the short term as taxpayers decide whether to opt in to the voluntary regime.
The key features of the draft bill are as follows:
- Companies may consolidate from 1 July 2002 onwards;
- Once an election to consolidate has been made the election is irrevocable; and
- If the decision to consolidate is made, all eligible entities must consolidate. This includes all 100% owned subsidiary companies as well as wholly owned trusts and partnerships.
The main benefits of consolidation are:
- The consolidation group will be required to lodge only one income tax return per year rather than one for each entity in the group;
- All transaction between group members will be ignored for tax purposes;
- It may be possible to "step up" the value of assets within the consolidated group; and
- All franking credits will be transferred to the head entity of the consolidated group, eliminating the problem of trapped franking credits where an entity's retained earnings are less than its franking credit balance.
A number of changes are to be introduced that may disadvantage taxpayers. These include:
- The ability to rollover assets between group companies CGT free will be removed;
- Income and capital losses will be unable to be transferred between group companies in an unconsolidated group;
- The inter-corporate dividend rebate will be abolished; and
- The ability to recoup pre-consolidated tax losses will be severely impacted by the introduction of a "loss factor", effectively limiting the amount of a group's taxable income that can be absorbed by losses in any one income year. Market valuations of group members will be required to determine the loss factor.
Corporates need to undertake the following actions to best position themselves to take advantage of the consolidation measures:
- Determine the membership of your group. Is there action that needs to be taken to bring partly owned entities within the group or, conversely, to introduce outside equity into certain subsidiaries to exclude them from the group?
- Determine your reliance on the tax measures to be abolished such as CGT rollover, dividend rebate and loss transfer to see if there is an imperative for your group to consolidate;
- For groups with losses, understand the "loss factor" methodology to see how it will impact on your ability to recoup losses in the future;
- Understand if there is a possibility for your group to achieve a "step up" in asset values by entering consolidation; and
- Assemble a project team to manage the transition to consolidations. This team should consist of at least legal, finance and systems personnel.