17. Consolidation

 

CONSOLIDATION – TAXING WHOLLY OWNED GROUPS AS SINGLE ENTITIES

The income taxation of consolidated and MEC (Multiple Entry Consolidated) groups has been in force since 1 July 2002.

Eligible companies, partnerships and trusts that are wholly owned are taxed as if they are part of a single head company. Many small businesses use simple
structures (a single company, partnership or trust) and will not be affected by the consolidation legislation. It is not relevant to the business activity
of individuals (such as people operating as sole traders or in partnership). However, consolidation may be an option for your business if the business
structure includes a company that wholly owns one or more entities.

Some key elements of the Consolidation regime:

• To form a consolidated group, a group must consist of an Australian resident head company and at least one other Australian resident entity – a company,
  trust or partnership – wholly owned by the head company.

• The choice to consolidate is optional, but irrevocable.

• If a head company of a consolidated group chooses to consolidate on a specified date then, from that time, both the head company and all of its eligible
  wholly owned subsidiaries will be part of the consolidated group for income tax purposes.

• The head company of a consolidated group must notify the Tax Office of its decision to consolidate using the appropriate approved form by the earliest
  of either:

-The end of the day on which it gives the Commissioner its income tax return for the year which contains its chosen date of consolidation; or

-The end of the day on which it is required to lodge that income tax return. The period for making a choice to consolidate cannot be changed. If you cannot
lodge your notification of choice with the Commissioner by this time you should contact the ATO to discuss extending the due date of your income tax
return.

If the head company is not required to lodge an income tax return for the year that contains the chosen date of consolidation, the notification of choice
must be given to the Commissioner on or before the date that a return would need to be lodged for that year if such a return were required.

• If notification of choice is not given to the Commissioner on or before the relevant time, the group cannot be treated as consolidated for that income
  year.

• If a foreign company, either directly or through its wholly owned foreign entities, has multiple entry points into Australia, special MEC group rules
  will apply where a MEC group is formed.

• A MEC group will have a provisional head company (PHC) during the course of the income year. The PHC at the end of the income year will be the head
  company for that particular income year.

• On consolidation, the head company of a consolidated or MEC group and its entire eligible wholly owned subsidiary members are treated as a single entity
  for their income tax purposes – that is, each subsidiary member is treated as a part of the head company.

• The tax costs of assets of an entity joining a consolidated or MEC group (other than eligible tier-1 companies) which become assets of the head company
  under the single rule are reset in accordance with special tax cost setting rules (see below).

• The consolidated or MEC group operates as a single entity for income tax purposes, with the head company lodging a single income tax return and then
  paying a single set of PAYG instalments for the group.

• A consequence of choosing to consolidate is that transactions that occur solely between members of the consolidated or MEC group will not result in
  income or deductions to the group’s head company.

• If an entity becomes a subsidiary member of a consolidated or MEC group part-way through its income year or it has a period in the year that it is
  not a subsidiary member for any other reason (non-membership periods), it will also need to lodge a tax return for that income year. However, the
  tax return will be based only on amounts properly attributable to all of the periods that the company was not a subsidiary member of a consolidated
  or MEC group during the income year.

• The losses, franking credits, pre-commencement excess foreign income tax, and conduit foreign income and attribution accounts surpluses of each subsidiary
  member can generally be brought into, and used by, the Head Company of a consolidated or MEC group.

• Carry-forward losses, franking balances, pre-commencement excess foreign income tax and conduit foreign income transferred to the head company of the
  group remain with the head company when an entity leaves the group. Special rules apply regarding treatment of carry-forward losses transferred
  into the consolidated or MEC group.

• The consolidation regime does not affect a subsidiary member’s obligations in relation to other taxes such as goods and services tax (GST), fringe
  benefits tax (FBT) and pay as you go (PAYG) withholding.

• Certain corporate unit trusts and public trading trusts may form a consolidated group and be treated like the head company of the group.

• Where a consolidated or MEC group includes one or more subsidiary members that are life insurance companies, special consolidation rules apply to take
  into account the particular taxation treatment of life insurance companies.

The head company of a consolidated or MEC group or an Australian Parent Company or (eligible tier-1 companies), where relevant must (among other things):

• Notify the ATO of the decision to consolidate,
• Pay the group’s PAYG instalments when it is issued with a consolidated instalment rate after the lodgement by the head company of its first group tax
  return,
• Determine, report and make any balancing adjustments to meet the group’s annual income tax liabilities,
• Manage any ongoing income tax liabilities and supply income tax information to the ATO when required, and
• Notify the ATO of any members that join or leave the group.

TAX Cost Setting Rules 

 

When a consolidated group forms or a new member is added to that group the head company is deemed to have acquired those assets.

The amount that the head company paid for those assets may be different to the book value of those assets in the subsidiary company.

The cost of each incoming asset to the head company is determined using the allocable cost amount (ACA). Determining the ACA is an intricate calculation
that involves a series of processes. The resulting ACA aims to allocate the actual cost of the incoming assets in an economic way.

Example: Big Bob Enterprises is an existing group of five wholly owned Australian companies which are consolidated for tax purposes. Big Bob Enterprises
acquires all the shares in Little Bob Pty Ltd for $50,000. Little Bob Pty Ltd has liabilities of $100,000, no retained earnings or tax losses.

Little Bob Pty Ltd’s assets consist of:

The ACA is calculated as $150,000 (i.e. cost of shares plus liabilities).This ACA is then allocated to the assets based on relative market values as follows:

From the example above it can be seen that there can be opportunities to increase the cost base of CGT and depreciable assets on purchase of a subsidiary
member. In this example the following is of advantage to Big Bob:

• Big Bob will be able to depreciate plant and equipment based on a value of $40,000, instead of the $25,000 value that it was being held at in the books
  of Little Bob;

• The increase in the value of the trading stock held by Big Bob will result in a greater cost of goods sold (and tax deduction);

• Due to the higher cost base for the land and goodwill held by Big Bob, any subsequent sale will have a reduced capital gain.

Tax Sharing Agreement (TSA)

Under consolidation the head company is liable for the taxation liabilities of the consolidated group. In the event of the default of the head company
all members are jointly and severally liable for the outstanding amount.

A Tax Sharing Agreement (
TSA) can be entered into to limit the liability of the subsidiary members.

A
TSA is a legal document that requires a number of attributes to be valid. The most important is the calculation of how each member of the group calculates
their taxation liability. The method used must be “reasonable” and if deemed by the Commissioner to inhibit his ability to recover taxation, then
the
TSA may be deemed invalid.

TSAs offer protection to subsidiary group members from other subsidiary group members who fail to meet their taxation liabilities.

PAYG Instalments and the Consolidated Group 

Where the head company has not yet been assessed as the head of the consolidated group for PAYG purposes, instalments of all members of the group must
still be paid. When the head company lodges its first consolidated return it will receive a credit for amounts already remitted by its subsidiary members.

From this point on the head company will receive an instalment rate for the whole group.

RECENT CHANGES

The Government has announced three new measures designed to modify, broaden and defer certain previously announced integrity measures within the tax consolidation
scheme.

Integrity measures for liabilities from securitised assets

 

The Government has announced an extension of measures concerning the recognition of liabilities for non-financial institutions arising from securitisation
arrangements for the purposes of the entry and exit cost calculations.

When a company holds securitised assets, the accounting treatment requires the company to recognise the liability, but not the asset. This can create a
tax benefit when joining or leaving a consolidated group. These measures address the mismatch by requiring the liability to be excluded when undertaking
entry and exit calculations, unless the associated asset is included as well.

Removal of deferred tax liabilities

The tax consolidations regime’s treatment of the deferred tax liability will be amended by removing adjustments to deferred tax liabilities from the consolidation
entry and exit calculations, as including the liabilities creates a commercial/tax mismatch and gives rise to integrity risks and uncertainty.

Removing the double benefit of deductible liabilities

Previously a double tax benefit could be achieved when a consolidated group acquired a subsidiary with deductible liabilities. The modifications mean these
deductible liabilities are no longer included in the consolidation entry tax cost setting calculation.

CONSOLIDATED GROUPS – INDICATIVE ANNUAL COMPLIANCE DEADLINES

15 January Lodgement Date

 

The head company of a consolidated group, including new registrant, must lodge by 15 January 2018 where the following applies:

• Any member of the consolidated group is deemed to be a large/medium taxpayer in their last year lodged;
• The consolidated group is deemed to be a large/medium taxpayer through the single entity rule;
• The 2017 tax return will be taxable;
• Payment of any tax due for these entities is required by 1 December 2017.

28 February Lodgement Date

 

The head company of a consolidated group, including new registrant, must lodge by 28 February 2018 where the following applies:

• Any member of the consolidated group is deemed to be a large/medium taxpayer in their last year lodged;
• The consolidated group is deemed to be a large/medium taxpayer through the single entity rule;
• The 2017 tax return will be non-taxable.

If a member exits the consolidated group during the financial year, their due date will be 28 February.

Due dates for other consolidated groups

 

The head company of a consolidated group must lodge and pay any tax due by 31 March 2018 if the following applies:

• They do not have a member who has been deemed a large/medium taxpayer in the latest year lodged;
• They do have a member who had total income of more than $2m in the latest year lodged.

All other head companies of consolidated groups must lodge by 15 May 2018.

When a head company lodges a consolidated tax return for the first time, the due date for lodgement of that tax return is the latest date on which the
group’s Notification of formation of an income tax consolidated group form can be lodged.

Consolidated groups that operate under an approved Substituted Accounting Period (SAP)

Head companies of consolidated groups that operate under an approved SAP must lodge and pay in accordance with the SAP rules.