Taxation Determination

TD 2005/3

Income tax: consolidation: will a choice to consolidate under Part 3-90 of the Income Tax Assessment Act 1997 affect the method of income recognition of the consolidated group?

• Please note that the PDF version is the authorised version of this ruling.

FOI status:

may be released

Preamble

1. No. In most cases a choice to consolidate under Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997) will have no effect on the appropriate basis of income recognition of the consolidated group for income tax purposes.

Explanation

2. The choice of a method of income recognition directly affects the process of working out the amount of income tax liability or losses and so falls within the core purposes in subsections 701-1(2) and (3) of the ITAA 1997. The single entity rule therefore applies for the purpose of making the choice.

3. Under the single entity rule, the head company of a consolidated group is the only entity in the consolidated group for income tax purposes. The subsidiary members are taken to be parts of the head company for these purposes.

4. The head company of a consolidated group may conduct a range of business activities. Like any other taxpayer, the head company must apply the method of income recognition for each business activity that gives a 'substantially correct reflex of the taxpayer's true income' (CT (S.A.) v. Executor Trustee and Agency Co of South Australia Limited (1938) 63 CLR 108); see Taxation Ruling TR 98/1.

5. In most cases, the mere fact of consolidation will not affect the choice of the method of income recognition for business activities carried on by a consolidated group, because the business activities carried out within the group will remain the same even though the effect of the single entity rule is that the members of the group are considered to be one entity for income tax purposes.

6. In practice, it is expected that when the head company evaluates the business activities after consolidation, the same accrual accounting method will apply as before consolidation.

7. In a limited number of cases, the effect of the single entity rule may be to alter the evaluation of the business activities to the extent that the method of income recognition may need to change, for example, where the effect of the single entity rule in disregarding intra-group dealings requires that such a change is made.

Example

8. A Co Pty Ltd (A Co) owns 100% of B Co Pty Ltd (B Co).

9. A Co's sole activity is the sub leasing of premises to B Co and A Co's rental income is not business income. Under TR 98/1 the rental income is assessable when received or applied at A Co's direction. B Co uses the premises to produce its trading income which is assessable under TR 98/1 on an earnings basis.

10. When the group consolidates, under the single entity rule the sub leasing of premises to B Co is disregarded for income tax purposes. The head company, A Co, is taken to conduct the trading business of B Co and must now return its income on an earnings basis.

Date of effect

11. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
16 March 2005

Previously issued as Draft TD 2004/D81

References

ATO references:
NO 2004/10557

Related Rulings/Determinations:

TR 92/20
TR 98/1

Subject References:
accounting methods
income
single entity rule
Consolidation

Legislative References:
TAA 1953 Pt IVAAA
ITAA 1997 Pt 3-90
ITAA 1997 701-1(2)
ITAA 1997 701-1(3)

Case References:
CT (S.A.) v. Executor Trustee and Agency Co of South Australia Limited
(1938) 63 CLR 108