Tax consolidations where are we at? - · PDF fileTax consolidations – where are we at? Written by: Narelle McBride ... a RTFI asset is a retained cost base assets with a TCSA equal

© Narelle McBride, Greenwoods & Freehills, 2013

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

Corporate Tax Conference

Tax consolidations – where are we at?

Written by:

Narelle McBride

Director

Greenwoods & Freehills

Presented by:

Narelle McBride

Director

Greenwoods & Freehills

Western Australian Division

14 November 2013

Parmelia Hilton, Perth

Narelle McBride, Greenwoods & Freehills Tax consolidations – where are we at?

© Narelle McBride, Greenwoods & Freehills 2013 2

CONTENTS

1 Where are we at? ............................................................................................................................ 3

1.1 Prospective tax cost setting rules ............................................................................................. 3

1.1.1 WIP amount assets............................................................................................................ 4

1.1.2 RTFI assets ....................................................................................................................... 4

1.1.3 Assets for tax cost setting .................................................................................................. 5

1.1.4 Business acquisition approach .......................................................................................... 5

1.1.5 Non-TOFA derivatives ....................................................................................................... 8

1.2 TOFA interactions ................................................................................................................... 13

1.2.1 TOFA liabilities ................................................................................................................. 13

1.2.2 Retrospective law changes impacting the ACA ............................................................... 14

2 What does the future hold?......................................................................................................... 15

2.1 2013 Budget announcements ................................................................................................. 15

2.1.1 Deductible liabilities ......................................................................................................... 15

2.1.2 Intra group TOFA liabilities on exit .................................................................................. 17

2.1.3 Intra-group value shifts .................................................................................................... 19

2.1.4 ‘Churning’ restructures..................................................................................................... 19

2.1.5 MEC groups - tri-partite review ........................................................................................ 21

2.2 Other outstanding announcements ......................................................................................... 23

2.2.1 200% diminishing value uplift .......................................................................................... 24

2.2.2 CGT event L5 exemption for demergers ......................................................................... 24

2.2.3 TSA amendments ............................................................................................................ 25

3 Other future possibilities – BoT recommendations ................................................................. 26

4 Concluding comments ................................................................................................................ 29

Narelle McBride, Greenwoods & Freehills Tax Consolidations – Where are we at?

© Narelle McBride, Greenwoods & Freehills, 2013 3

1 Where are we at?

1.1 Prospective tax cost setting rules

Now that the right to future income (RTFI) ‘saga’ is over, we are left with the ‘prospective’ tax cost

setting rules which apply essentially when an entity joins a consolidated group after 30 March 2011.1

The following implications arise under the prospective rules in section 701-55 for each of the following

types of assets, where their tax cost is set as a result of a subsidiary member joining a consolidated

group:2

a. depreciating assets are taken to be acquired at the joining time for an amount equal to their tax

cost setting amount (TCSA), so deductions under Division 40 for the decline in value of such

assets are calculated based on the asset’s TCSA (subsection 2);

b. the TCSA of trading stock becomes the value of the trading stock at the start of the year for

Division 70 purposes so a deduction is effectively obtained for the TCSA of the asset (subsection

3);

c. like trading stock, the TCSA of registered emissions units becomes the value of the asset at the

start of the year for Division 420 purposes so a deduction is effectively obtained for the TCSA of

the asset (subsection 3A);3

d. qualifying securities are taken to be acquired at the joining time for an amount equal to their

TCSA, so amounts determined under Division 16E reflect the TCSA of the asset (subsection 4);

e. the cost base and reduced cost base under Parts 3-1 and 3-3 for a capital gains tax asset will be

adjusted to equal the TCSA of the asset at the joining time (so the TCSA is recognised in the

calculation of any capital gain or loss on the asset) (subsection 5);

f. Division 230 applies to ‘TOFA assets’ that are subject to the accruals/realisation (Subdivision

230-B) and hedging (Subdivision 230-E) methods as if the asset were acquired at the joining time

for its TCSA (paragraph 5A(a));4

g. Division 230 applies to TOFA assets that are subject to the fair value (Subdivision 230-C), foreign

exchange (FX) retranslation (Subdivision 230-D) or financial reports (Subdivision 230-F) methods

as if the asset were acquired at the joining time for its accounting value (paragraph 5A(b));5

1 Tax Laws Amendment (2012 Measures No. 2) Bill 2012 (Act No 99 of 2012) (2012 Amendments).

2 All references are to the Income Tax Assessment Act 1997 or the Income Tax Assessment Act 1936 (collectively, the Tax

Act), unless specified otherwise. 3 This will have limited effect post 1 July 2014 as a result of the Carbon Tax repeal. However, it will have a minor ongoing

operation. 4 ‘TOFA assets’ are assets that are subject to the operation of Division 230, Taxation of Financial Arrangements (TOFA).

5 The difference between the accounting value and the TCSA is recognised under section 701-61 over 4 years.



h. the TCSA of a work in progress (WIP) amount asset is taken to have been an amount paid so a

deduction is able to be claimed for the TCSA under section 25-95 (subsection 701-55(5C));6

i. the TCSA of a consumable item is taken to be an outgoing incurred in acquiring the asset,

therefore, provided the item meets other requirements of section 8-1, it can give rise to a

deduction (subsection 701-55(5D));

j. the TCSA of a residual asset (all other ‘reset cost base assets’) is taken to be the cost, outgoing,

expenditure or other amount incurred or paid to acquire the asset for the purposes of applying

any other provision of the Tax Act (other than the provisions referred to above) (subsection 701-

55(6));7 and

k. a RTFI asset is a retained cost base assets with a TCSA equal to its terminating value

(subsections 705-25(5) and (5B)).8

1.1.1 WIP amount assets

A ‘WIP amount asset’ is defined in subsection 701-63(6) as:

‘…an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in

paragraph 25-95(3)(b) for a third entity but not yet completed to the stage where a recoverable debt has arisen in

respect of the completion or partial completion of the work.’

Unfortunately, the scope of the word ‘work’ in this definition was not clarified in the Tax Act or the

explanatory memorandum to the 2012 Amendments.

The difficulties arise mainly from the scope of the word ‘work’. The obvious examples involving

physical exertion and mental exertion of a ‘human’ is fine and have been informally agreed to by the

Australian Tax Office (ATO). The ATO has also indicated the provision of services ‘under a

management agreement’ will be work. However, the situation becomes more difficult where the

exertion involves mechanical activities, use of, or access to, assets or rights to use infrastructure.

We are currently waiting for more guidance from the ATO regarding what it will accept as ‘work’ under

these new rules.

1.1.2 RTFI assets

A ‘RTFI asset’ is defined in subsection 701-63(5) as:

‘…a valuable right (including a contingent right) to receive an amount if:

(a) the valuable right forms part of a contract or agreement; and

6 The definition of a WIP amount asset is considered in 1.1.1.

7 Reset cost base assets are defined in section 705-35 as an asset of the joining entity that is not a ‘retained cost base asset’.

8 The definition of a RFTI asset is considered in 1.1.2. Retained cost base assets are defined in subsection 705-25(5).



(b) the *market value of the valuable right (taking into account all the obligations and conditions relating to the right)

is greater than nil; and

(c) the valuable right is neither a *Division 230 financial arrangement nor a part of a Division 230 financial

arrangement; and

(d) it is reasonable to expect that an amount attributable to the right will be included in the assessable income of any

entity at a later time.’

The ATO has informally confirmed this definition will include ‘non-TOFA’ derivatives9 but will not

include a share or an equally proportionately unperformed contract for the provision of goods, work or

services.

The terminating value of RTFI assets will often be nil. Therefore, the allocable cost amount (ACA) that

that would have otherwise been allocated to these assets ( based on their market value if they were

treated as reset cost base assets) should instead be allocated across all of the reset cost base assets

of the entity (subject to application of the market value capping rules in section 705-40).

1.1.3 Assets for tax cost setting

Prior to the 2012 Amendments, a commercial or market value concept was adopted for identifying

assets for tax cost setting purposes.10

The rules now only apply to assets recognised by the Tax

Act.11

The following types of ‘assets’ will therefore now be excluded from the tax cost setting process:

a. deferred tax assets; and

b. accounting intangible assets that do not constitute contractual rights (that would not be

recognised as assets under the Tax Act) such as know-how and customer lists.

Given the prospective rules do not deem these assets to be included in the goodwill of the joining

entity, these assets should simply be ignored in the tax cost setting process. This means that any

ACA that would otherwise be attributable to the value of these assets (if they were reset cost base

assets) will be allocated across all other reset cost base assets of the joining entity (subject to

application of the market value capping rules in section 705-40).

1.1.4 Business acquisition approach

Prior to the 2012 Amendments, the tax cost setting process was based on an ‘asset-based model’

which focused on particular assets. The 2012 Amendments introduced a new ‘business acquisition

9 ‘Non-TOFA derivatives’ are derivative financial instruments that are not subject to the operation of Division 230.

10 Paragraph 5.19 of the explanatory memorandum to the original consolidation bill (New Business Tax System (Consolidation)

Bill (No. 1) 2002) defined an asset as ‘anything of economic value which is brought into a consolidated group by an entity that

becomes a subsidiary member of the group...’ 11

Section 701-67.



approach’ shifts the focus to a ‘going concern’ or whole of business approach.12

This is a significant

change. Therefore, it is disappointing the relevant provisions are sparse13

and the explanatory

memorandum to the 2012 Amendments add very little guidance. In addition, the case law does not

provide clear guidance regarding the distinction between revenue and capital account assets where

they are acquired as part of a business acquisition.

At least the explanatory memorandum to the 2012 Amendments contemplates that the residual tax

cost setting rule in subsection 701-55(6) could still have some application under this new business

acquisition approach.14

Initial indications by the ATO seem to suggest that under a business acquisition approach essentially

all assets will have a capital nature. This is inconsistent with the existence of subsection 701-55(6)

and the statement in the explanatory memorandum referred to immediately above.

The cases being cited by the ATO as authority for a capital approach when setting the tax costs of an

asset are City of London Contract Corporation v Styles15

, John Smith and Son v Moore,16

Commissioner of Inland Revenue v New Zealand Forest Research Institute Ltd17

and National

Australia Bank v Federal Commissioner of Taxation.18

As explained in greater detail below, the cases cited as authority for the principle that assets acquired

under a business acquisition should be on capital account are not as widely applicable as has been

suggested. Further, the ATO stance ignores principles established in cases where assets have been

held to be on revenue account, such as the National Australia Bank case. Therefore, there is

considerable uncertainty around how this new rule will apply.

City of London Contract Corporation v Styles

This case involved the incorporation of a company to acquire the business of a firm of contractors as

a going concern. The business acquired was a number of uncompleted construction contracts, for

which a sum was paid. The taxpayer sought to claim the amount paid for the contracts as a deduction

against its profit made in carrying out the contracts.

It was unanimously held that the amounts paid for the contracts had a capital nature, and therefore

could not be deducted. Bowen L.J. stated that the amount paid for the contracts was not used ‘for the

purpose of’ the concern (that is, in carrying on the concern), but rather ‘to acquire the concern’.19

Although this case is frequently cited as authority for treating an asset as being held on capital

account, its application is limited to the context of WIP assets because the business being acquired

12 Subsection 701-56(2) now provides that the head company is treated as having acquired the asset of the subsidiary member

‘at the joining time as part of acquiring the business of the joining entity as a going concern’. 13

Specifically, subsections 701-56(1), (1A), (1B) and (2). 14

Paragraph 3.101 of the explanatory memorandum to the 2012 amendments states ‘there may be limited circumstances

where the application of the business acquisition approach to a particular asset results in the asset being on revenue account. ’ 15

[1887] 2 TC 239. 16

[1921] 2 AC 13. 17

[2000] 3 NZLR 1. 18

(1997) 80 FCR 352. 19

City of London Contract Corporation v Styles [1887] 2 TC 239, 243.



‘consisted entirely of partially executed or wholly unexecuted contracts’ (as per Viscount Finlay in

John Smith and Son).20

The question is whether the analysis can extend to asset other than WIP.

John Smith and Son v Moore

This case involved a son acquiring his deceased father’s coal merchant business, paying for each

asset the value determined by a firm of chartered accountants. This resulted in the payment of

£30,000 for unexecuted fixed price coal contracts. The son attempted to claim a deduction for this

amount.

The majority held that this amount was capital, and therefore non-deductible. Lord Sumner stated that

the amount had to be capital as ‘the business carried on was not that of buying and selling contracts,

but buying and selling coals’.21

However, as one judge (Viscount Finlay) dissented, and one of the

judges made his decision without considering whether the £30,000 was of a revenue or capital nature,

only 2 of the 3 judges to consider the capital/revenue issue determined that it was capital.

This case was read down in Commissioner of Taxes v Nchanga Consolidated Copper Mines,22

with

particular emphasis placed on the lack of allocation of the purchase price across the individual assets

of the business (as although £30,000 was allocated as the value of the contracts, once all assets and

liabilities were taken into account a lesser amount was actually paid). As stated in Nchanga

Consolidated Copper Mines, ‘it is difficult to accept as a sound general proposition that if a man

acquires and pays for stock-in-trade for his own business on the taking over of another he is not

entitled to set off against the gross proceeds of realising the stock the identifiable cost of acquiring

it.’23

Additionally, as this case concerned a contract to buy goods (albeit at a favourable price), rather than

selling them the authority perhaps may not extend to sales or distribution contracts of a joining entity?

Commissioner of Inland Revenue v New Zealand Forest Research Institute Ltd

This case involved the acquisition of a business from the New Zealand government. As part of the

acquisition the purchaser assumed a liability for leave payments. When these amounts were paid, a

deduction was claimed.

The Privy Council reversed the decision of the New Zealand Court of Appeal in finding that the

payments were capital, being a liability assumed as part of a business acquisition. The relevance of

this case in the tax cost setting context can be queried, as it relates to a liability assumed as part of a

business acquisition, rather than an asset acquired as part of that process.

20 John Smith and Son v Moore [1921] 2 AC 13, 32.

21 Ibid, 38.

22 [1964] AC 948.

23 Ibid, 963-964.



National Australia Bank v Federal Commissioner of Taxation

In this case, the National Australia Bank paid $42 million for the exclusive right to participate for

15 years as lender under the scheme of housing loan assistance established by the Defence Force

(Home Loans Assistance) Act 1990 (Cth).

The Court held that the amount was fully deductible in the year it was incurred, as the amount paid

was determined based on expected future profits. The unanimous majority stated that the payment

‘did not enlarge the framework within which the Bank carried on its ordinary activities of borrowing and

lending money’ and was ‘incurred as part of the process by which the Bank operates to obtain regular

returns by means of regular outlay’.24

The relevance of this case can also be questioned, as (i) it arose outside the context of a business

acquisition and (ii) the National Australia Bank had only made a lump sum payment out of commercial

necessity (and if it had made recurring payments, the Court held that they would clearly have been

deductible).

Amounts have been held to be deductible on revenue account based on similar reasoning in cases

such as BP Australia Limited v Commissioner of Taxation (1965) 112 CLR 386 and Tyco Australia Pty

Ltd v Commissioner of Taxation (2007) 67 ATR 63, where the focus of the expenditure has been upon

seeking to win customers in the context of carrying on the business rather than changing the capital

structure of the business. Can this rationale can be applied in a business acquisition context, where

assets are purchased as part of buying the business rather than by buying the owner of the business

(as is effectively the case under the tax consolidation regime)? Further, what happens when an

existing business is simply expanded by the acquisition of a smaller business of the same nature?

1.1.5 Non-TOFA derivatives

Based on the policy intention of the consolidation regime, the tax cost setting rules and the

consolidation/TOFA interaction provisions, one would expect that when a consolidated group that is

subject to Division 230 acquires an entity that entity holds derivative assets/liabilities, those derivative

assets/liabilities would meet the definition of a financial arrangement and would become subject to the

operation of Division 230.

This expectation is supported by the Tax Act deeming TOFA assets to be acquired by the head

company at the joining time25

and treating a head company as staring to have TOFA liabilities by

deeming the receipt of a payment for the liability26

.

At a meeting of the NTLG Finance and Investment sub-committee on 25 February 2013 (the NTLG

Meeting) the ATO expressed the view that subsection 701-55(5A) and section 715-375 would not

apply in the context of a joining entity that has financial assets/liabilities that were not subject to

24 Ibid 15, 365.

25 Subsection 701-55(5A).

26 Subsection 715-375(2).



Division 230 when they were held by the joining entity because they were pre-TOFA financial

assets/liabilities.27

The effect of the ATO’s interpretation is that these financial assets/liabilities will remain outside TOFA

for the acquiring group and:

a. the Division 230 tax cost setting rules referred to in 1.1f. and g. above will not apply to the assets;

and

b. the TOFA rules in 1.2.1 below will not apply to the liabilities.

Questionable view - assets

The ATO view seems to interpret the words in subsection 701-55(5A) as a pre-condition that needs to

be satisfied before the provision may apply.

Subsection 701-55(5A) states:

If Division 230 is to apply in relation to the asset, the expression means that the Division applies as if the asset were

acquired at the particular time for a payment equal to:

(a) unless paragraph (b) applies--the asset’s *tax cost setting amount; or

(b) if the asset’s tax cost is set because an entity becomes a *subsidiary member of a *consolidated group, and

Subdivision 230-C (fair value method), Subdivision 230-D (foreign exchange retranslation method) or

Subdivision 230-F (reliance on financial reports method) is to apply in relation to the asset--the asset’s *Division

230 starting value at the particular time.

This subsection operates to deem the head company to have acquired the relevant asset at the

joining time. It is clear that the deemed acquisition applies for the purposes of the head company’s

application of Division 230 to the asset.

The reference to ‘If Division 230 is to apply in relation to the asset’ is a reference to whether

Division 230 will apply to the asset when it is effectively acquired by the head company. This is a

reference to a future tense rather than the past tense (for example, ‘if Division 230 previously applied

…’ or ‘if Division 230 applied …’) or the present tense (that is, ‘if Division 230 applies’). On this basis,

it seems clear that Division 230 would apply to the asset if it were acquired after the implementation of

Division 230.

The ATO’s interpretation of subsection 701-55(5A) appears to be based on the application of the

entry history rule to the asset acquired. That is, in the ATO interpretation, the relevant question to ask

is whether, applying the entry history rule in section 701-5, Division 230 would apply to the asset

when considering the perspective of the head company.

Although the precise scope of the ATO interpretation is not entirely clear, the ATO may be asserting

that the opening words in subsection 701-55(5A) (the pre-condition) will be satisfied if, having regard

27 This would only be relevant where the joining entity was not subject to TOFA and the head company of the consolidated tax

group has not made the Division 230 un-grandfathering election. This position was also adopted in Private Binding Ruling

(PBR) Authorisation Number 1012412579052.



to the time that the joining entity acquired the financial asset, the asset would have been subject to

Division 230 if the head company of the acquiring group had acquired the asset on that date (having

regard to the application of Division 230 including any elections that the head company has made).

This seems to be a very obscure approach to the rules and is clearly unintended.

The opening words were intended to ask whether the asset will be subject to Division 230 from the

perspective of the head company (that is, for the reasons considered above, on a forward looking

basis). The effect of section 701-55(5A) is to deem the head company to have acquired the asset at

the joining time. The fact that there is a deemed acquisition and that the deemed acquisition occurs at

the joining time demonstrates that the entry history rule should not apply. Rather, the deemed

acquisition is intended to break the entry history rule by ensuring that the head company is deemed to

have acquired the asset at the joining time.

This construction is consistent with the explanatory memorandum to the Tax Laws Amendment

(Taxation of Financial Arrangements) Bill 2008 which introduced subsection 701-55(5A) as follows:28

…

12.7 Second, the head company will apply the consolidation rules and Division 230 (depending on whether it is

required or has elected to apply Division 230) as if the head company had directly acquired assets or assumed

liabilities that are, or form part of, financial arrangements from the joining entity. Certain amendments are

made to this proposition to reduce compliance costs specifically related to Division 230 interactions.

…

Treatment of head companies at the joining time

12.17 A head company which commences to hold an asset or liability that is a financial arrangement will apply

Division 230 as if the head company directly acquired the asset or liability. There are two implications of this:

– the tax cost of any asset that is a financial arrangement that the head company is taken to have acquired is

equal to the asset’s tax cost setting amount; and

– any election the head company has made in relation to its existing financial arrangements will apply to the

financial arrangements it has [been] taken to have acquired as a result of the joining entity becoming a

member of the consolidated group.

[our emphasis added]

These statements are clear, the head company is treated as if it had directly acquired the relevant

asset. In addition, no reference is made in the explanatory memorandum to the 2009 Amendments to

any requirement that in order for subsection 701-55(5A) to apply, the relevant asset must be a

financial arrangement that either was subject to TOFA in the joining entity’s hands before the joining

time or would have been subject to TOFA if the head company had acquired the asset at the time that

the joining entity acquired the asset. Rather, the extracts set out above demonstrate that the relevant

consideration is whether, following the deemed acquisition by the head company at the joining time,

the arrangement is subject to TOFA from the head company’s perspective.

28 This bill was enacted as Act No 15 of 2009 (2009 Amendments).



Assets – consequences under prospective RTFI rules

The implications of the ATO’s view that a non-TOFA asset of a joining entity cannot become subject

to Division 230 can be seen when one considers the position that a non-TOFA derivative meets the

definition of an RTFI asset. The non-TOFA derivative is treated as a retained cost base asset and is

likely to have an pre-consolidation tax cost of nil. Therefore, if the non-TOFA asset is later transferred

or settled, the proceeds from that event will be taxed.29

Questionable view – liabilities

The language in section 715-375 is different to that in subsection 701-55(5A). Section 715-375

provides the following:

(1) Subsection (2) applies if:

(a) an entity (the joining entity) becomes a *subsidiary member of a *consolidated group at a time (the joining

time); and

(b) a thing (the accounting liability) is, in accordance with *accounting standards, or statements of accounting

concepts made by the Australian Accounting Standards Board, a liability of the joining entity at the joining time

(disregarding subsection 701-1(1) (the single entity rule)) that can or must be recognised in the entity’s

statement of financial position; and

(c) the accounting liability is or is part of a *Division 230 financial arrangement of the head company at the joining

time (because of subsection 701-1(1) (the single entity rule)).

(2) For the purposes of Division 230 and Schedule 1 to the Tax Laws Amendment (Taxation of Financial

Arrangements) Act 2009, treat the *head company of the group as starting to have the accounting liability at the

joining time for receiving a payment equal to …

The ATO considers that although the language of section 715-375 is different, it should be interpreted

in the same way as subsection 701-55(5A).

This interpretation may be again based on analysing sub-paragraph (1)(c) from the perspective of the

head company of the acquiring group having regard to the entry history rule. So, assuming that the

head company of the acquiring group is subject to TOFA, the date of entering into/assuming the

financial liability by the joining entity becomes the crucial determining factor. In other words, the

relevant question is ‘would the liability have been subject to TOFA if the head company of the

acquiring group had entered into the relevant arrangement on the day that the joining entity entered

into the arrangement?’ This position is a very obscure approach to the rules and is clearly unintended.

However, this is consistent with the position set out in the edited version of PBR Authorisation

Number 1012412579052.

For the reasons considered above in relation to subsection 701-55(5A), this interpretation does not

reflect the position that subparagraph (1)(c) was intended to be analysed from the perspective of the

29 Based on the uncertainty referred to in 1.1.4 above regarding the business acquisition approach, whether this taxable gain

will be on revenue or capital account is unclear.



head company on a go-forward basis (that is, as if the head company assumed the liability at that

time).

Section 715-375 was amended by the 2012 Amendments to specifically ensure that the deemed

acquisition of a financial arrangement which is a liability is not limited to situations in which the

financial arrangement was subject to TOFA in the hands of the joining entity before the joining time

(the amendment was considered sufficiently important that it was made retrospective from the

introduction of subsection 715-375).

Prior to the 2012 Amendments, paragraph 715-375(1)(c) stated:

(c) the accounting liability is or is part of a *Division 230 financial arrangement.

This drafting was considered to be ambiguous as to whether it was necessary for the relevant liability

to be a Division 230 financial arrangement in the hands of the joining entity or the head company.

The explanatory material to the 2012 Amendments to paragraph 715-375(1)(c) explicitly

acknowledges the intention that the treatment of financial arrangements held by a joining entity at the

joining time be determined based on whether the financial arrangement will be subject to TOFA from

the head company’s perspective without regard to the application of Division 230 to the financial

arrangement from the perspective of the joining entity. Therefore, the ATO’s approach is very

surprising, especially given it is so obscure.

The explanatory memorandum to the 2012 Amendments state that:

2.25 Schedule 2 of the Bill amends paragraph 715-375(1)(c) so that, in order for subsection 715-375(2) to apply, the

liability assumed by the head company at the joining time must be, or be part of, a Division 230 financial arrangement

of the head company at the joining time - the joining entity's TOFA status being irrelevant.

…

2.29 Where the joining entity is not a TOFA entity (that is, an entity not applying Division 230 to its financial

arrangement liabilities) immediately before the joining time, paragraph 715-375(1)(c) is not satisfied if applied from the

joining entity's perspective. Consequently, subsection 715-375(2) would not apply to deem the head company as

having assumed the liabilities at the joining time. This is unintended.

2.30 The amendments clarify that, while paragraphs 715-375(1)(a) and (b) apply from the joining entity's

perspective, paragraph 715-375(1)(c) operates from the head company's perspective.

[our emphasis added]

Based on these statements and the amendments made to section 715-375, the current ATO view in

relation to section 715-375 is even more surprising than that in relation to subsection 701-55(5A).

Liabilities – consequences under the 2012 Amendments

The implications of the ATO’s view that a non-TOFA liabilities of a joining entity cannot become

subject to Division 230 under the current law would be that the head company would still obtain the

type of ‘double benefit’ in relation to the liability that the 2012 Amendments referred to in 1.2.1 below

were intended to prevent. Although, this double benefit will also be addressed when the 2013 Budget



announcements are legislated (refer to 2.1.1 below), there will be a period (from commencement of

Division 230 to 14 May 2013) where this perceived double benefit will continue to exist.

1.2 TOFA interactions

The 2012 Amendments changed the treatment of liabilities under the TOFA/consolidation interaction

provisions, which then had consequential impacts for an entity’s ACA.

1.2.1 TOFA liabilities

Essentially, for Division 230 purposes, a head company is now deemed under section 715-375 to

have received a payment equal to the accounting value of any TOFA liabilities of a joining entity at the

joining time. This treatment was previously only relevant to liabilities subject to the fair value, financial

reports and FX retranslation methods.30

In broad terms, the practical effect is to deny the head company a future deduction in respect of the

value of the liability at the joining time. This result is achieved by effectively ‘setting the cost’ of the

liability at its accounting value for all purposes within Division 230, including the balancing adjustment

provisions in Subdivision 230-G.31

The effect of the section 715-375 resetting is most easily seen through a simple example as follows.

Head Company acquires Target for $10. Target has cash of $10 and two swaps, one is $100 in-the-

money and the other is $100 out-of-the-money at the joining time.

Prior to the 2012 Amendments, Target’s ACA would be $80 calculated as follows:

Step $ $ Reference

Step 1 – cost base of membership interests 10 s705-65

Step 2

Accounting liabilities

Less adjustment for future deductible amount

Subtotal

100

(30)

70

s705-70(1)

s705-75(1)

Step 8 (ACA) 80

Prior to the 2012 Amendments, the reset tax cost of Target’s assets would have been $10 for the

cash and $70 for the in-the-money derivative. Then, if the derivatives were closed out immediately

30 The 2012 Amendments also change the language in section 715-375 to ensure that the ‘deemed payment received’

mechanism operates effectively. 31

The Head Company is deemed to have ‘received a payment’ equal to the accounting value of the liability at the joining time.



after the joining time for their market value, the Head Company would have a gain of $30 on the in-

the-money derivative and a loss of $100 on the out-of-the money derivative.

This outcome is obviously an extreme example. However, it was considered by the ATO and the

Board of Taxation (BoT) to be inappropriate.

The 2012 Amendments changed section 715-375 retrospectively from commencement of Division

230 so that Head Company will be deemed to have received $100 in return for assuming the

derivative liability at the joining time (this will be the case regardless of the TOFA method that will

apply to the derivative for Head Company). This mechanism effectively resets Head Company’s ‘tax

cost’ in the liability (at $100).

After the 2012 Amendments, no gain or loss will arise on the out-of-the money derivative if it is closed

out immediately after the joining time for its market value. However, no gain or loss will arise on the

in-the-money derivative either. This is because, the section 705-75(1) adjustment for ‘future

deductible liabilities’ will not apply. Therefore, Target’s ACA will be $110 and its reset tax cost of its in-

the-money derivative will be $100.

1.2.2 Retrospective law changes impacting the ACA

As outlined immediately above, the 2012 Amendments result in Target’s ACA being understated by

the denied deduction. Because the application of these changes was retrospective, Head Company

should go back and amend its ACA for Target because the TOFA liability no longer represents a

future deductible liability under subsection 705-75(1). In addition, where the error provisions in

Subdivision 705-E apply, Head Company should be able at least recognise a capital loss for the

understatement of Target’s ACA.32

Very surprisingly, whether Head Company is now able to amend its ACA and amend historic returns

(or apply Subdivision 705-E) in order to reflect the ‘lost’ 30% ACA as a result of the 2012

Amendments is a further issue which has been subject to a number of discussions between Treasury,

the ATO and Industry. In short, we understand although the ATO believes that taxpayers should be

entitled to re-adjust the outcomes to reflect the reduction made to the joining entity’s Step 2 amount,

the ATO considers that it is not possible to interpret the provisions to provide for this outcome. There

are good arguments that, under current law, taxpayers with the appropriate records should be able to

make the necessary historic adjustments. This is something to monitor.

32 Refer to Taxation Ruling 2007/7 where the ATO clearly outlined in paragraph 9 that a retrospective amendment to the law

was considered to be an error for the purposes of Subdivision 705-E.



2 What does the future hold?

According to the Treasurer’s and Assistant Treasurers 6 November 2013 Press Release,33

the current

Government will implement the announcements made by the former Government in the 2013 Federal

Budget regarding ‘closing the loopholes in the consolidation regime’.34

These proposed changes are

intended to take effect from the date of the announcements (14 May 2003) and are summarised

below.35

Also according to the 6 November 20013 Press Release, the current Government has a pre-

disposition to withdraw the former Government’s stated announced changes to the consolidation

regime. However, they will enter into an intense period of consultation with Industry to confirm each

announced change. We should know the fate of these announcements by 1 December 2013. There

long awaited amendments are summarised below.

2.1 2013 Budget announcements

Based on the 6 November 2013 Press Release, the following announcements by the former

Government in the 2013 Federal Budget are expected to be implemented by the current Government.

2.1.1 Deductible liabilities

The perceived double counting issue regarding TOFA liabilities referred to at 1.2.1 above is also

considered to arise for non-TOFA liabilities of a joining entity that result in future deductions for the

head company of a consolidated group.

Continuing the example in 1.2.1 above, if Target’s reset cost base asset was instead land and its

liability was a provision that will give rise to a deduction when the liability is settled, the current rules

will result in the same ACA as the example above as follows:

Step $ $ Reference

Step 1 – cost base of membership interests 10 s705-65

Step 2

Accounting liabilities

100

s705-70(1)

33 ‘Restoring Integrity in the Australian Tax System.’

34 The Press Release does not specifically address each announcement. It simply refers to ‘Protecting the corporate tax base

from erosion and loopholes — closing loopholes in the consolidation regime. Improves the integrity of the consolidation regime

and prevents entities claiming double deductions.’ For the purposes of this paper it is assumed this announcement will cover all

of the 2013 Federal Budget announcements regarding the tax consolidation regime. This will be able to be confirmed when the

relevant legislation is tabled in Parliament. 35

These announcements were contained in Attachment E of the Assistant Treasurer’s Press Release of 14 May 2013

‘Protecting the corporate tax base from erosion and loopholes – Measures and consultation arrangements.’



Less adjustment for future deductible amount

Total

(30)

70

s705-75(1)

Step 8 (ACA) 80

Under the current rules, the reset tax cost of Target’s assets would have been $10 for the cash and

$70 for the land. Then, if immediately after consolidation the land is sold for its market value of $100

and the liability is settled for its accounting value of $100, Head Company will have an assessable

gain of $30 on the land and a deduction of $100 on the liability.

The current outcome is considered to be a double counting of the liability.

The 2013 Federal Budget announcement provided that the former Government would implement

recommendation 2.1 of the BoT’s April 2013 report36

as follows:

The Board recommends that the income tax law be amended so that:

a) where an entity that has deductible liabilities is acquired by a consolidated group, the head company includes the

amount at step 2 of the entry tax cost setting rules for those deductible liabilities in assessable income at the following

times:

– where the deductible liability is a current liability for accounting purposes, the assessable income is brought

to account over the 12 month period following the joining time; and

– where the deductible liability is a non-current liability for accounting purposes, the assessable income is

brought to account over the 48 month period following the joining time;

b) integrity rules be considered where a subsidiary exits with group with a non-current liability, or a group is liquidated,

within the 48 month period; and

c) in the case of an entity that is acquired progressively, the assessable amount reflects the acquired component of

the deductible liabilities included at step 2 of the entry tax cost setting rules using a shortcut method to work out the

acquired component.

In the ‘key features’ of the Budget announcement, this proposed amendment was described as:

…the consolidation regime's treatment of certain deductible liabilities will be amended so that they are not taken into

account twice...

In the ‘detailed action’ of the Budget announcement, this proposed amendment was described as:

…

- consolidated groups that purchase entities with deductible liabilities will be deemed to have received or paid an

amount that equals the value of the joining entity's non-TOFA deductible liabilities that were taken into account

for tax cost setting purposes;

36 Post implementation review of certain aspects of the consolidation tax cost setting process – A Report to the Assistant

Treasurer, April 2013.



- the amount increases (to the extent the liability will give rise to a deduction) or decreases (to the extent the

liability will give rise to an assessable amount) the purchasing entity's assessable income over 12 months in

relation to current liabilities and over 48 months in relation to non-current liabilities.

Going back to the example, if the announced change to the law is implemented, then:

a. Target’s ACA will be $110 because there will no longer be a reduction to the step 2 amount of the

liability to reflect the future deduction;

b. the reset tax cost of Target’s assets will be $10 for the cash and $100 for the land;

c. if the land is sold immediately after the joining time for its market value, Head Company will not

have any gain or loss on the disposal;

d. when the liability is settled, Head Company will have a deductible loss of $100; and

e. assuming the liability is a non-current liability for accounting purposes, Head Company will have

assessable income in respect of the liability of $100 over 12 months from the joining time.

This ‘double counting’ is the same issue outlined for TOFA liabilities at 1.2.1 above. It is just that the

mechanism for dealing with the perceived double counting is to recognise an assessable income

adjustment (the case for non-TOFA liabilities) rather than deny a deduction (the case for TOFA

liabilities). The alternative has been applied for non-TOFA liabilities to reduce compliance difficulties

in tracking when deductible liabilities that existed at the joining time are settled.

This ‘fix’ however, does not work for situations where, when the liability was recognised, an amount

was included in assessable income. This situation arises in the retirement living industry, who are

discussing with Treasury a potential carve out.

2.1.2 Intra group TOFA liabilities on exit

The 2013 Federal Budget announcement provided that the former Government would implement a

further consolidation/TOFA interaction measure that was not previously addressed by any of the BoT

papers.


‘…the tax treatment of intra-group liabilities and assets between a continuing member of a consolidated group and a

departing member of the consolidated group, which become subject to the taxation of financial arrangements (TOFA

regime upon exit, will be amended to ensure that only net gains and losses are recognised for tax purposes.

For example this will prevent a lender from being assessed on a return of the principal of a loan and prevent a

borrower from claiming a deduction for repayment of that principal.’


…



- the entity that holds the liability will be deemed to have received, as consideration for assuming that liability, a

financial benefit equal to the liability’s market value at the leaving time, so that any deduction obtained under the

TOFA regime will reflect the entity’s economic loss (if any); and

- ensure that the entity that holds such an asset takes into account the asset’s market value tax cost setting

amount in working out the TOFA gain or loss from the asset, so that the entity is assessed on their economic

gain (if any).

This proposed amendment is best described by an example.

Consider an existing consolidated group that consists of a Head Company with one direct subsidiary

member (Subsidiary 1) and one indirect subsidiary member (Subsidiary 2) where Subsidiary 1 has

loaned $1,000 to Subsidiary 2.

Under the single entity rule in section 701-1, the loan between Subsidiary 1 and Subsidiary 2 would

be ignored and would not have a tax cost.

If a purchaser were to acquire Subsidiary 2, and Subsidiary 2’s loan payable to Subsidiary 1 became

recognised as a TOFA liability of Subsidiary 2, it may be arguable that any repayment of the principal

on the liability would be deductible under Division 230. This is quite an aggressive approach to the

rules. This approach may have been relying on the ATO’s approach to intra-group liabilities in

Taxation Determination (TD) 2004/33.

The proposed amendment will apply to treat the ‘cost’ of the liability for Subsidiary 2 for Division 230

purposes as the market value of the liability at the time Subsidiary 2 leaves the original consolidated

tax group. Under this proposed amendment, if Subsidiary 2 repays the market value of its loan liability

to Subsidiary 1 immediately after it leaves the original consolidated tax group Subsidiary 2 will not

have any Division 230 deductible loss.

If Purchaser and Subsidiary 2 form a consolidated group, this proposed outcome would already arise

because the consolidation rules already effectively set a ‘tax cost’ for TOFA liabilities in section

715-375 as discussed in 1.2.1 above.

There are other problems around the approach the ATO has taken for intra-group assets and

liabilities.37

A separate recommendation by the BoT was made to deal with intra-group assets and

liabilities more generally. This separate recommendation by the BoT received ‘in principle agreement’

by the former Government but is subject to further consideration.38

The proposed amendment for

TOFA arrangements amendment just covers a specific consolidation/TOFA interaction issue.

37 See for example, TD 2004/34 and TD 2004/35 where the ATO approach assesses taxpayers on transfers of inter-group

assets (at market value with no cost base). Then consider TD 2004/33 where the transfer of an intra-group liability is effectively

ignored by the ATO. 38

Refer to the Assistant Treasurer’s Media Release No 68 of 14 May 2013 ‘The Board of Taxation’s review of the consolidation

regime’. We do not know what will happen with these BoT recommendations under the new Government.



2.1.3 Intra-group value shifts

The 2013 Federal budget announcement provided that the Government would implement

recommendation 4.2 of the BoT’s June 2012 report39

as follows:

The Board recommends that integrity rules should be designed to address any double benefit which arises when an

encumbered asset, whose market value has been reduced due to the intra-group creation of rights over the encumbered

asset, is sold by a consolidated group, whether directly or indirectly.


…consolidated groups will no longer be able to access double deductions by shifting the value of assets between

entities…

In the ‘detailed action’ of the announcement, this proposed amendment was described as:

…the tax cost setting rules will be amended so that an asset that has been created by transferring the value of an

existing asset to a subsidiary is given a cost base that reflects the notional cost of creating the asset, rather than the

market value of the newly created asset.

Again, this proposed amendment is best described by an example.

Consider a consolidated group that consists of a Head Company and two direct subsidiary members

(Subsidiary 1 and Subsidiary 2). Subsidiary 2 has land with a cost of $100 and a market value of $200.

Subsidiary 2 grants Subsidiary 1 a favourable lease over the asset which has a market value of $100.

As a result, the value of Subsidiary 2 is reduced by $100 to $100.

Under the current rules, if Subsidiary 2 were disposed of for its market value of $100, Head Company

would not have any gain. This is because value has been shifted to Subsidiary 2. If instead of

disposing of Subsidiary 2, the land were disposed of, the same outcome would arise.

These outcomes are considered to give rise to a double benefit because:

a. if Subsidiary 2 is disposed of, sections 701-20 and 701-60 will operate to give Subsidiary 1 a

market value cost base for the favourable lease asset; or

b. if the land is disposed of directly, the market value substitution rule in section 112-25 may operate

to give the consolidated group a market value cost base for the favourable lease asset.

According to the announcement, this potential double benefit will be addressed by Subsidiary 1’s

favourable lease asset receiving a cost base that reflects the notional cost of creating the asset,

rather than a market value cost base.

2.1.4 ‘Churning’ restructures

The 2013 Federal Budget announcement provided that the Government would implement

recommendation 5.6 of the BoT’s June 2012 report as follows:

39 ‘Post implementation review into certain aspects of the consolidation regime’, A report to the Assistant Treasurer, June 2012.



The Board recommends that where the membership interests in an entity that are transferred to a consolidated group

are not regarded as taxable Australian property under the non-resident CGT rules, the consolidation tax cost setting

rules should only apply to the transferred membership interests if:

- there has been change in the underlying majority beneficial ownership of the membership interests in the entity;

or

- there has not been a change in the underlying majority beneficial ownership of the membership interests in the

entity, but the membership interests in the entity were recently acquired by the foreign entity (or the foreign

group);

- membership interests in an entity will be recently acquired if they have been majority owned by the foreign entity

(or the foreign group) for less than 12 months.


…non-residents will no longer be able to 'churn' assets between consolidated groups to allow the same ultimate

owner to claim double deductions…


…

- when membership interests in an entity that are transferred to a consolidated group or a MEC group are not

regarded as taxable Australian property under the non-resident CGT rules, the consolidation tax cost setting

rules will only apply when:

- there has been a change in the underlying majority beneficial ownership of the membership interests in

the entity; or

- the membership interests in the entity were recently (less than 12 months) acquired by the foreign

entity (or group).

Again, this proposed amendment is best described by an example.

Consider a Foreign parent that has an investment in an Australian company (Aust Co) and an

investment in a Multiple Entry Consolidated (MEC) group or a consolidated group. Aust Co is not ‘land

rich’ under the requirements of Division 855 and its assets have a tax cost of $100 and a market value

of $1,000.

If Aust Co disposes of its assets to a third party purchaser, Aust Co will have a taxable gain of $900.

If Foreign Parent sells its shares in Aust Co to the MEC or consolidated group for their market value

of $1,000, Foreign Parent will not be subject to capital gains tax on the transaction. In addition,

because Aust Co will join the MEC or consolidated group, the tax cost of Aust Co’s asset will be reset

to its market value of $1,000. Then, if Aust Co disposes of its assets to a third party purchaser, Aust

Co will not have a taxable gain.

This transaction has clearly created a benefit for the group. Although, one would expect the operation

of the general anti-avoidance rule in Part IVA should apply to prevent such an outcome.



According to the announced amendment, this potential benefit will be addressed by preventing the tax

cost setting rules from applying to Aust Co’s assets. The tax cost setting rules will only apply where

there has been a change in the underlying ownership of the entity or where the entity was acquired by

the foreign parent less than 12 months earlier.

2.1.5 MEC groups - tri-partite review

The operation of Multiple Entry Consolidated (MEC) groups was originally a compliance saving

measure during the transitional implementation period for the consolidation regime. The rules were

introduced to avoid international groups from having to incur costs associated with changing their

corporate structure to fit within Australia’s consolidation regime.

The MEC rules (including the MEC cost base pooling rules in subdivision 719-K and many other

specific rules) were carefully drafted to enable the consolidation regime to operate for these groups.

Imply by their nature, they could not have applied the same rules as a ‘normal’ consolidated group.

There continues to be significant uncertainty, some significant disadvantages and just inadvertent

oversights in the law for MEC groups. For example:

a. it is still unclear whether the TCASA of all of the assets of a subsidiary member of a MEC group

are reset when the membership interests in the entity are transferred from a foreign parent to

another member of the MEC group;40

b. simply incorporating a new eligible tier-1 entity in a MEC group causes all of the group losses of

the MEC group to become available fraction losses;41

c. CGT event J1 was modified to appropriately interact with consolidated groups but the

amendment failed to include MEC groups.42

Inconsistences between MEC groups and consolidated groups (necessary because of their inherent

nature) are now considered to be giving too much flexibility to MEC groups and therefore an unfair tax

advantage over consolidated groups.

Therefore, the 2013 Federal Budget announcement provided that the former Government would

implement a tri-partite review of the MEC rules.43

At the same time, the former Government released

an Issues Paper that outlined the review process, terms of reference and an overview of the key

issues to be considered.

The three examples from Issues paper are reproduced below:44

40 This is a ‘transfer down’ of the ‘eligible tier’1 entity’. Refer to the ATO’s non-binding discussion paper issued at the National

Tax Liaison Group Consolidation Subcommittee meeting on 23 November 2006. 41

Refer to subsection 719-300(2). 42

Section 104-182 only deals with consolidated groups and does not refer to MEC groups. This was just an oversight and one

that the Government previously announced it would rectify. Refer to the Labour Government’s June 2010 discussion paper

‘Improvements to the calculation and Collection of Income Tax Liabilities’. 43

Refer to Attachment E, Assistant Treasurer’s Press Release 14 May 2013. 44

‘Removing the tax advantages available to multiple entry consolidated groups’, Issues Paper, May 2013, pages 4 to 6.



Example: MEC group restructuring asset sale to avoid CGT

Example: MEC group avoiding CGT by retaining the cost base of a joining entity’s asset



Example: MEC groups minimising CGT liability by using the pooling rules

The issues in the examples appear to be problems that should be dealt with under the general anti-

avoidance rules in Part IVA, especially the first example, which is a similar example to the ‘mischief’

addressed by the proposed integrity rule outlined in 2.1.4 above.

Based on the issues paper, we were supposed to see a discussion paper in July 2013 and

submissions were due on this discussion paper in October 2013. None of this consultation occurred.

In addition, it is unclear from the 6 November 2013 Press Release whether the MEC tri-partite review

was included in the announcement of consolidation amendments that the current Government will

proceed with. We will have to wait and see what happens through this process. Until such time, MEC

groups will have even more uncertainty to deal with.

The Budget announcement stated that the amendments ‘to equalise the treatment of MEC groups

and ordinary consolidated groups’ would apply from 1 July 2014 unless the announcement let to

inappropriate behaviours’ then they would apply from the date of the announcement.

2.2 Other outstanding announcements

According to the 6 November 2013 Press Release, the current Government has a pre-disposition to

withdraw the following changes proposed to the consolidation regime by the former Government but

will enter into an intense period of consultation with Industry to confirm each previously announced

change.



2.2.1 200% diminishing value uplift

As outlined in 1.1 above, when the tax cost of depreciating assets is set, subsection 701-55(2)

provides that the asset is treated as having been acquired at the joining time for a payment equal to

its TSCA.

For depreciating assets that an entity starts to hold on or after 9 May 2006, subsection 40-72(1)

provides a 200% diminishing value uplift for determining the decline in value of the asset (under the

diminishing value method).

To prevent consolidated group’s from accessing this concession, the former Government announced

on 8 May 2007 that with effect from that date, in applying this 200% diminishing value uplift, a head

company of a consolidated group (or MEC group) would be taken to have acquired the asset at the

time the asset was originally acquired by the joining entity.45

As a result, from 8 May 2007,

consolidated groups or MEC groups are not supposed to be able to access this concessional

depreciation rate.

Disappointingly, if taxpayers conservatively lodged their income tax returns on the basis of the

proposed amendment and if this proposed amendment is withdrawn by the current Government,

those taxpayers may be prevented under section 170 from amending their assessment for some

years. This is not a good outcome for taxpayers attempting to do the ‘right thing’! Perhaps this issue

will be addressed, given that the 6 November 2013 Press Release refers to ‘legislative protection’ and

refunds for taxpayers where the changes do not proceed and for taxpayers that self-assessed in

accordance with the announced changes.

2.2.2 CGT event L5 exemption for demergers

There is currently an anomaly in the law as the capital gains tax demerger relief in Division 125 does

not extend to CGT event L5 which applies when leaving entity has a negative exit ACA under Division

711 when it ceases to be a member of a consolidated group. In addition, the demerged group is

required to reset the tax cost of all assets of its subsidiary member. This is an onerous exercise and

can result in ACA skewing away from trading stock and depreciating assets and toward capital gains

tax assets like goodwill. This outcome seems inappropriate given that demergers do not involve any

change in the underlying ownership of the demerged group.

The former Government announced in November 2010 that these issues demerger/consolidation

interaction issues would be rectified as follows:46

‘The Government will extend the demerger relief provisions so that, when entities with net liabilities demerge from a

consolidated group and immediately form a new consolidated group, capital gains that arise for the old group are

disregarded and the new group retains the tax costs of its assets, with effect from the date of announcement.’

This announcement was followed by a Media release and Treasury discussion paper.47

These

subsequent documents clarified that the amendment would allow taxpayers to retain existing tax costs

45 Media Release No 50 of 8 May 2007.

46 Mid-Year Economic and Fiscal Outlook, 2010-11, released 9 November 2010.

47 Media Release No 21 of 7 December 2010. Treasury discussion paper ‘Consolidated groups that undertake demergers’.



on a demerger, regardless of whether there was a potential CGT event L5 capital gain for the group.

However, these subsequent documents did not clarify whether the amendment would include a

choice by taxpayers as to whether they would reset the tax costs of assets in the demerged group or

not.

2.2.3 TSA amendments

In May 2010 some amendments to the ‘Pay as You Go’ rules and tax sharing agreements were

announced for consolidated groups and MEC groups (with various dates of effect depending on the

relevant amendment.48

This announcement was supposed to be followed by a consultation. Again,

we will have to wait and see how the current Government decides to deal with this announced change.

48 Media Release No 91 of 10 May 2010.



3 Other future possibilities – BoT recommendations

It will be interesting to see where all of the BoT’s hard work and recommendations will end up. The

6 November 2013 Press Release did not mention the BoT reviews of the regime or the

recommendations from the reviews.

The BoT undertook two reviews of the regime, as follows.

First review – ‘certain aspects of the regime’

3/6/09 9/12/09 13/10/10 26/6/12 14/5/13

Review announced

Discussion Paper

Position Paper

Final Report (but not released

until 14/5/13)

Report and Government

Response released

Second review – ‘certain aspects of the tax cost setting process

May 2011 25/11/11 11/9/12 October 2012 26/4/13 11/9/12

RTFI report: Recommend-

ation to review liabilities and capping TCSA

Review announced

Discussion Paper Consultation Final Report (but not

released until 14/5/13)

Report and Government

Response released



The following table summarises the BoT review outcomes and recommendations.

October 2010 Position Final Report Recommendation

Former Government Response

49

Asset acquisition approach Business acquisition approach, with entry history rule exceptions

Agreed in principle (recommendation 3.1)

Intra-group assets tax cost recognised Ending/creation model, with special rules for debt interests


Assets with corresponding intra-group liabilities not otherwise recognised – s711-40 should apply

Same Agreed in principle (recommendation 4.1)

Integrity rule for assets encumbered within a group Same Adopted (recommendation 4.2) (addressed above)

Various rules regarding trusts and beneficiaries joining and leaving groups

Broadly similar Agreed in principle (recommendations 5.1 - 5.4)

Foreign hybrids be subsidiary members of groups Unclear Agreed in principle (recommendation 5.5)

All group assets be taken into account for Div 855 Where membership interests are not TAP of vendor, the tax cost setting rules only apply to the joining entity if:

• change in underlying majority beneficial ownership; or

• no change, but entity acquired

Adopted (recommendation 5.6)

Div 855 assets should not have their tax cost reset As above As above

SMEs be given access to formation stick/ spread choice and 3-year loss concession

Same To be considered

(recommendation 6.1)

All consolidatable groups have access for a limited time Same To be considered (recommendation 6.1)

Deferred Tax Liabilities

• Board recommends DTLs be removed from the tax cost setting process

• Inclusion or removal – neither gives the “correct” result; removal in joining situations likely to increase DTLs recognised in head companies

• Trade-off between “correct” result and compliance savings

Same Agreed in Principle (recommendation 3.1)

Adjustments to Liabilities in ACA calculations

• S705-70(1A): Likely to only apply to DTLs, so if DTLs removed, then this adjustment should also be removed

• S705-80: Board recommends it be removed for full acquisition cases. Given DTAs no longer assets for tax cost setting purposes, need for s705-80 may be removed

Same Agreed in Principle (recommendations 4.1 and 4.2)

Assets and Liabilities recognised on different bases

• Given TCSA applies to only CGT assets, increased chance of accounting liabilities with no corresponding tax asset

• Board recommends, to extent no asset recognised, accounting liability should not be recognised; − complex example of when rule may apply: assigned

loans − example suggests not just when no CGT asset, but

also where CGT asset has no (or little) market value • Complementary rule proposed for CGT asset where related

liability not recognised for accounting – to be included in

Same Agreed in Principle

(recommendation 5.1)

49 Refer Media Release No 68 of 14 May 2013 ‘The Board of Taxation’s Review of the Consolidation Regime’.



October 2010 Position Final Report Recommendation

Former Government Response

49

ACA calculation − example is trading stock purchased on consignment

Capping the tax cost-setting amount of assets

Extending existing revenue asset cap (i.e. TCSA limited to > of market value and existing tax cost), to all assets

No discussion of when/ how this arises

Options for excess ACA are goodwill CB or L4/ L8 capital loss – goodwill may be preferred?

Should there be a floor for some assets – e.g. trading stock?

No change be made, but 2012 rules re goodwill TCSAs be monitored

Agreed (recommendation 6.1)

CGT interactions – Rollovers

Rollovers: issues with profits in Step 3, tax cost for shares used in rollover provisions, skewing of tax cost, and ‘old group’ break-up

Board recommends the following for restructures: recognising profits as accrued, using 124-G tax cost rule for shares, no ‘old group’ break-up, and tax cost of assets not be reset (unless 124-M rollover)

Question: why limit no ‘old group’ break-up rule to restructures?

No ‘old group’ break up for restructures


CGT interactions – CGT event J1

• To be considered at a stakeholder workshop

• No changes to MEC pooling rules

• Rectify duplication of capital gains and capital losses where non-ET1 entity leaves MEC group

• Monitor situations where head companies owned by non-residents leave a group

• Noted (recommendation 7.3)

• Agreed in principle (recommendation 7.4)

• Agreed (recommendation 7.5)



4 Concluding comments

Where are we at? We are still in a bit of a mess. Uncertainty, waiting for further clarity on many issues,

waiting for outcomes from further consultation on announced but unlegislated amendments that the

current Government has a pre-disposition not to pursue… Many problems identified by the ATO,

Industry and the BoT, what will happen to these?

* * * * *

Documents

Tax consolidations where are we at? - · PDF fileTax consolidations – where are we at? Written by: Narelle McBride ... a RTFI asset is a retained cost base assets with a TCSA equal