The Budget will improve the integrity of the corporate tax system by addressing a number of key issues relating to consolidated groups that were identified by the Board of Taxation in June 2012 and April 2013.
In particular, the law will be amended to ensure that:
- Consolidated groups will no longer be able to access double deductions by shifting the value of assets between entities ie “value shifting between subsidiaries” (recommendation 4.2 of the June 2012 report). In particular, 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 base of creating the asset, rather than the market value of the newly created asset.
- Foreign residents will no longer be able to “churn” assets between consolidated groups to allow the same ultimate owner to claim double deductions (recommendation 5.6 of the June 2012 report). In particular, 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 CGT rules, the consolidation tax cost setting rules will only apply when (i) there has been a change in the underlying majority beneficial ownership of the membership interests in the entity, or (ii) the membership interests in the entity were recently (less than 12 months) acquired by the foreign entity or group.
- The consolidation’s treatment of certain deductible liabilities are not taken into account twice (recommendation 2.1 of the April 2013 report). In this regard, (i) 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, and (ii) 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.
In addition, the tax treatment of intra-group liabilities and assets between a continuing member of a consolidated group and a departing member of a consolidated group which becomes subject to the 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 the return of a principal of a loan and prevent a borrower from claiming a deduction for the repayment of the principal. The Government will consult on the development of the legislation.
The Government will also address concerns raised by the Board of Taxation about inconsistencies in the tax treatment for multiple entry consolidated (MEC) groups used by multinationals and ordinary consolidated groups. The Government will ensure that MEC groups cannot access tax benefits not available to domestic consolidated groups. A tripartite review chaired by the Treasury and involving the Australian Taxation Office and the private sector will consider how best to implement the measure.
Date of effect – These amendments implementing these Board of Taxation recommendations will apply to transactions that take place after that announcement. The amendments to equalise the tax treatment of MEC groups and ordinary consolidated group will apply from 1 July 2014.
Other integrity measures – To protect the integrity of the corporate tax system, the Assistant Treasurer has also announced that the Government reserves the right to take earlier legislative action (including with effect from 14 May 2014), if it becomes aware of any aggressive tax minimisation practices over the course of the tripartite review. Moreover, the Government will consider any evidence of aggressive tax practices to include, but not be limited to, a significant number of:
- foreign-owned ordinary consolidated groups transitioning to MEC group structures;
- MEC groups flattening their structures (eg by incorporating new tier-1 companies or by lifting low level subsidiaries up to the tier-1 level); and
- foreign-owned ordinary consolidated groups transferring subsidiaries to MEC groups with the same ultimate owner.
To preserve how taxpayers have complied with the current law, taxpayers will be prevented from changing their previous tax positions to take advantage of the deficiency in the law. This is because the Commissioner will not have the power to alter the treatment of affected amounts in assessments made before the announcement.
New Board Reports and Government responses
In the Budget, the Government announced that it had released 2 Board of Taxation Reports on Budget day [14 May 2013], which are available on the Board’s website.
The Government also released its response to recommendations contained in those reports, which included the following:
- give formal recognition to the primacy of the business acquisition approach in relation to the treatment of assets transferred to a consolidated group, retain the “entry history rule” (but as an exception to the business acquisition approach), but without changes per se to the operation of the consolidation rules and the current treatment of assets or liabilities – ;the Government agreed in principle, but subject to legislative priorities
- the “ending/creation” model be applied to ensure that the tax costs of intra-group assets (apart from membership interests) acquired or disposed of by consolidated groups, whether directly or indirectly, are appropriately recognised (subject to some exceptions) – the Government agreed in principle, but subject to legislative priorities and fiscal constraints;
- the 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 the rights over the asset, is sold by a consolidated group – the Government agreed to this recommendation;
- the effect of the single entity rule should be extended to a transaction between a consolidated group and a shareholder of the head company, a liquidator appointed to a member of the group or a third party that is an associate of the group – the Government agreed in principle, but subject to legislative priorities and fiscal constraints;
- issues relating to the determination of a trust’s net income that is assessed to each beneficiary and/or trustee when the trust is a member of the consolidated group for part of an income be considered as part of the rewrite of the trust income tax provisions – the Government agreed with this recommendation;
- … [there were many more points, which I’ve deleted as beyond the scope of this paper…]
The Government also agreed to evaluate the state of the consolidation regime within 5 years of any implementation of the recommendations to assess their affect and to continue to consult with business community over any issues.
Source: Budget Paper No 2 [pp 33-34 ]; Assistant Treasurer’s press release, 14 May 2014
[WTB 20, 14/5/13]