House of Representatives

Explanatory Memorandum

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

Chapter 5 - Regulation impact statement - Consolidation

Policy objective

Background

5.1 The consolidation measures in this bill supplements those contained in the Consolidation Bill introduced on 16 May 2002. Further consolidation legislation is scheduled for introduction later this year.

5.2 An overview of the consolidation regime was contained in Chapter 1 of the explanatory memorandum to the above bill. The regulation impact statement in Chapter 14 of the explanatory memorandum to that bill discussed the policy objectives, implementation options and an assessment of the impacts of the consolidation regime both in its initial transition phase and as a mature system.

5.3 This bill is part of the legislative program implementing the New Business Tax System. Other bills have already been introduced and passed.

5.4 Consolidation is expected to address both efficiency and integrity problems existing in the taxation of wholly-owned entity groups, many of which arise from this inconsistent treatment. These include:

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compliance and general tax costs;

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double taxation where gains are taxed when realised and then taxed again on the disposal of equity;

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tax avoidance through intra-group dealings;

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loss cascading by the creation of multiple tax losses from the one economic loss; and

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value shifting to create artificial losses where there is no actual economic loss.

The objectives of the consolidation measure in this bill

5.5 The object of the consolidation regime is to improve efficiency and reduce compliance costs by providing a business environment in which some highly complex business structures are no longer seen as necessary.

5.6 The objectives of the consolidation measure in this bill are to:

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modify the existing cost setting rules to accommodate the formation of a consolidated group under the asset-based model discussed in A Platform for Consultation and recommended in A Tax System Redesigned ;

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reduce compliance costs by having special rules that apply where consolidated groups form within the transitional period (1 July 2002 to 30 June 2004) to provide an election to retain the existing tax costs of assets on formation; and

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implement the single entity principle for international tax aspects and avoid double taxation, by providing that only the head company operate an attribution account and utilise foreign tax credits on behalf of the consolidated group.

Implementation options and assessment of impacts

5.7 Implementation options and impacts of both transitioning to and being part of the consolidation regime were fully explored in the regulation impact statement referred to in paragraph 5.2. In particular, reference was made to the earlier material from A Platform for Consultation and A Tax System Redesigned which has been the subject of extensive consultation.

5.8 Paragraphs 5.9 to 5.15 discuss some of the implementation and assessment issues associated with the consolidation measure being introduced in this bill.

5.9 The formation cost setting provisions in this bill reflect the modifications required to the cost setting rules for the basic case of a single entity joining an existing consolidated group. The modifications take into account that there may be more than one entity becoming a subsidiary member.

5.10 The transitional cost setting provisions being introduced in this bill are expected to reduce compliance costs by removing the need for consolidated groups to re-value assets as required under the ongoing tax cost setting rules.

5.11 The implications of treating groups as a single entity for international taxation were discussed in A Platform for Consultation on pages 552 to 564. This bill contains the rules for attribution accounts and foreign tax credits within the consolidation regime.

5.12 The single entity principle under the consolidation regime is expected to result in reduced compliance and record keeping costs. The head company will have a single attribution account for the group rather than each member of the group having to keep these account records. Further, under the amendments in this bill, foreign tax credits for the consolidated group will be pooled.

5.13 The single entity rule will mean only the head company includes foreign income in its assessable income. As a result, only the head company will need to calculate credits for foreign tax to reduce its Australian tax liabilities. The foreign tax credit amendments in this bill will ensure the head company will be able to use credits for foreign tax paid by subsidiary members to reduce the head companys Australian tax liabilities.

5.14 An additional feature will be that the provisions will also allow existing excess foreign tax credits of entities that become subsidiary members of a consolidated group to be available to the head company of the group.

5.15 Similarly, existing balances in attribution accounts maintained by companies that become subsidiary members will be transferred to the head company, to avoid double Australian taxation. This is fairer than cancelling these balances and easier to comply with than requiring each member to maintain the accounts.

Consultation

5.16 The consultation process leading up to the introduction of the Consolidation Bill on 16 May 2002 was described in the regulation impact statement accompanying that bill. That process commenced with the release of the Governments tax reform document: Tax Reform: not a new tax, a new tax system in August 1998and concluded with the release of the several documents about business tax reform, in particular, A Platform for Consultation and A Tax System Redesigned canvassed options, discussed issues and sought public input.

5.17 The development of the consolidation measure in this bill has continued within the framework of consultation established for business tax reform whereby draft legislation has been exposed to a focus group of external users during its development. Issues raised during the consultation process have, as far as possible, been taken into account in the development of the consolidation measure in this bill.

Conclusion

5.18 The consolidation regime is expected to support a more efficient, innovative and internationally competitive Australian business sector, to reduce compliance costs and to establish a simpler and more structurally sound business tax system.

5.19 The consolidation measure contained in this bill, which cover cost setting transitional and formation rules as well as international aspects in respect of attribution accounts and foreign tax credits, will contribute to that outcome.