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- the current grouping provisions be repealed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
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