House of Representatives

Explanatory Memorandum

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

Chapter 13 Removal of grouping provisions

Outline of chapter

13.1 This chapter discusses the amendments to the existing grouping provisions of the ITAA 1997 and the ITAA 1936 applicable to wholly-owned groups. The modification or removal of these grouping provisions is consequent upon the introduction of a consolidation regime for wholly-owned groups.

Context of reform

13.2 As part of the introduction of the consolidation regime, A Tax System Redesigned recommended that all existing grouping provisions of the ITAA 1936 and the ITAA 1997 be repealed. The current provisions in effect treat - for some limited purposes - wholly-owned groups as if they were consolidated by allowing tax concessions within wholly-owned groups. The intention of the measures contained in this bill is to allow wholly-owned groups to elect to be taxed in one of 2 ways - as a single consolidated taxpaying entity or on an individual entity basis for each member of the group. The existing hybrid and less than comprehensive arrangements as represented by the grouping provisions will be replaced by the consolidation regime. Groups who choose not to consolidate will be governed by loss integrity and anti-value shifting measures in relation to intra-group transactions.

13.3 In accordance with this policy intent, the removal of the various grouping provisions was to correspond with the general introduction of the consolidation regime. In order to accommodate the position of some small and medium sized businesses, the removal of these grouping rules will be delayed for 12 months to ensure that these groups will not be disadvantaged while they are preparing to make the election to enter consolidation. Groups who are nevertheless ready to consolidate from 1 July 2002 may do so.

13.4 Further, the fixed termination date for grouping will be modified in the case of some groups with SAPs to avoid imposing significant additional compliance costs on those SAP groups.

Summary of new law

13.5 Broadly, the existing grouping provisions will be phased out commensurate with the transition to a consolidation regime. In the case of loss transfers and capital gains tax rollover relief concessions applicable to wholly-owned groups, concessions will be limited to certain loss transfers or CGT events. Accordingly in those cases, the existing provisions will be replaced by new rules.

13.6 The termination date for the current grouping provisions for consolidated groups will depend on whether:

•

a choice is made to consolidate in the first year of consolidation (i.e. that commencing on 1 July 2002), or in the second year (generally, that commencing on 1 July 2003);

•

the head company of a consolidated group chooses to consolidate on the first day of its income year commencing on or after 1 July 2003; and whether

•

a group chooses to consolidate at all.

13.7 The measures contained in this bill deal with the removal and phasing out of:

•

the loss transfer provisions currently applying to wholly-owned groups (although loss transfers will be retained for Australian branches of foreign banks in some cases); and

•

CGT asset rollovers for wholly-owned groups.

13.8 Subsequent legislation on grouping will deal with:

•

the intercorporate dividend rebate under sections 46 and 46A of the ITAA 1936;

•

transfers of excess foreign tax credits within wholly-owned groups;

•

grouping rules contained in the Thin Capitalisation legislation that applies to a taxpayers first income year commencing on or after 1 July 2001; and

•

the rate of loss utilisation permitted in the retained loss transfers for Australian branches of foreign banks.

Detailed explanation of new law

General

13.9 The consolidation provisions will come into effect on 1 July 2002. The current grouping provisions will, in general, continue to apply until 1 July 2003 in conjunction with the new consolidation regime for a period of 12 months. Nevertheless, the grouping provisions will cease if the date of consolidation occurs before 1 July 2003. Special provisions relating to SAP groups that consolidate are discussed in paragraph 13.12.

Grouping provisions as referred to in this discussion are:

•

loss transfer provisions in Divisions 170-A to 170-C of the ITAA 1997; and

•

CGT rollover for asset transfers between companies in the same wholly-owned group in Division 126-B of the ITAA 1997.

Extension of grouping in parallel with consolidation

13.10 Although the grouping provisions will continue to operate until 1 July 2003 where a wholly-owned group does not make a choice to consolidate in that period, a choice to consolidate in the first year has the effect that grouping benefits cease for the entity concerned in that first year. Accordingly, the parallel period allows groups to consider whether they will consolidate but without being penalised by losing concessions. If however, a group decides to consolidate in the first year, access to grouping ceases in that first year.

13.11 In particular, where a choice to consolidate is made in the first year of consolidation and which occurs during the parallel period up until 1 July 2003, grouping concessions will cease for all members of the group as of the date of consolidation.

Example 13.1

The head company of Group A is an ordinary balancer and chooses to consolidate on 1 September 2002. Grouping entitlements cease on the date of consolidation for all members of that group.

Example 13.2

The head company of Group B has a SAP of 1 April 2002 to 31 March 2003. The group consolidates on 1 December 2002. Grouping entitlements cease on the date of consolidation for all members of that group as this date falls before 1 July 2003.

Extension of grouping for SAPs

13.12 Wholly-owned SAP groups that wish to consolidate in the year after the parallel period may be faced with high additional compliance costs by the fixed start date of 1 July 2003 in comparison with ordinary balancing groups. To reduce these potential compliance costs, which would otherwise be incurred because of the truncation of a SAP, certain SAP taxpayers will be permitted to use the existing grouping provisions (in their current form) beyond 1 July 2003 (depending on whether a choice is made in the first year of consolidation). This extended access will be permitted where certain conditions are complied with in relation to each particular provision.

13.13 These conditions are designed to ensure that groups have extended, but not unlimited access to the existing grouping benefits. In particular, those companies which have already been a member of a consolidated group will cease to have access to grouping provisions after an initial entry into the consolidation regime.

13.14 The general and specific conditions in each provision apply both to consolidated groups and MEC groups. Except where otherwise stated, a reference to a consolidated group should also be taken to refer to a MEC group.

13.15 Extended access to the concessions allowed under these grouping provisions until the date of consolidation applies to any company within a consolidated or MEC group.

Example 13.3

Head Co has a SAP of 1 April to 31 March. It avails itself of the parallel grouping period and chooses to consolidate on 1 July 2003. Grouping ceases for all members of this group on 1 July 2003.

Example 13.4

Head Co has a SAP of 1 April to 31 March. It consolidates on 1 September 2003. Grouping also ceases for all members of this group on 1 July 2003.

Example 13.5

Head Co, with the same SAP as Examples 13.3 and 13.4, consolidates on 1 April 2004. Grouping ceases for all members of the group on 31 March 2004, as Head Co has complied with the conditions for extension of grouping beyond 1 July 2003 and has consolidated on the first day of its next income year commencing after 30 June 2003.

13.16 Tables 13.1 and 13.2 summarise termination dates for the current grouping provisions.

Specific provisions

Loss transfers

Retention of loss transfers for foreign banks

13.17 Broadly, company groups that do not choose to consolidate may not transfer losses.

13.18 However, as an exception, loss transfers will be retained for transfers involving an Australian branch of a foreign bank (as defined under Part IIIB of the ITAA 1936) where the resident wholly-owned subsidiaries of the foreign bank form a consolidated group or a MEC group (should they be eligible to do so). [Schedule 3, item 27, subsection 170-5(2A), item 28, subsection 170-30(3), item 31, subsection 170-105(2A) and item 32, subsection 170-130(3)]

13.19 Where the foreign banks resident 100% subsidiaries are not eligible to be members of a consolidated group, Division 170 will continue to operate as it does now in respect of loss transfers between an Australian branch of the foreign bank and the subsidiaries. [Schedule 3, item 28, subsection 170-30(4), item 3 in the table, item 32, subsection 170-130(4), item 3 in the table]

13.20 Division 170 will generally also operate as it does now for losses made after consolidation by an Australian branch of a foreign bank or by a head company of a consolidated group or a MEC group where the branch and the head company are members of the same wholly-owned group. [Schedule 3, item 28, subsection 170-30(4) items 1 and 2 in the table, item 32, subsection 170-130(4), items 1 and 2 in the table]

13.21 Modifications to Division 170 will be required for the transfer of losses made by a foreign bank branch after the formation of a MEC group if an additional tier-1 company joins the MEC group after the loss is made but before it is transferred. Modifications will also be required to impose limits on the transfer of certain pre-consolidation losses between the Australian branch of the foreign bank and the head company of a consolidated group or a MEC group. These modifications are necessary in order to ensure that the ability for foreign banks to transfer losses is not extended beyond what is available under the current law. These modifications are to be included in a later bill.

Extended access to existing loss transfer rules

13.22 Generally, the loss transfer provisions in their current form will cease to apply according to the guidelines discussed in paragraphs 13.10 to 13.15. The loss transfer provisions are:

•

Subdivision 170-A of the ITAA 1997 (transfer of tax losses within a wholly-owned group);

•

Subdivision 170-B (transfer of net capital losses within a wholly-owned group); and

•

Subdivision 170-C (provisions which apply to transfers under Subdivisions 170-A and 170-B).

13.23 Nevertheless, members of wholly-owned SAP groups will retain access to the loss transfer provisions in their current form - up to the date of consolidation and after the parallel period - if the following basic conditions are satisfied:

•

the company must become a member of a consolidated group on the day that the group comes into existence;

•

the head company of the group must make an election to consolidate on the first day of its next income year commencing after 30 June 2003;

•

the date of consolidation must be before 1 July 2004; and

•

the company must not have been a member of a consolidated group before the date of consolidation.

[Schedule 3, items 37 and 38]

13.24 In general, apportionment of a loss or of an income year based on 1 July 2003 will occur in some scenarios (such as those where a group does not consolidate, or where a group does not consolidate on the first day of its income year). Essentially, the loss itself or the income year for which it is sought to be transferred will be apportioned. This will occur on the basis of:

•

the portion of the loss year which occurs before the consolidation date; and

•

the portion of the income companys income year which occurs before the consolidation date.

[Schedule 3, item 39]

Example 13.6

The head company of Group A is an ordinary balancer and chooses to consolidate on 1 September 2002. The apportioning date for this group is 1 September 2002.

Example 13.7

The head company of Group B has a SAP of 1 April 2002 to 31 March 2003. The group consolidates on 1 December 2002. The apportioning date for this group is 1 December 2002.

Example 13.8

Head Co has a SAP of 1 April to 31 March. It avails itself of the parallel grouping period and chooses to consolidate on 1 July 2003. The apportioning date for this group is 1 July 2003.

CGT asset rollover

Retention of CGT rollover for certain asset transfers

13.25 Broadly, CGT rollover relief for asset transfers within wholly-owned groups will cease with the introduction of consolidation. Nevertheless, as recommended in A Tax System Redesigned , CGT asset rollover relief will be retained for wholly-owned groups where assets are transferred between:

•

non-resident companies; or

•

a non-resident company and the head company of a consolidated group.

[Schedule 3, item 21, subsection 126-50(5), items 1 and 2 in the table, item 22, subsection 126-50(6)]

13.26 Rollover relief will also be retained where an asset is transferred between a non-resident and a resident company that is not a member of a consolidatable group. [Schedule 3, item 21, subsection 126-50(5) and item 22, subsection 126-50(6)]

13.27 Additional restrictions apply to the circumstances in which rollover relief will be available. If the originating company in the transaction is a foreign resident, and the asset has already been rolled over to that foreign resident by an Australian resident under a previous application of new Subdivision 126-B, subsequent rollover under new Subdivision 126-B is not permitted. This restriction is necessary to prevent the removal of CGT rollover relief in relation to resident companies from being undermined. If however, the asset is merely re-transferred by the foreign resident back to the Australian resident company, rollover relief will be available for the subsequent re-transfer of the asset to the Australian resident. [Schedule 3, item 22, subsections 126-50(7) and (8)]

13.28 Rollover relief is however allowed where an asset is transferred from the head company of a MEC group to its foreign resident parent, then transferred subsequently back to the head company of the same MEC group, but not to the same head company. Where there has been a change in the head company of the MEC group since the time of the first transfer to the foreign resident parent, rollover relief will therefore be permitted under the new provisions. [Schedule 3, item 22, subsection 126-50(9)]

J1 events and the break-up of a consolidated group

13.29 A consequential amendment has been made to the circumstances in which a J1 event occurs under section 104-175 of the ITAA 1997. If the recipient company following a rollover under new Subdivision 126-B ceases to be a subsidiary member of a consolidated group at the break-up time, CGT event J1 does not occur. This is because the cost base provided to the group for its membership interests in the leaving entity under Division 711 of new Part 3-90 is the same as would have been provided if the group had disposed of the assets of the leaving entity directly. [Schedule 3, item 18, section 104-182 and item 19]

Extended access to existing CGT rollover

13.30 CGT asset rollover relief currently available under Subdivision 126-B of the ITAA 1997 will cease to apply to transfers of assets between resident companies in a wholly-owned group according to the guidelines discussed in paragraphs 13.10 to 13.15. [Schedule 3, item 23]

13.31 Nevertheless, members of wholly-owned SAP groups will retain access to the CGT rollover relief provisions in their current form - up to the date of consolidation and after the parallel period - if the following basic conditions are satisfied:

•

the originating company involved in the CGT trigger event must become a member of a consolidated group on the day that the group comes into existence;

•

the head company of the group must make a choice to consolidate on the first day of its next income year commencing after 30 June 2003;

•

the date of consolidation must be before 1 July 2004; and

•

the company seeking entitlement to the grouping concession must not have been a member of a consolidated group before the date of consolidation.

[Schedule 3, item 23]

Example 13.9

Head Co has a SAP of 1 April to 31 March. It consolidates on 1 September 2003. Rollover relief is not available to the members of this group in relation to a CGT trigger event occurring after 30 June 2003.

Example 13.10

Head Co, with the same SAP as Example 13.9, consolidates on 1 April 2004. Rollover relief ceases to apply to members of this group in relation to a CGT trigger event after 31 March 2004, as the Head Co has complied with the conditions for extension of grouping beyond 1 July 2003 and has consolidated on the first day of its next income year commencing after 30 June 2003.

Application and transitional provisions

13.32 In general, these amendments remove the grouping provisions in the existing law for wholly-owned groups from any date of consolidation before 1 July 2003. For certain wholly-owned groups with SAPs which consolidate after 1 July 2003, the grouping provisions in the existing law will instead cease to apply from the start of a groups first SAP income year commencing after 1 July 2003. For SAP groups that do not consolidate, or consolidate on any other date, grouping provisions will cease on 1 July 2003.

Consequential amendments

13.33 Amendments consequential to the removal or modification of the various grouping provisions will be included in later legislation.