House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

General outline and financial impact

Consolidated groups

The consolidation measure represents a significant change to the taxation of corporate groups. Due to its magnitude, the measure will be enacted progressively via a series of bills. Schedule 1 to this bill contains most of the key elements of the measure. Broadly, the rules contained in this bill will:

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allow wholly-owned groups of entities to make a choice to consolidate and therefore be treated as a single entity for the purposes of determining income tax liability;

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determine the membership of a consolidated group, including the membership of certain groups with a single non-resident head company;

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determine the cost (for income tax liability purposes) of assets, including membership interests, in relation to consolidated groups;

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allow, in certain circumstances, pre-consolidation losses to be transferred to the head company of a consolidated group, and prescribe how those losses may subsequently be used by the head company;

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allow the transfer of franking credits to a consolidated group;

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determine PAYG instalments for consolidated groups;

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determine tax liability for income tax payments within a consolidated group where a head company fails to pay on time; and

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remove certain existing grouping provisions, including those allowing transfer of losses and CGT roll-over relief for the transfer of assets between wholly-owned company groups.

Date of effect: Wholly-owned entity groups will be allowed to choose to consolidate under this scheme from 1 July 2002. The existing grouping provisions will continue to operate in parallel with the consolidation regime until 1 July 2003, subject to special rules applying to consolidated groups with a head company with a SAP. In general, such SAP groups will retain access to grouping provisions until the date of consolidation, provided that the head company chooses to consolidate from the first day of their next income year commencing after 1 July 2003.

Proposal announced: The proposals were announced in Treasurers Press Release No. 58 of 21 September 1999.

Financial impact: The consolidation measure is expected to cost approximately a billion dollars over the forward estimate period. This cost largely relates to the transitional concessions and the expectation that groups will be able to use their losses faster than is allowed under the current law.

Compliance cost impact: The measures in this bill are expected to reduce ongoing compliance costs by ensuring that:

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intra-group transactions are ignored for taxation purposes, so that taxation and accounting treatment are more closely aligned;

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administrative requirements, such as multiple tax returns and multiple franking account, losses, foreign tax credit, and PAYG obligations, are reduced; and

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integrity measures aimed at preventing loss duplication, value shifting or the avoidance or deferral of capital gains within groups do not apply within a consolidated group.

The consolidation regime will necessitate some initial up-front costs for groups as they familiarise themselves with the new law, update software and notify the ATO of a choice to consolidate. Large corporate groups may incur greater start-up costs in determining the market values of group assets. These costs will be alleviated by a transitional measure under which the group can elect (prior to 1 July 2003) to bring assets into the group at their existing cost bases. Groups that form after the transitional period may use the market value guidelines developed by the ATO to minimise compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact: Medium to high.

Main points:

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The consolidation measure will implement a system which treats wholly-owned groups as a single entity for income tax purposes.

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Consolidation will address efficiency and integrity problems in the existing taxation of wholly-owned groups, including compliance and general tax costs, double taxation, tax avoidance through intra-group dealings, loss cascading and value shifting.

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The regime will assist in the simplification of the tax system, resulting in both reduced taxpayer compliance costs and ATO administration costs, improve the efficiency of business restructuring and strengthen the integrity of the income tax system.

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Wholly-owned groups that do not consolidate will no longer have access to grouping rules, which currently provide some of the benefits intended to be replaced by consolidation.