Foreign income return form guide 2007

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Chapter 5: 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 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 (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 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.

Note: This chapter simply provides a summary of the provisions that relate to the application of income attributed from controlled foreign companies (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 (NAT 6835) - see also More information below.

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, 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 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 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 MEC 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 MEC 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 MEC 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 a 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.

Elections

Where entities become subsidiary members of a consolidated group and where members leave a group subdivisions 715-J and 715-K of the ITAA 1997 deal with elections made in relation to Part X (the CFC measures) of the ITAA 1936.

Subdivision 715-J ensures that the entry history rule does not adversely affect the head company's ability to make elections in relation to its interests in CFCs. Similarly, subdivision 715-K ensures the exit history rule does not adversely affect the leaving entity's ability to make elections in relation to its interests in CFCs that it takes with it on exit.

More information

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 the Business Infoline on 13 28 66.

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

ATO references:
NO NAT 1840