Senate

Revised Explanatory Memorandum

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

Chapter 2 - Attribution and attributed tax accounts

Outline of chapter

2.1 This chapter explains the rules for dealing with attribution accounts and attributed tax accounts maintained for the purposes of the CFC and FIF measures, for entities that form, join or leave a consolidated group.

2.2 This chapter also explains the rules for calculating the appropriate amount of FIF income that should be assessed to an entity that joins or leaves a consolidated group with an interest in a FIF. The amendments explained in this chapter are contained in Schedule 6 to this bill

Context of reform

2.3 Under the current law there is little need to transfer attribution and attributed tax account surpluses. However, under consolidation the taxpayer that receives a distribution of profits that have been subject to accruals taxation may well be different from the taxpayer that was subject to accruals taxation prior to consolidation.

2.4 The ability to transfer attribution and attributed tax account surpluses will ensure the policy behind the requirement for those accounts is maintained. That is, the possibility of double Australian taxation of profits subject to accruals taxation will continue to be avoided.

Summary of new law

2.5 In accordance with the single entity principle, only the head company will be able to operate attribution accounts and attributed tax accounts for the purposes of the CFC and FIF provisions during the period of consolidation. The pre-consolidation balances of these accounts will be transferred to the head company to facilitate the use of any pre-consolidation surpluses during consolidation. In this chapter, references to attribution accounts will include FIF attribution accounts, attributed tax accounts will include FIF attributed tax accounts and attribution account entities will include FIF attribution account entities.

2.6 Subsidiary members of a consolidated group will have inoperative attribution and attributed tax accounts during the period of consolidation once the balances in those accounts have been transferred to the head company.

2.7 When a company with an interest in a CFC or FIF leaves a group, it may need to maintain attribution and attributed tax accounts for each attribution account entity in which it has an interest. A proportion of the attribution account and attributed tax account surpluses the head company has in relation to the interests in the CFC or FIF that leave the group will be transferred to the leaving company.

2.8 The notional accounting period of a FIF will be taken to end at the joining or leaving time if it does not actually end at that time. This will ensure the normal operation of Part XI of the ITAA 1936 will result in the correct amount of FIF income being included in the assessable income of the company for the period that it is not a member of the consolidated group.

Detailed explanation of new law

2.9 Parts X and XI of the ITAA 1936 provide rules for maintaining attribution and attributed tax accounts in order to prevent double Australian taxation of the profits of CFCs/FIFs when those profits are distributed. They also contain rules as to when credits and debits are made to these accounts. A surplus in the attribution or attributed tax account at any point in time occurs when the credits in the account exceed the debits.

2.10 These provisions will continue to operate in relation to attribution and attributed tax accounts maintained by a head company of a consolidated group.

Transfer of attribution account and attributed tax account surpluses

On formation or joining a consolidated group

2.11 Where a company becomes a subsidiary member of a consolidated group, it will transfer to the head company at the joining time any attribution and attributed tax account surpluses it has in relation to attribution account entities (e.g. CFC, FIF or FLP) at that time. The joining company must also have an interest in the CFC, FIF or FLP at the time it joins the group. Although entities other than companies can become subsidiary members of a consolidated group only companies will have attribution or attributed tax account surpluses to transfer to the head company. These rules apply at the time a consolidated group comes into existence as well as for companies joining an existing consolidated group. [Schedule 6, item 2, sections 717-210, 717-215, 717-220 and 717-225]

2.12 The attribution and attributed tax account surpluses are transferred to the head company so that future distributions of income received from an attribution account entity are not assessed to the head company to the extent the income was previously attributed to the joining company.

2.13 The transfer of attribution account surpluses of a joining company is effected by an attribution account credit arising in the accounts of the head company. The credit arises at the joining time (or formation time) and is equal to the attribution account surplus calculated immediately before the joining time for each attribution account entity of the joining company. [Schedule 6, item 2, subsection 717-210(2)]

2.14 Subsection 717-210(2) can also mean a credit can arise in relation to a surplus in an attributed tax account, FIF attribution account and FIF attributed tax account. [Schedule 6, item 2, sections 717-215, 717-220 and 717-225]

2.15 A corresponding and equal attribution account debit will arise in the relevant accounts of the joining company at the same time [Schedule 6, item 2, subsection 717-210(3)] . This ensures that there is no net creation of the surpluses, but rather a transfer from one entity to another. The attribution and attributed tax accounts of the joining company will have a nil balance after joining a consolidated group and will be inoperative during consolidation.

2.16 Subsection 717-210(3) can also mean a debit can arise in relation to a surplus in an attributed tax account, FIF attribution account and FIF attributed tax account. [Schedule 6, item 2, sections 717-215, 717-220 and 717-225]

2.17 Any attribution account debits or credits that would have arisen in a subsidiary member's attribution or attributed tax accounts during the time it is a member of a consolidated group will arise instead in the head company's accounts as the head company will be the only entity that can operate the relevant accounts.

Example 2.1

Assume:

•

Companies A, B and C form a consolidated group at the beginning of company A's income year. All the companies have the same income year which is from 1 July to 30 June. Company A is the head company;

•

Company A holds an interest in FIF 1 and has a FIF attribution surplus in the FIF attribution account for FIF 1 of $100 at the time it forms the consolidated group. The notional accounting period of FIF 1 is company A's income year;

•

Company B also holds an interest in FIF 1 and has a FIF attribution surplus in the FIF attribution account for FIF 1 of $250 immediately before it becomes a subsidiary member of the consolidated group. The notional accounting period of FIF 1 is company B's income year; and

•

Company C holds an interest in CFC 1 and has an attribution surplus in the attribution account for CFC 1 of $300 immediately before it becomes a subsidiary member of the consolidated group.

At the time the group consolidates, a $250 credit will arise in the FIF attribution account for FIF 1 that company A holds and a $250 debit will arise in the FIF attribution account for FIF 1 that company B holds. The FIF attribution account for FIF 1 that company B holds will be inoperative during consolidation (after the $250 debit entry is made to the account at the joining time) as company B is no longer the taxpayer in relation to the FIF income of FIF 1. Company A's FIF attribution account surplus for FIF 1 is $350 immediately after consolidation.

At the time the group consolidates, a $300 credit will arise in a new attribution account for CFC 1 in company A's books. A $300 debit will arise in the attribution account for CFC 1 that company C holds. The attribution account for CFC 1 that company C holds will be inoperative during consolidation (after the $300 debit entry is made to the account at the joining time) as company C is no longer the attributable taxpayer in relation to CFC 1. Company A's attribution surplus for CFC 1 is $300 immediately after consolidation.

For subsidiary members that leave a consolidated group

2.18 Where a company leaves a consolidated group, taking with it an interest in a CFC, FIF or FLP, the head company will transfer to the leaving company at that time a proportion of the attribution surplus and attributed tax account surplus (if any) the head company has in relation to that CFC, FIF or FLP. [Schedule 6, item 2, sections 717-245, 717-250, 717-255 and 717-260]

2.19 The attribution and attributed tax account surpluses are transferred to the leaving company so that future distributions of income received from the CFC, FIF or FLP are not assessed to the leaving company to the extent the income was previously attributed to the head company or to another company before it joined the group.

2.20 The transfer of an attribution account surplus from the head company is effected by an attribution account credit arising in the new attribution account of the leaving company. The credit arises at the leaving time and is equal to a proportion of the surplus calculated immediately before the leaving time for each attribution account entity. [Schedule 6, item 2, subsection 717-245(2)]

2.21 Subsection 717-245(2) can also mean a credit can arise for a leaving company in relation to a surplus in an attributed tax account, FIF attribution account and FIF attributed tax account. [Schedule 6, item 2, sections 717-250, 717-255 and 717-260]

2.22 The proportion of the surplus the leaving company is entitled to is the percentage of the group's attribution account percentage in relation to the attribution account entity at the leaving time that is taken by the leaving company. [Schedule 6, item 2, subsection 717-245(4)]

2.23 A corresponding and equal attribution account debit will arise in the relevant accounts of the head company at the leaving time. [Schedule 6, item 2, subsection 717-245(3)]

2.24 Subsection 717-245(3) can also mean a debit can arise in relation to a surplus in an attributed tax account, FIF attribution account and FIF attributed tax account. [Schedule 6, item 2, sections 717-250, 717-255 and 717-260]

Example 2.2

Assume:

•

Companies A, B and C are a consolidated group. Company A is the head company;

•

Company A has a FIF attribution surplus in the FIF attribution account for FIF 1 of $500 at the end of its income year 2010, after the determination of FIF income that will be included in company A's assessable income. The notional accounting period of FIF 1 is company A's income year. Company A also has an attribution surplus in the attribution account for CFC 1 of $600 at the end of its income year 2010, after the determination of attributable income included in its assessable income for that income year; and

•

Company B leaves the group at the end of the income year 2010 with half the interests in FIF 1 held by the consolidated group and one third of the interests in CFC 1.

At the time company B leaves the group, a $250 credit (50% of $500) will arise in a new FIF attribution account for FIF 1 that company B will start to hold and a $250 debit will arise in the FIF attribution account for FIF 1 that company A holds. Immediately after company B leaves the group, company A's FIF attribution surplus for FIF 1 will be $250. Company B's FIF attribution surplus will also be $250.

Further, at the time that company B leaves the group, a $200 credit (one third of $600) will arise in a new attribution account for CFC 1 in company B's books. A $200 debit will arise in the attribution account for CFC 1 that company A holds. Immediately after company B leaves the group, company A's attribution surplus for CFC 1 will be $400. Company B's attribution surplus will be $200.

Calculation of FIF income before the joining or leaving time

2.25 With the introduction of the new consolidation regime it is necessary to ensure that attributable income calculated under Part X of the ITAA 1936 and FIF income calculated under Part XI of the ITAA 1936 is included for all periods in the assessable income of the correct taxpayers. Special considerations arise where:

•

a consolidated group is formed;

•

a company joins a consolidated group; and

•

a company leaves a consolidated group.

This will ensure that the attribution account and attributed tax account surpluses that are transferred to the head company or to a leaving company are correct at the relevant time.

2.26 When these events occur during the notional accounting period of a FIF (either the year of income of the taxpayer or, where the taxpayer elects, the accounting period of the FIF), special rules are needed to ensure that Part XI can operate appropriately. These rules are required principally because the amount of FIF income included in the taxpayer's assessable income depends on how much of the notional accounting period for which the taxpayer held an interest in the FIF. In some cases, they are also needed because Part XI only applies to a taxpayer that has an interest in a FIF at the end of the income year. Therefore, the notional accounting period of the FIF will be taken to end at the formation, joining or leaving time. If the notional accounting period actually ends at the formation, joining or leaving time, Part XI would operate in an appropriate way without new rules. The rules are discussed in more detail in paragraphs 2.28 to 2.44.

2.27 Similar problems do not arise under Part X as the attributable taxpayer at the end of a statutory accounting period of a CFC includes in its assessable income for an income year its share of the attributable income of the CFC for the whole statutory accounting period that ends in the income year. If the head company is the attributable taxpayer because an entity with an interest in a CFC has joined the group during the statutory accounting period of the CFC, the head company will include in its assessable income for the income year in which that statutory accounting period ends its share of the attributable income of the CFC for the whole of that statutory accounting period. If the statutory accounting period had ended in the year of income of the joining entity before it joined the group, the joining entity would include all the attributable income for the whole of the statutory accounting period in its assessable income for that income year.

On formation or joining a consolidated group

2.28 If the notional accounting period of a FIF in which a company holds an interest ends immediately before that company becomes a subsidiary member of a consolidated group, the joining company will calculate the FIF income relating to the notional accounting period [Schedule 6, item 2, section 717-230] . The surplus held by the joining company at the joining time, after any credit or debit arising from the calculation of the FIF income, will be transferred to the head company.

2.29 Where the notional accounting period of the FIF does not ordinarily end at the joining time, the notional accounting period of the FIF will be taken to end immediately before the joining time [Schedule 6, item 2, subsection 717-230(2)] . This has the effect that a notional accounting period of the FIF ends in the income year of the company that joined the group, the period in respect of which FIF income may be attributed to the company.

2.30 The joining company can then determine the FIF income for the part of the notional accounting period up to the joining time according to the rules in Part XI. That amount would then be included in the joining company's assessable income for the income year in which the company joined the group (or it may have an allowable deduction for that income year). [Schedule 6, item 2, subsection 717-230(3)]

2.31 To the extent that FIF income is included in the assessable income of the joining company for that income year, an attribution credit will arise in its FIF attribution account immediately before the joining time. All credits and debits to the FIF attribution account should arise before the calculation of the FIF attribution surplus that will be transferred to the head company.

2.32 If the calculation of the FIF income results in a FIF loss, and the joining company otherwise has a surplus in the FIF attribution account at the joining time, the joining company will be able to deduct (some or all of) the loss from its assessable income. A debit will arise in its FIF attribution account just before the joining time.

2.33 The head company will include FIF income in its assessable income from the joining time onwards according to Part XI. Part XI will operate as if the head company had the FIF interests brought into the consolidated group only from the joining time.

2.34 Where the notional accounting period of the FIF is taken to end immediately before the joining time, the head company is taken to acquire the FIF interest at the joining time for a deemed consideration, to prevent the double taxation of FIF income. If the head company chooses to use the market value method to determine FIF income in the joining year, the consideration taken to be given at the joining time for the FIF interest will be the market value of the FIF interest for the joining company on the last day of the notional accounting period of the FIF taken to end at the joining time. [Schedule 6, item 2, subsection 717-230(4)]

Example 2.3

Assume:

•

Companies A, B and C are a consolidated group. Company A is the head company and has an income year from 1 July to 30 June;

•

Company A purchases the shares in company D at 1 September 2005. Company D holds an interest in FIF 1. The notional accounting period of FIF 1 is 1 January to 31 December. Company D's income year is 1 July to 30 June; and

•

Company D has a FIF attribution surplus at the beginning of its 2006 income year of $200. There have been no debits or credits to the FIF attribution account prior to company D calculating the FIF income at 1 September 2005.

At the time company A purchases company D the notional accounting period of FIF 1 will end. The FIF income for the period 1 January to 31 August 2005 is calculated to be $350 at that time. That FIF income will be included in company D's assessable income for the year ended 30 June 2006.

A FIF attribution credit will arise in the FIF attribution account of company D immediately before the joining time. The surplus in the FIF attribution account for FIF 1 is now $550. A credit will arise in the FIF attribution account for FIF 1 in the accounts of company A and a corresponding FIF attribution account debit will arise in the FIF attribution account for FIF 1 that company D holds. The FIF attribution account for FIF 1 that company D holds will be inoperative as company D is no longer the taxpayer in relation to the FIF income of FIF 1. Immediately after the joining time company A's FIF attribution account surplus for FIF 1 is $550.

Company A includes any FIF income of FIF 1 for the period 1 September to 31 December 2005 in its assessable income for 2005-2006 if it still has an interest in FIF 1 at 30 June 2006.

For subsidiary members that leave a consolidated group

2.35 The head company of a consolidated group will calculate the FIF attribution and FIF attributed tax account credits and debits according to the rules in Part XI for any interests in FIFs the head company holds.

2.36 For the same reasons as explained in paragraphs 2.28 to 2.31, where a company leaves a consolidated group with an interest in a FIF, the head company will be required to calculate the FIF income at the leaving time. Under the normal operation of Part XI, if the company leaves the group at the end of the head company's income year, the head company would determine the FIF income of a notional accounting period that ends in that year.

2.37 If the company leaves the group before the end of the notional accounting period, the notional accounting period of the FIF will be taken to end at the time immediately before the company left the group [Schedule 6, item 2, subsection 717-265(2)] . This has the effect that this notional accounting period of the FIF ends in the income year of the head company (in addition to any other notional accounting period that actually ends in the income year).

2.38 The head company will determine the FIF income and the FIF attribution and attributed tax account surpluses at the leaving time, according to the rules in Part XI, as though an interest in a FIF held by the leaving company (at the leaving time) was held by the head company at the end of the head company's income year [Schedule 6, item 2, subsection 717-265(4)] . This will enable the FIF income to be calculated at the leaving time for the period from the beginning of the notional accounting period of the FIF to immediately before the leaving time.

2.39 The FIF income calculated immediately before the leaving time will be included in the head company's assessable income in the year the company leaves the group. The head company will include the FIF income in its assessable income for that part of the notional accounting period, despite the fact that it no longer holds (some or all of) the interests in the FIF at the end of its income year.

2.40 To the extent FIF income is included in the assessable income of the head company for that income year, a FIF attribution credit will arise in the FIF attribution account immediately before the leaving time. All credits and debits to the FIF attribution account arise before the calculation of a FIF attribution surplus that will be transferred to the leaving company.

2.41 If the calculation of the FIF income results in a FIF loss and the head company otherwise has a FIF attribution surplus at the leaving time, the head company will be able to deduct (some or all of) the loss from its assessable income. A debit will arise in the FIF attribution account at the leaving time despite the loss not being deducted from the head company's assessable income until the normal end of the year of income of the head company.

2.42 The determination of the FIF income at the leaving time, on the basis that the notional accounting period of the FIF ended at that time, is solely for the purpose of determining the correct FIF attribution account and attributed tax account surpluses at the leaving time. The head company will continue to determine the FIF income in relation to the FIF interests remaining in the group from the leaving time until the end of the notional accounting period of the FIF, unless the remaining FIF interests leave before that time or the head company otherwise disposes of the group's interests in the FIF before the end of its income year. [Schedule 6, item 2, subsection 717-265(3)]

2.43 The leaving company will have FIF income included in its assessable income from the leaving time onwards according to Part XI. Part XI will operate in relation to the leaving company as if the leaving company had those FIF interests only from the leaving time.

2.44 Where the notional accounting period of the FIF is taken to end immediately before the leaving time, the leaving company is taken to acquire the FIF interest at the leaving time for a deemed consideration, to prevent the double taxation of FIF income. To calculate the FIF income under the market value method for the leaving year, the consideration taken to be given by the leaving company for the FIF interest it takes with it will be the market value of the FIF interest for the head company on the last day of the notional accounting period of the FIF taken to end at the leaving time. [Schedule 6, item 2, subsection 717-265(5)]

Example 2.4

Assume:

•

Companies A, B and C are a consolidated group. Company A is the head company and has an income year from 1 July to 30 June;

•

Company A has a FIF attribution surplus in the FIF attribution account for FIF 1 of $500 at the end of its 2010 income year. There have been no debits or credits to the FIF attribution account since then;

•

The notional accounting period of FIF 1 is company A's income year (i.e. 1 July to 30 June); and

•

Company B leaves the group on 1 January 2011 with half the interests in FIF 1 that were held by the consolidated group at the leaving time. Company B's income year is also from 1 July to 30 June. Both company A and company B still have an interest in FIF 1 on 30 June 2011.

At the time that company B leaves the group the notional accounting period of FIF 1 will end. The FIF income for the period 1 July to immediately before the leaving time is $200. That FIF income will be included in company A's assessable income for the year ended 30 June 2011. A $200 credit will arise in company A's FIF attribution account just before the leaving time. The FIF attribution surplus is now $700.

A FIF attribution credit of $350 ($700 50%) will arise in a new FIF attribution account for FIF 1 that company B will start to hold in relation to FIF 1. A $350 debit will arise in the FIF attribution account for FIF 1 that company A holds. Immediately after company B leaves the group Company A's FIF attribution surplus for FIF 1 will be $350. Company B's FIF attribution surplus will also be $350.

Company A will calculate any FIF income in relation to FIF 1 for the period 1 January 2011 until the actual end of the notional accounting period of FIF 1 but will only include in its assessable income the amount of FIF income that relates to the attribution account percentage in FIF 1 that it continues to hold. This amount will be added to the amount that was calculated at the time company B left the group.

Company B will include in its assessable income at 30 June 2011 any FIF income calculated from the leaving time until the time the actual notional accounting period of FIF 1 ends (i.e. 1 January to 30 June 2011).

Application and transitional provisions

2.45 These provisions will come into effect on 1 July 2002, along with the other aspects of the consolidation measures.

Consequential amendments

2.46 Amendments consequential to the measures in this chapter will be included in subsequent legislation.