- Entities in a consolidate group can lodge one combined consolidated account
- We must understand if we have a consolidated group – Tax group that can be consolidated must comprise an Australian resident head company.
- It must have at least one whole owned (100%) resident subsidiary
- Head company – must be an Australian resident; Tax consolidation
- Residency – every company is Australian residents
- FBT – a single rule doesn’t apply to FBT
- Taxable income – all income from the group perspectives; intra-group assets or transactions need to be eliminated.
- Tax-losses and bad debt deduction – the consolidated group needs to satisfy the continuity of the ownership or the same business test
- Profits – only external transactions will have an impact
- Franking account – the head company maintains a franking account; any franking debits or credits that occur for a subsidiary member are taken to have occurred for the head company.
- PAYG installments – for the entire group;
First rule – the single entity rule; the subsidiaries are treated as parts or divisions of the company rather than separate entities.
Intra-group transactions will be eliminated
Consequence of tax consolidation – a head company prepares and lodges a single company income-tax return for the consolidated group.
Tax liability – the commissioner of tax is entitled to receive any outstanding income, tax debts from everyone in the group. Usually a valid tax sharing agreement provides the allocation of the tax liability on default and sets up appropriate amount that each body is liable to pay.
Entry History rule – the history of the subsidiary will be the history of the head company; History will be inherited (Income; deductions; assets and liabilities; pre-CGT assets; tax rulings)
Allocate the entire assets and liabilities into a consolidated company
3 Step methodology
Stage 1 – Calculate the ACA joining entity
Stage 2 – Classify each of the assets as the retained cost-based asset or reset cost-based asset
Stage 3 – Allocate the ACA amounts to those underlying assets
Stage 1– ACA value is worked out under S705-60 (8 Steps process) [Most questions will provide this ACA amount to you]
Stage 2– We need to classify the asset of the joining entity
retained cost base asset (anything that has a monetary value) – an asset where the amount is going to be denominated as a currency format or a right to currencies; Therefore, the tax cost of the retained cost based asset is generally set equal to the joining entity’s tax cost. (e.g. Australian currency ; debts; right to future income; )
Reset cost based asset (asset can not be defined in monetary terms) – Have the value reset from the value they had in the hands of the joining entity. (e.g. trading stock; WIP; CGT assets; depreciating assets and etc)
e.g. Aussie sport (head company) acquires shares in Hockey Sticks(subsidiary).
Step 1 – Calculate the ACA
1. We paid 1.75 million for Hockey Sticks ;
2. liabilities of 150,000.
6. Any utilized losses – None
7. Any inherited deductions – 30% of acquired deductions ; sticks has $50,000 in undeducted borrowing costs ($50,000 * 30% = 15,000)
8. ACA = $1.75 million + $150,0000 – $15,000 = $1,885,000
Stage 2 – We need to allocate this $1,885,000 to retained and reset cost base asset
Cash – Retained
Plant(written – down value) – Reset/depreciating asset
Trading stock – Reset/trading stock
Buildings – Reset/non-revenue
Goodwill – Reset/non-revenue
Step 3 – Allocate the ACA to each asset of Hockey Sticks
The initial amount allocated to the reset cost based asset generally could be capped to ensure any amount is consistent with its market value
e.g. Aussie airline decides to consolidate for tax purposes and finds that the allocation to the ACA results in the reset cost asset at $35 million. However, this exceeds the terminating value of the plane, which is $20 million and the market value $30 million.
In this case, the cap will be $30 million. The excess $5 million will be allocated to the remaining assets.
Once the tax cost is allocated, then that becomes the cost base for the head company
Some CGT events related to ACA
CGT event L3 – Retained cost base assets retain their cost base under the allocation
process. If the total ACA is less than the tax cost setting amount of allthe retained cost base assets, the excess is treated as a capital gain. e.g., if the ACA is $100 and the retained cost base balanceis $200, this will result in an ACA allocated to the asset of $200 and a capital gain of $100 (s. 104-510)
Tax loss transfer and utilization rules
3 Step process
Step 1 – can the loss be transferred? (joining entity pass a modified continuity of the ownership test (COT) / a modified same business test (SBT))
Step 2 – can transferred losses be used? (pass the COT or SBT test)
Step 3 – calculate the tax loss that can be used
The available fraction – calculated for each bundle of losses; Multiple each bundle by the available fraction to understand the amount of loss that can actually be used in the year.
e.g. Headco is the head company of the consolidated group. They have two bundles of transferred losses.
• Bundle 1: $4,500 net capital loss, with an available fraction of 0.940.
• Bundle 2: $20,000 tax loss, with an available fraction of 0.060.
During the year, Headco taxable income include a net capital gain of $4500, and an ordinary income of $17,000.
1st think for bundle 1, how much of that can be utilized ?
Net capital gain can be reduced by a net capital loss & the available fraction of the income tax loss. So in this case, all of it can be reduced.
Bundle 1 : $4500 * 0.94 = $4230
Bundle 2: $4500 * 0.06 = $270
2st – ordinary income
Capital loss cannot be used to reduce capital income . So for the ordinary income of $17,000, the available fraction can be attached is 0.060.
Bundle 1: Not applicable
Bundle 2: $17,000*0.060 = $1020
Final taxable income = ($17,000 – $1,020) + (4500 – 4230 – 270) = $15,980
Balance of transferred losses
Bundle 1 = $4500 – $4230 = $270
Bundle 2 = $20,000 – $270 – $1020 = $18,710
Franking credit transfer rules
When a subsidiary joins a consolidated group and its franking account is in surplus, the balance transferred to the head company, setting the subsidiary member’s franking account balance to zero.
If it’s in deficit, the subsidiary becomes liable for franking deficit tax with a corresponding credit in the franking account, setting its franking account balance to zero.
Franking account for a subsidiary must always be zero.
Existing a consolidated group
Step 1 – calculate the exit ACA of the leaving company (5 step process)
Step 2 – allocate the exist ACA of the leaving company to the membership interest held by the head company