House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Consolidated groups

The consolidation measure, which represents a significant change to the taxation of corporate groups, is being enacted progressively via a series of bills. The key elements to the measure were introduced in the May Consolidation Act and the June Consolidation Bill. The amendments contained in schedules 1 to 18 to the New Business Tax System (Consolidation and Other Measures) (No. 1) Bill 2002, which build on the legislative platform already in place, will:

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modify the core rules to apportion, where necessary, income and deductions between a head company and a subsidiary member that is only in the consolidated group for part of an income year;

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modify the membership rules to ensure that, in limited circumstances, a consolidated group will not cease to exist when the head company is replaced by a new head company. Similar amendments are also being introduced to cater for the replacement of one head company of a MEC group by another;

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modify the general cost setting rules to:

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cater for situations where a consolidated group joins an existing consolidated group, multiple entities which are linked through membership interests join an existing consolidated group and where trusts join or leave a consolidated group;

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implement the measures to address revenue risks which were foreshadowed by Government on introduction of the June Consolidation Bill;

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ensure they apply in an appropriate manner to MEC groups;

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apply cost setting rules to membership interests in eligible tier-1 companies of a MEC group that are held outside of the group;

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modify the loss transfer provisions that will continue to exist outside the consolidation regime for a transfer of tax losses or net capital losses involving an Australian branch of a foreign bank so that:

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transfers can continue where the other party to the transfer becomes a member of a consolidated group after the loss that is sought to be transferred was incurred;

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the amount that can be transferred from a branch to a consolidated group approximates the amount that could have been transferred to members of the group had consolidation not occurred;

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complete the removal of the current grouping rules for wholly-owned groups in relation to foreign tax credits, thin capitalisation, the inter-corporate dividend rebate and capital gains and losses;

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ensure the thin capitalisation and foreign tax credit regimes will continue to operate as intended; and

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make a number of technical and consequential amendments and refinements to the May Consolidation Act and the June Consolidation Bill to address issues raised through consultation. By way of example, these amendments will:

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rectify technical deficiencies in the consolidation loss rules;

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ensure the existing R & D deductions interact properly with the consolidation provisions and preserve the policies behind both regimes to the greatest extent possible.

Date of effect: The consolidation measure will allow wholly-owned entity groups to choose to consolidate under this regime from 1 July 2002. The existing grouping provisions will continue to operate in parallel with the consolidation regime until 1 July 2003, subject to special rules applying to consolidated groups with a head company that has a SAP. In general, such SAP groups will retain access to grouping provisions until the date of consolidation, provided that the head company chooses to consolidate from the first day of their next income year, commencing after 1 July 2003.

Proposal announced: The proposals were announced in the Treasurers Press Release No. 58 of 21 September 1999. The consolidation elements in this bill were foreshadowed in Minister for Revenue and Assistant Treasurers Press Release No. C72/02 of 27 June 2002.

Financial impact: The consolidation measure is expected to cost approximately $1 billion over the forward estimate period as follows:

Further explanation of this impact was provided in the explanatory memorandum to the May Consolidation Act which received Royal Assent on 22 August 2002.

Compliance cost impact: The amendments in this bill are integral to the consolidation measure which is expected to reduce ongoing compliance costs to corporate groups by ensuring that:

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intra-group transactions are ignored for taxation purposes, so that taxation and accounting treatments are more closely aligned;

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administrative requirements, such as multiple tax returns and multiple franking account, losses, foreign tax credit and PAYG obligations are reduced; and

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integrity measures aimed at preventing loss duplication, value shifting or the avoidance or deferral of capital gains within groups do not apply within a consolidated group.

The impacts were fully explained in Chapter 14 of the explanatory memorandum to the May Consolidation Act.

The consolidation regime will necessitate some initial up-front costs for groups as they familiarise themselves with the new law, update software and notify the ATO of a choice to consolidate. Large corporate groups may incur greater start-up costs in determining the market values of group assets. These costs will be alleviated by a transitional measure under which the group can elect, if they form a consolidated group prior to 1 July 2004, to bring assets into the group at their existing cost bases. Groups that form after the transitional period may use the market value guidelines developed by the ATO to minimise compliance costs.

Imputation rules - transitional and other amendments

Schedules 16 to 18 to the New Business Tax System (Consolidation and Other Measures) (No. 1) Bill 2002 contain amendments relating to the new simplified imputation system that commenced on 1 July 2002.

The amendments in Schedule 16 will amend the ITAA 1936 to remove the inter-corporate dividend rebate under sections 46 and 46A for:

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franked dividends paid after 30 June 2002. The rebate has been replaced by the imputation offset; and

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unfranked dividends paid within wholly-owned company groups after 30 June 2003, as a consequence of the introduction of the consolidation regime.

The amendments in Schedule 17 will amend the ITAA 1997 to:

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broaden the exemptions from the benchmark rule, which requires that all dividends paid by a company in a certain period (a franking period) be franked to the same extent; and

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replicate provisions in former Part IIIAA of the ITAA 1936 relating to distributions on non-share equity interests.

The amendments in Schedule 18 will amend the IT(TP) Act 1997 to provide transitional rules relating to:

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franking periods for early and late balancing companies;

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the conversion of franking accounts on a tax paid basis for early balancing companies; and

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the determination of FDT liability for late balancing companies.

The New Business Tax System (Franking Deficit Tax) Amendment Bill 2002 will make consequential amendments to the New Business Tax System (Franking Deficit Tax) Act 2002 . These amendments are required because of the transitional amendments to be made to the IT(TP) Act 1997 concerning the determination of FDT liability for late balancing companies.

Date of effect: These amendments will generally apply to dividends paid on or after 1 July 2002. However, the removal of the rebate under sections 46 and 46A for unfranked dividends paid within wholly-owned company groups will generally apply to dividends paid on or after 1 July 2003. If the date of consolidation occurs before 1 July 2003, the removal of the rebate will apply to dividends paid on or after the date of consolidation. For groups with SAPs, the removal of the rebate will apply to dividends paid after the date of consolidation if the date of consolidation is after 30 June 2003 and before 1 July 2004.

Proposal announced: These amendments are mostly consequential to the new simplified imputation regime that came into effect on 1 July 2002. The removal of the rebate under sections 46 and 46A for unfranked dividends paid within wholly-owned company groups is a consequence of the introduction of the consolidation regime. These measures were announced as part of the Governments business tax reform measures.

Financial impact: None.

Compliance cost impact: Negligible.