Bills Digest No. 173 2001-02
New Business Tax System (Consolidation) Bill (No. 1) 2002
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
New Business
Tax System (Consolidation) Bill (No. 1) 2002 (Bills Digest 173, 2001-02)
Date Introduced:
16 May 2002
House:
House of Representatives
Portfolio:
Treasury
Commencement:
Royal Assent, with the amendments having effect
from 1 July 2002.
Purpose
To enable wholly-owned company groups
to form, for tax purposes, a single entity which will be responsible for
the tax affairs of the group.
Consolidation refers to the concept where companies in
a group which are wholly owned, and which satisfy certain other conditions,
may elect to be treated as a single entity for tax purposes. While the
consolidation regime covers areas also currently subject to grouping rules(1),
consolidation represents a much more comprehensive system which will eventually
replace the current grouping rules.
Consolidation has its origins in the August 1998 statement
Tax Reform – not a new tax – a new tax system, but received greater
substance in the Review of Business Taxation, A Tax System Redesigned
(the Ralph Report).
The Ralph Report indicated that a major reason for the
proposed changes was the removal of high tax compliance costs where each
member of a group has to individually comply with tax laws while also
passing losses and profits between members of the group of commonly owned
companies. It was also indicated that a consolidation regime would allow
members of the consolidated group greater flexibility in the way they
could operate compared to the current grouping rules.(2)
The Ralph Report sets out a number of general principals
to apply to a consolidation regime, including:
- consolidation be optional but if a group decides to consolidate all
wholly-owned Australian resident group entities must consolidate
- a consolidated group with a head entity be treated as a single entity
- the current grouping provisions be repealed
- losses and franking account balances be able to be brought into the
consolidated entity, and
- losses and franking account balances remain within the consolidated
entity on a member’s exit.(3)
Within the general principles there are a number of modifications
to take account of special circumstances, such as, for example, allowing
trusts to be members of a consolidated group based on the object of the
trust rather than it being wholly owned.
While the general principles and their modifications
may be relatively straight forward, their translation into legislation
gives rise to a great number of complications, particularly regarding
the initial establishment of a consolidated group, such as who may be
a member, who is to be the head entity and the value to be assigned to
the various losses and franking balances of the members of the consolidated
entity. The complications reflect the number of variables which may apply
to different entities, such as different valuation methods, and are reflected
in the history of the drafting of the Bill.
Following consultation regarding the detail of the Bill,
the Treasurer released an Exposure Draft Bill on 8 December 2000, calling
for further comments on the proposed legislation. It was envisaged that
the consolidation regime would commence from 1 July 2000.(4)
After extensive further comments on the proposals, the
Assistant Treasurer released further draft legislation and associated
material on 7 February 2002, seeking comments by 15 March 2002. It was
now envisaged that the regime would commence from 1 July 2002. When releasing
the draft legislation the Assistant Treasurer stated:
The ATO has taken into account the suggestions of
business involved in the earlier consultation process and gone back
to the drawing board to produce this revised package of materials.(5)
On releasing the draft material the Assistant Treasurer
also announced a number of Consolidation Feedback Forums which ran during
February and March 2002 to gather the views of business on the latest
material.
Given the long period for public comment on the proposed
legislation, the time given for Parliamentary scrutiny appears very short.
While the Bill passed the House of Representatives on 29 May 2002 and,
given that the measures are to apply from 1 July 2002, its passage through
Parliament is envisaged during the remaining 2 sitting weeks before the
end of the 2001-02 financial year.
While there has been extensive consultation with the
private sector regarding the measures contained in the Bill there has
not been a general endorsement of the impact of measures contained in
the Bill. For example, the Institute of Charter Accountants in Australia,
while supporting the consultative approach to the drafting of the consolidation
measures stated that:
While consolidation potentially offers a better tax
regime for corporate groups the cost of transition to the new regime
will be significant so that businesses need time to determine the
best way forward.
In particular small and medium enterprises will need
to consider their tax profiles carefully before opting to Consolidate,
a decision which will also require them to make numerous internal
system changes.(6)
While this Bill contains the structure necessary for
the establishment of the consolidation regime, the Assistant Treasurer
has stated that a further Bill will be introduced in June 2002 containing
additional rules and that this will be followed by another Bill in the
Spring sittings dealing with residual matters.(7)
As noted above, a recommendation of the Ralph Report
was that the current grouping rules be abolished when the consolidation
regime comes into force. The February 2002 Draft Bill proposed that the
grouping measures would cease to be available on the introduction of the
consolidation regime, effectively meaning that businesses would have to
chose to consolidate or operate as independent entities from 1 July 2002.
Following representations on the February draft Bill, the Assistant Treasurer
announced that the current grouping rules would apply for a 12 month transitional
period (until 1 July 2003) and that the rules relating to loss transfers
and capital gains tax cost bases will continue to be available for a further
12 month transitional period (ie until 1 July 2004). These measures were
seen as assisting small and medium sized businesses to transfer to the
new consolidation regime.(8)
Schedule 1 of the Bill will insert a new Part
3-90 into the Income Tax Assessment Act 1997. The proposed
Part contains the rules dealing with consolidation and proposed Division
701 contains ‘Core rules’.
Subsidiary members of a consolidated group are to be
treated as part of the head company of the consolidated group rather than
as separate entities for determining the head company’s liability for
tax in a year or whether the head company has made a particular sort of
a loss in the year. (Particular sorts of loss include an overall tax loss,
film losses, net capital loss and various types of foreign losses.) (proposed
section 701-1).
When calculating the value of an asset for the head company,
the prior history of the asset in the hands of the subsidiary member of
the consolidated group is generally to be taken to be its history in the
hands of the head company (proposed section 701-5). The value of
the asset will generally be its tax cost (basically its depreciation value
but see below for further detail), although some assets, such as a right
to deductions, will not have their value set (proposed section 701-10).
If an entity ceases to be a member of a consolidated
group, proposed sections 701-20 and 701-25 provide for the valuation
of the assets held by the head company to be returned to the associated
entity. If the member leaves the group and does not become a member of
another group the value of the assets for the head company is to be determined
according their tax cost at the time of the subsidiary leaving the group.
However, the head company will also be able to take into account any outstanding
liability owed to a member of the consolidated group by the entity leaving
the group when determining the value of the assets leaving the group.
Trading stock of the subsidiary leaving the group is to be valued as the
same amount for the head company, ensuring that there are no tax consequences
relating to the trading stock although its actual value may have changed.
If an entity ceases to be part of a group for a period
during a year, its profit or loss contribution to the group is to be determined
according to the actual periods when it was or wasn’t a member rather
than on a pro-rata basis (proposed section 701-30).
If an entity ceases to be a member of a consolidated
group, the history of assets deemed to be held by the head company will
continue to apply to the assets as if the leaving member held those assets
during the consolidation period (proposed section 710-40).
Proposed sections 701-55 and 701-60 deal with
the setting of the tax cost of an asset. As noted above, where depreciation
values apply to the asset this will generally be the tax cost, although
there are provisions for adjusting the effective life of the asset to
reflect its depreciation value at the time the tax cost is calculated.
The tax cost of trading stock is to be the value for other tax purposes
at the time, while the tax cost of liabilities owed to the head company
by an entity leaving the group will be its market value at the time.
There are also a number of situations where there will
be adjustments to reflect special arrangements between various entities,
such as where the head company enters into an arrangement to pay for a
service to be delivered to the group company, where there are disproportionate
deductions allowed between the times before and after joining the group
and to take account of any accelerated depreciation available (proposed
sections 701-70 to 701-80).
Proposed Division 703 deals with the membership
of a consolidation group. A consolidation group is to consist of a head
company and all the subsidiary members of the group and will continue
to exist until the head company ceases to be the head company or becomes
a member of a multiple entry consolidated (MEC) group (this is a group
where foreign ownership applies – see below) (proposed sections 703-5
and 703-10).
A head company must be an Australian resident which also
has some or all of its income taxed at the company tax rate. If the head
company is a wholly-owned subsidiary of another company which also satisfies
these requirements, it must not be a member of a consolidated group or
a group which is capable of being consolidated.
An entity may be a subsidiary member of a group if:
- it is a company, trust or partnership that is not an excluded entity
(see below)
- if it is company, all or part of its income is taxed at the general
company tax rate, it is not a non-profit company and it is an Australian
resident (but not a dual resident)
- if it is a trust, it is a resident trust for tax purposes for the
year in question, and
- it must be a wholly-owned subsidiary of the head company of the group.
This will be where the holding entity and/or one or more of its subsidiaries
hold all of the membership interests in the entity. There are special
rules to allow employee shares to be disregarded and to take account
of interposed entities in determining ownership (proposed sections
703-15, 703-25, 703-30, 703-35 and 703-45).
An entity will be excluded from being a subsidiary member
of a group if:
- it is tax exempt under Division 50 of the ITAA97 (eg as it is a charity,
educational institution etc)
- it is a company and:
- it is a credit union and it is not a recognised large credit union
- is a co-operative company which borrowed money from a government
- is a pooled development fund at the end of the year, or
- is a film licensed investment company, or
- it is a complying superannuation entity or a non-complying approved
deposit fund or superannuation fund (proposed section 703-20).
The head company of a group on the day when it chooses
to become a consolidated group may apply to the Commissioner for the group
to be consolidated on that day. Such a choice is irrevocable and must
specify a day after 30 June 2002. Such an application may be made by a
company which is not a head company at the time of application (ie the
group may anticipate later consolidation and make the application before
the group actually consolidates) (proposed section 703-50). A group
may also come into existence when a MEC group, which has foreign ownership,
ceases to exist but the remaining structure complies with the consolidation
rules in regard to both having a head company and eligible subsidiaries
(proposed section 703-55).
The head company of a group will be required to notify
the Commissioner of certain events, including when a member becomes or
ceases to be a member of the group and when the group ceases to exist
(proposed section 703-60).
A MEC (multiple entry consolidated) group may arise where
there is a foreign entity which has at least two wholly owned Australian
subsidiaries (tier-1 company) which also have Australian resident subsidiaries.
Under the proposals, the Australian subsidiaries may elect to become a
consolidated group with one of the tier-1 companies becoming the head
company (proposed sections 719-5 and 719-10).
For an MEC there must also be a top company, which is
to be a foreign resident company which is not a wholly-owned subsidiary
of another resident company, other than a prescribed dual resident company
or a resident company which fails to meet the taxation requirements of
a tier-1 company (see below).
A tier-1 company must:
- have all or part of its income taxed at the general company tax rate
and not be taxed as an excluded company (see proposed section 703-20
above)
- be an Australian resident who is not a prescribed dual resident, and
- be a wholly-owned subsidiary of the top company and not a wholly-owned
subsidiary of a resident company unless that company fails to meet the
above two requirements (proposed section 719-20).
Members of a potential MEC group may apply to the Commissioner
to become a MEC group on a specified day so long as none of the tier-1
companies party to the application are already members of a group. Such
a choice cannot be revoked (proposed section 719-50). The application
will have to specify which of the tier-1 companies is to be the head company
(proposed section 719-60).
As noted above, the current concessions applying to wholly-owned
company groups will substantially cease to apply after a transitional
period for the introduction of the consolidation regime. Part 3 of
Schedule 3 of the Bill deals with the restriction of the availability
of the current grouping concessions. In relation to the CGT roll-over
relief available between members of a company group, this will generally
cease to be available after a consolidation event occurred after 30 June
2003. However, if the income year of the consolidated group occurs after
30 June 2003, the operative date will be extended to the earlier of the
consolidation date and 1 July 2004. After the changes come into effect
for an entity, CGT roll-over relief for the transfer of assets will only
be available if both companies are members of a wholly-owned group and
one of the companies is a foreign resident, effectively denying the relief
to resident company groups (items 20 to 23 of Schedule 3).
Similarly, transfers of losses between wholly-owned members
of a company group will be restricted from 30 June 2003, or their consolidation
date, or 1 July 2004 for entities which have an income year ending after
30 June 2003. After the relevant date, if a group has not consolidated,
losses will only be able to be transferred where both of the companies
are members of a wholly-owned group and one of the companies is an Australian
branch of a foreign bank (proposed subdivision 170-B).
The explanatory memorandum to the Bill states that the
repeal of other existing grouping concessions, such as the inter-corporate
dividend rebate, will be dealt with in later legislation.(9)
If the head company of a group fails to pay its tax liabilities
as they fall due, the members of the group will be jointly and severably
liable to pay the liability (proposed Division 721).
Proposed Divisions 705 and 707 contains rules
relating to the value of assets and losses when these are transferred
to the head company. The rules are of a technical nature and cover a vast
range of circumstances. They will not be examined in this Digest.
Transitional provisions for the initial transfer to the
consolidation regime are contained in Schedule 2 of the Bill and
relate to special rules for the calculation of loss values during the
initial consolidation.
Specific anti-avoidance provisions relating to franking
credit trading by membership of a group are contained in Part 4 of
Schedule 3 of the Bill. The measures reinforce existing measures in
this area.
The Pay as you go instalment rules will be amended to
make the head company liable for paying the PAYG instalments (Schedule
4).
While the consolidation regime will no doubt result in
lower administrative and compliance costs for larger company groups, with
the Minister for Revenue estimating the savings to business to be ‘around
$1 billion over three years’(10), the estimated benefit for
small and medium enterprises is difficult to judge. As noted above, the
Institute of Charter Accountants has expressed concern about the potential
cost to such enterprises and their need to consider if consolidation will
be beneficial. The removal of most of the existing grouping tax concessions
in effect leaves such business with the choice of incurring additional
costs of consolidation or losing the benefits of grouping.
- These rules allow concessional tax treatment in a number of areas
for amounts passed within wholly-owned company groups including capital
gains tax relief for the transfer of assets, inter-corporate dividend
rebate for unfranked dividends, loss transfers and the transfer of excess
foreign tax credits.
- Review of Business Taxation, A Tax System Redesigned, pp. 517&8.
- ibid., p. 517.
- Treasurer, Press Release, 8 December 2000.
- Assistant Treasurer, Press Release, 7 February 2002.
- Institute of Chartered Accountants, Latest News, 17 May 2002.
- Assistant Treasurer, Press Release, 16 May 2002.
- Assistant Treasurer, Press Release, 16 May 2002.
- Explanatory memorandum, p. 288.
- Assistant Treasurer, Press Release, 7 February 2002.
Chris Field
25 June 2002
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
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