Foreign investment funds guide

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Chapter 10: Consolidation (consolidated income tax treatment for groups of entities)

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 Australian resident group entities must become members of that consolidated group.

Once a group has consolidated the choice becomes irrevocable and the consolidated group is treated as a single entity for income tax purposes.

If 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 (MEC) group rules will apply to the wholly owned resident companies and their wholly owned resident subsidiary entities.

The following losses and tax attributes can generally be brought into a consolidated group (or MEC group) when the group forms or a subsidiary member joins the group which is used by the group's head company:

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

Note: This chapter provides a summary of the provisions on the application of income attributed from FIFs and included in the assessable income of a head company of a consolidated group. Detailed information on the operation of consolidation is in the Consolidation reference manual , which provides information on the operation of consolidation, including its practical effects for business. The manual and legislation are available on our website.

If you have tax technical queries, phone the Business Infoline on 13   24   78 or email us at consolidation@ato.gov.au

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 MEC group) in its assessable income.

Once consolidated only the head company can use foreign tax credits to reduce its Australian tax liabilities to avoid double taxation.

The head company can claim a 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 those 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 1   July 2002 to 30   June 2004 to allow such groups ('transitional groups') to use a joining entity's excess foreign tax credits in the joining year, provided certain conditions are met.

Where an entity pays tax on foreign income, while it is a member of a consolidated group (or MEC 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.

When an entity leaves a consolidated group (or MEC group) it cannot take with it any excess foreign tax credits and it will only include foreign income in its assessable income for the period it is not a member of any consolidated group.

The date of effect of consolidation and the related provisions regarding excess foreign tax credits is 1   July 2002. These provisions are in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 .

FIF attribution account surpluses and FIF attributed tax account surpluses

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

The pre-consolidation surplus balances of the FIF attribution accounts and FIF attributed tax accounts of subsidiary members of the group are transferred to the head company (or MEC group), at formation or when a subsidiary member joins the consolidated group (or MEC group). This ensures that distributions from FIFs are not taxed to the head company where the joining entity has already been subject to FIF taxation.

Once the account balances have been transferred to the head company of a consolidated group (or MEC group) the FIF attribution accounts and FIF attributed tax accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group (or MEC group).

When an entity with an interest in a FIF leaves a group, a proportion of the head company's FIF attribution account and FIF attributed tax account surpluses that the head company has in relation to the interests in the FIF that leaves the group with the leaving entity are transferred to the leaving entity.

The date of effect of consolidation and the related provisions regarding FIF attribution accounts and FIF attributed tax accounts is 1   July 2002. These provisions are in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 .

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 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 a 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.

In the same way, 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 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.

ATO references:
NO NAT 2130