Foreign income return form guide 2008

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Chapter 5: Consolidation (consolidated income tax treatment for groups of entities)

Note: This chapter simply provides a summary of the provisions that relate to the application of income attributed from CFCs and included in the assessable income of a head company of a consolidated group. Detailed information on the operation of consolidation is contained in the Consolidation reference manual - see also ' More information ' below.

Overview

For income tax purposes, consolidation is optional. However, if the head company of a wholly owned resident group decides to consolidate, all its wholly owned eligible Australian resident group entities must become members of that consolidated group.

The choice to consolidate is irrevocable. Once a group has consolidated it is treated as a single entity for income tax purposes.

Where a foreign company, either directly or through its wholly owned foreign group, has multiple entry points of investment into Australia through Australian resident companies, special multiple entry consolidated group rules apply to enable eligible wholly-owned resident companies and their eligible wholly-owned resident subsidiary entities to consolidate.

The following losses and tax attributes can generally be brought into a consolidated, or multiple entry consolidated group, and used by the group's head company:

• losses (including foreign losses)
• franking credits
• excess foreign tax credits
• attribution account surpluses, and
• attribution tax account surpluses.

Excess foreign tax credits

The consolidation regime through the single entity rule ensures that only the head company of a consolidated group includes the foreign income of the consolidated group or multiple entry consolidated group in its assessable income.

Once consolidated, the head company can use foreign tax credits to reduce its Australian tax liabilities to avoid double taxation. The head company can claim foreign tax credit against Australian tax payable on this income - using its own foreign tax credits, foreign tax credits of subsidiaries and excess foreign tax credits transferred into the group from joining entities.

Generally, the head company can only use the transferred excess credits at the end of the income year after the year the entity joined the group, unless the member joins the group at the start of the head company's income year.

However, transitional rules apply to groups that consolidated within the transitional period of 1   July 2002 to 30   June 2004, to allow groups to use a joining entity's excess foreign tax credits in the joining year, provided certain conditions are met.

Where an entity pays foreign tax on foreign income while it is a member of a consolidated group, the head company will be assessed on the foreign income and will be taken to have paid and been personally liable for the foreign tax paid by the subsidiary member.

Where an entity leaves a consolidated group or multiple entry consolidated group, it cannot take any excess foreign tax credits with it and it is only required to include foreign income in its assessable income for the period it is not a member of any consolidated group.

The provisions relating to consolidation and excess foreign tax credits became effective on 1   July 2002.

Attribution account surpluses and attributed tax account surpluses

Under consolidation, only the head company can operate attribution accounts and attributed tax accounts for the purposes of the CFC measures.

Subsidiary members transfer the pre-consolidation balances of their attribution accounts and attributed tax accounts to the head company, on formation or when the entity joins the consolidated group or multiple entry consolidated group, to facilitate its use of any pre-consolidation surpluses during consolidation.

Once the account balances have been transferred to the head company of a consolidated group, the attribution and attributed tax accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group or multiple entry consolidated group. However, the attribution and attributed tax account surpluses are transferred to the head company so that, to the extent that income had previously been attributed to the member entity, subsequent distributions of income from an attribution entity - for example, a CFC, that had previously been attributed to the member entity - are not assessed to the head company.

When an entity with an interest in a CFC leaves a group, a proportion of the attribution and attributed tax account surpluses that the head company has in relation to the interests in the CFC that leave the group with the leaving company will be transferred to the leaving entity.

Choices

Section 715-660 of the ITAA 1997 overrides the entry history rule in section 701-5 of the ITAA 1997 to permit the head company of a consolidated group or multiple entry consolidated group to remake certain normally irrevocable choices made by entities before they became subsidiary members of the group. These choices include all irrevocable declarations, elections, choices or selections provided for in Part XI of the ITAA 1936 and the election to value all items of trading stock that are interests in an FIF at market value (rather than cost) under section 70-70 of the ITAA 1997. Any such choice (or the absence of it) by a joining entity is ignored for the purposes of the head company's income tax affairs. The head company may make the choice, if it is eligible.

Similarly, section 715-700 of the ITAA 1997 overrides the exit history rule in section 701-40 of the ITAA 1997 to permit an entity leaving a consolidated group or multiple entry consolidated group to remake similar choices made by the head company after the entity became a subsidiary member of the group. The head company's choice (or absence of it) is ignored for the purposes of the leaving entity's income tax affairs for income years ending after the leaving time. The leaving entity may make the choice, if it is eligible.

More information on consolidation

Note that the information concerning foreign tax credits and foreign losses in this guide only applies to the year ending 30 June 2008. New rules apply from that date. For more information about the new rules, refer to Changes to foreign loss quarantining and foreign tax credit calculation rules - Update September 2007 - Fact sheet .

The Consolidation reference manual provides detailed information on the operation of consolidation, including its practical impacts for business. It is available on the Tax Office website.

If you have any queries, phone 13   28   66 .

You can email any enquiries to consolidation@ato.gov.au

More information

For more information or help in understanding your foreign income tax obligations phone:

13   28   61	- for personal tax enquiries
13   28   66	- for business tax enquiries

Or visit:

• www.ato.gov.au for easy access to a range of business and personal tax information, services and transactions with government.
• The website contains information on the location of tax offices around Australia.

	If you do not speak English well, and want to talk to a tax officer, phone the Translating and Interpreting Service on 13   14   50 for help with your call.
	If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13   36   77 .
	If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300   555   727 .

ATO references:
NO NAT 1840