House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 16 Entities

Outline of chapter

16.1 This chapter explains:

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how Division 215 of the Minerals Resource Rent Tax Bill 2011 (MRRT Bill) provides for groups of entities that have formed a consolidated group for income tax purposes to also choose to consolidate for Minerals Resource Rent Tax (MRRT) purposes. An MRRT consolidated group has lower compliance costs because it is treated as a single entity for MRRT purposes; and

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how the MRRT treats partnerships, trusts and unincorporated associations.

16.2 All legislative references throughout this chapter are to the MRRT Bill unless otherwise indicated.

Summary of new law

Consolidated groups

16.3 A group of entities that is a consolidated group or a multiple entry consolidated (MEC) group for income tax purposes can choose to consolidate for MRRT purposes. It must notify the Commissioner of Taxation (Commissioner) of its decision to do so.

16.4 An MRRT consolidated group is treated as a single entity, so that the group's mining project interests are treated as being those of the head company of the group and the group's internal transactions are usually ignored for MRRT purposes. However, the members of the group will be jointly and severally liable for paying the head company's MRRT liabilities if the head company does not pay them.

16.5 An entity that joins an MRRT group (when the group forms or because it is acquired by the group) transfers its mining project interests and pre-mining project interests to the head company of the group. For MRRT purposes, when an entity leaves a consolidated group, the head company transfers to it the interests (and parts of interests) the entity takes with it.

16.6 Changes in a group's head company, and certain conversions from a MEC group to a consolidated group (and vice versa), lead to rollovers under which the MRRT treatment that applied to the old head company is inherited by the new head company, ensuring a continuity of treatment for the group.

Partnerships, trusts and unincorporated associations

16.7 The MRRT taxes partnerships, trusts and unincorporated associations as entities. Because they are not legal persons, the liability for paying amounts owed by a partnership, trust or unincorporated association, and for satisfying their other MRRT obligations, is imposed on the partners, the trustees, and the members of the association's committee of management respectively.

Detailed explanation of new law

Consolidated groups

16.8 Company groups have been able to consolidate for income tax purposes since 2002. The broad effect of consolidating is that the group is treated as a single entity, with all the assets and activities of the group treated as belonging to the head company for income tax purposes, rather than to the various group entities that actually own those assets or conduct those activities. The effect is that intra-group transactions are ignored for income tax purposes, reducing the group's tax compliance costs.

16.9 The MRRT consolidation rules achieve the same thing, reducing a group's compliance costs by treating the group as a single entity for MRRT purposes. [Section 215-5]

Effects of consolidating for MRRT purposes

16.10 Subsidiary members of a consolidated group, or a MEC group, ^[7] that has chosen to consolidate for MRRT purposes, are treated as being parts of the group's head company (rather than separate entities) for these MRRT purposes:

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working out the mining project interests and pre-mining project interests the entities have;

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working out the MRRT payable in relation to those interests;

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working out the allowance components that arise for those interests for an MRRT year; and

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working out the entities' instalment income for an MRRT instalment quarter.

[Section 215-15]

16.11 This means that all the mining project interests and pre-mining project interests of the group are treated as being the interests of the head company. If an interest is transferred between two entities in the group, the transfer is ignored for MRRT purposes in the same way it would be if any single entity reorganised the management of its interests.

16.12 Any other transactions conducted within the group are also ignored. For example, if one group entity provides another with services on one of its mine sites, the MRRT will apply in the same way it would if the head company had provided those services to itself from within its organisation. No mining expenditure will be incurred in relation to that transaction.

16.13 Of course, there could be mining expenditure from the provision of those services. The salaries the service provider pays its employees would be mining expenditure of the head company, as would the costs of the assets the service company acquires from outside the group to use in the group's upstream mining activities.

16.14 Similarly, if taxable resources are supplied by one entity in the group to another, the supply will be ignored in the same way it would if the head company had moved its resources from its mining division to its transport or processing division. No mining revenue will arise from such a supply.

16.15 This does not mean that there can be no consequences from internal group activities. An export of resources to an overseas site owned by a group member would be an export rather than a supply, just as it would be if a single entity exported resources to its own overseas facilities.

16.16 Similarly, transferring a mining asset from a mining project interest of one group member to a mining project interest of another member would still result in adjusting the mining revenue and mining expenditure of each of those interests, just as it would if those interests were actually held by the same entity.

16.17 A group that chooses to consolidate for MRRT purposes will be able to do some things that a group that does not consolidate would not be able to do. For example, the group would combine project interests held by different members of the group if those interests satisfy the upstream integration test or the downstream integration test. Those things could otherwise only happen to interests held by the same entity.

Example 16.180 : The 'single entity' rule

King Resources Co and Wills Steelworks Co are subsidiaries of RO Burke Enterprises Pty Ltd. They have formed a consolidated group for income tax purposes and choose to form one for MRRT purposes.

King has a mining project interest that provides iron ore to Wills, which transforms it into steel. The steel is supplied to a customer in Australia. Due to the effect of the single entity rule, the mining project interest and the steelworks operation are both treated as being those of RO Burke. Therefore, a mining revenue event happens for the mining project interest when the steel is supplied to the customer, not when the ore is supplied to the steelworks. RO Burke has the MRRT liability for the mining project interest, not King.

Example 16.181 : The 'single entity' rule

Lewis Coal Co and Clark Mining Co are subsidiaries of Sacagawea Discoveries Pty Ltd. They have formed a consolidated group for income tax purposes and choose to form one for MRRT purposes.

Lewis and Clark each has a mine. The coal from those mines is blended to form the final product supplied to their Australian customer. Sacagawea has made the downstream integration choice for the group, so the two mines are treated as a single mining project interest Sacagawea has. When the blended coal is supplied, there will be a mining revenue event that will work out mining revenue for Sacagawea based on the proportion of the consideration that is reasonably attributable to the form and location of the coal when it was at its valuation point. The single entity rule means that Sacagawea will have the MRRT liability for one mining project interest rather than Lewis and Clark having separate liabilities for separate interests.

16.18 When a group consolidates for MRRT purposes, all the mining project interests and pre-mining project interests of the group's subsidiary members are treated as having been transferred to the head company of the group. This is discussed further below. [Section 215-20]

Choosing to consolidate for MRRT purposes

16.19 A group can choose to consolidate for MRRT purposes if it is an income tax consolidated group or MEC group. [Subsection 215-10(1)]

16.20 It must also have previously notified the Commissioner that it has consolidated for income tax purposes. This allows the Commissioner to verify that the group is eligible to consolidate for MRRT purposes. [Subsection 215-10(2)]

16.21 After it chooses to consolidate for MRRT purposes, the group's head company (or provisional head company in the case of a MEC group) must give the Commissioner notice of the choice in the approved form within 21 days (or within such further time as the Commissioner allows). This is different from the position for income tax law (where the choice is notified with the year's income tax return) because of the interaction of the MRRT instalments system and the MRRT consolidation rules. [Subsection 215-10(3)]

16.22 The choice has effect on the day it was made and continues to have effect for as long as the group exists. [Subsection 215-10(4)]

16.23 There are some cases where a group technically ceases to exist because it is converted into a different sort of group. This is the situation with a MEC group that becomes a consolidated group (see section 703-55 of the Income Tax Assessment Act 1997 (ITAA 1997) and with a consolidated group that becomes a MEC group (see section 719-40 of the ITAA 1997). A choice to consolidate for MRRT purposes, made before such a conversion, continues to have effect, despite the group technically ceasing to exist in those cases, because the head company of the group after the conversion inherits the history of things done by the head company before the conversion. [Section 215-55]

16.24 A choice to consolidate for MRRT purposes, once made, cannot be unmade and cannot be altered. [Schedule 1 to the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 (MRRT (CA & TP) Bill), item 8, section 119-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)]

Joining and leaving a consolidated group

Joining a group

16.25 Entities can join a consolidated group or MEC group in two broad ways. They can join when the group forms or they can join when the group acquires the entity some time after the group is formed. Complex allocable cost amount calculations can be involved for income tax purposes when an entity joins a consolidated group because the cost bases of the assets the entity brings with it are reset to reflect the joining entity's economic cost to the group. Those calculations do not apply for MRRT purposes when an entity joins a group.

16.26 Instead, the assets the joining entity brings with it will become the assets of the head company because of the single entity rule. The transfer of the assets will not give rise to mining revenue or expenditure for either the head company or the joining entity so that, in effect, the head company will inherit the joining entity's MRRT treatment of the assets. [Sections 120-15 and 215-15]

16.27 When an entity joins a group (whether because the group is formed or because the group acquires the entity), it is treated as transferring its mining project interests and pre-mining project interests to the group's head company. [Section 215-20]

16.28 This attracts the operation of the mining project transfer provisions, thus treating the interests in the head company's hands as a continuation of the interests in the hands of the joining entity. The effect of this treatment is to allow the head company to access the allowance components that come with the interests. Those provisions also transfer the mining revenue and mining expenditure for the transfer year and all earlier years to the head company, so that it acquires the MRRT liability for the interest for the transfer year. The joining entity remains liable for MRRT liabilities that arose in relation to the transferred interest before the transfer year. [Division 120]

16.29 A special rule applies to the transfer of pre-mining losses. Such transfers are subject to a cap, based on the consideration paid for the interest, to prevent entities acquiring interests just to access their pre-mining losses. When a consolidated group forms for MRRT purposes, there is a notional transfer from each joining entity to the head company. If that notional transfer were subject to that cap, no pre-mining losses would be transferred because no consideration is paid for the notional transfer. Therefore, the cap does not apply to the notional transfer. [Subparagraph 95-30(1)(a)(ii)]

16.30 However, the cap does apply if an entity joins a group by being acquired. In that case, a real transfer, occurring on the acquisition of the entity, precedes the notional transfer of the interests from the entity to the head company. The cap would apply to the real transfer and would be adjudged by reference to the consideration the group paid for the joining entity. The cap would not apply to the notional transfer of the interests to the group's head company. [Sections 95-25 and 95-30]

Leaving a group

16.31 When an entity leaves an MRRT consolidated group, the head company is treated as transferring to the leaving entity the interests (and part interests) it takes with it. This attracts the operation of the mining project transfer rules (or the mining project split rules in the case of part interests). [Sections 215-25 and 215-30]

16.32 Those rules treat the transferred interests in the leaving entity's hands as a continuation of the interests in the hands of the head company. The effect of that treatment is to allow the leaving entity to access the allowance components that come with the transferred interests. Those rules also transfer the mining revenue and mining expenditure for the transfer year and earlier years to the leaving entity, so that it acquires the MRRT liability for the transferred interests for the transfer year. The head company remains liable for MRRT liabilities that arose in relation to the transferred interests before the transfer year. [Sections 120-10 and 125-10]

16.33 The assets the leaving entity takes with it become its assets because the single entity rule stops applying when it leaves the group. The transfer of the assets does not give rise to mining revenue or expenditure for either the head company or the leaving entity so that, in effect, the leaving entity inherits the head company's MRRT treatment of the assets. [Sections 120-15, 125-20 and 215-15]

16.34 As with the joining case, there is an exemption from the normal rule that would cap the amount of pre-mining losses that are transferred with an interest by reference to the amount of consideration paid for the interest. The exemption deals with the fact that the leaving entity will have paid no consideration for the interest. [Subparagraph 95-30(1)(a)(ii)]

16.35 The cap should still apply in some form if an entity leaves the group because another entity has acquired it. In that case, a real transfer, occurring on the acquisition of the leaving entity follows the notional transfer of the interests from the head company to the leaving entity. The cap would apply to the real transfer and would be judged by reference to the consideration paid for the leaving entity. The cap would not apply to the earlier notional transfer of the interests from the head company to the leaving entity. [Sections 95-25 and 95-30]

16.36 When an entity leaves a consolidated group, it inherits the most recent MRRT instalment rate the Commissioner gave the group's head company. It would, of course, be free to choose a different instalment rate in the normal way. [Section 215-40]

Transferring from one group to another

16.37 When an entity leaves one consolidated group and joins another at the same time (that is, when one group acquires an entity from another group), the entity is treated as leaving its old group first and then joining its new group. This means that the mining project transfer rules (or the mining project split rules in the case of part interests) transfer the old group's interests to the leaving entity before transferring them from that entity to the head company of the group it has joined. [Section 215-35]

Roll-over rules

16.38 A number of 'roll-over' rules apply under the income tax consolidation provisions to deal with certain changes to a group. Their broad effect is to ensure that the treatment the group had before the change applies to the group after the change, so that there is a continuity of treatment for the group. A number of rules achieve the same result for the purposes of the MRRT.

Changing the head company of a consolidated group

16.39 When the head company of a consolidated group changes, the new head company can choose to treat the consolidated group as continuing in existence (see subsection 124-380(5) of the ITAA 1997). The income tax consequence is that the group is taken not to have ceased to exist and everything that happened in relation to the old head company is taken to have happened instead to the new head company (see sections 703-70 and 703-75 of the ITAA 1997).

16.40 If a group makes the choice under subsection 124-380(5) of the ITAA 1997, identical results apply to the group for relevant MRRT purposes as apply for income tax purposes. The group is taken to continue to exist and the new head company inherits the relevant history from the old head company, just as if the new head company had been the old head company at all relevant times (for example, the new head company would be treated as having been given the instalment rate that the Commissioner gave to the old head company). The old head company becomes a subsidiary member of the group from the time of the changeover. [Section 215-45]

Changing the head company of a MEC group

16.41 Whenever there is a change in the head company or provisional head company of a MEC group, the income tax consequence is that everything that happened in relation to the old head company is taken to have happened to the new head company. This ensures the continuity of the group's treatment despite the change in its head company (see sections 719-75 and 719-90 of the ITAA 1997).

16.42 The same result applies under the MRRT law when there is a change in the head company or provisional head company of a MEC group. For the relevant MRRT purposes , the new head company (or provisional head company) inherits the history from the old head company (or provisional head company) just as if the new head company had been the old head company at all relevant times. The old head company (or provisional head company) becomes a subsidiary member of the group from the time of the changeover. [Section 215-50]

Group conversions

16.43 When a MEC group converts into a consolidated group under section 703-55 of the ITAA 1997, and vice versa under section 719-40 of the ITAA 1997, the income tax consequence is that everything that happened to the head company of the old group is taken to have happened to the head company of the new group (whether it is the same company or a different company). This ensures the continuity of the group's treatment despite the change in the type of group (see sections 719-120 and 719-125 of the ITAA 1997).

16.44 The same result applies for MRRT purposes when a MEC group converts to a consolidated group, and vice versa. For the relevant MRRT purposes, the head company of the new group inherits the history from the head company of the old group just as if it had been the head company at all the relevant times. [Section 215-55]

Partnerships, trusts and unincorporated associations

16.45 The MRRT law applies to partnerships, trusts and unincorporated associations in the same way as it applies to any other entity.

16.46 'Entity' is a defined term in the income tax law (see section 960-100 of the ITAA 1997) and the MRRT law uses that meaning. [Section 300-1, definition of 'entity']

16.47 The income tax law taxes unincorporated associations as entities. In broad terms, they are treated for income tax purposes in the same way as companies.

16.48 Although the income tax law treats partnerships and trusts as entities, it does not tax them as entities. A partnership's taxable income or tax loss is broadly worked out in the same way as that of any other entity but the result (income or loss) is divided amongst the partners, who include their share in working out their own taxable income or loss. Similarly, the net income of a trust is divided amongst those beneficiaries who are entitled to the trust income, and included in their own taxable income calculation; with any remaining part of the net income being taxed to the trustee.

16.49 The MRRT law works out an MRRT liability for each mining project interest and pre-mining project interest. The liability is payable by the entity that has the interest at the end of the MRRT year. Unlike the income tax law, it is not divided amongst the partners of a partnership or the beneficiaries of a trust. Instead, it is payable by the partnership or trust in the same way as any other partnership or trust expense (including liabilities for indirect taxes such as the goods and services tax). That MRRT liability is then taken into account by the partnership or trust in working out its net income or loss for income tax purposes.

Entity status

Partnerships

16.50 Although the MRRT law treats partnerships as entities, they are not legal persons (unlike individuals and companies). Some people may therefore doubt that MRRT liabilities are imposed on a partnership. To put the issue beyond doubt, the MRRT law makes clear that the acts or omissions of partners, when acting in their capacity as partners, are the acts or omissions of the partnership. [Section 220-5]

Example 16.182 : The acts of the partners are the acts of the partnership

Shelby and Victoria are operating a coal mine as partners. Shelby enters into a contract with an overseas customer to supply it with 3 million tonnes of coal. Entering into the contract on behalf of herself and Victoria is an act Shelby takes as a partner and it is therefore taken to be an act of the partnership. Payment to Shelby and Victoria for the supply is taken to be payment to the partnership.

Victoria pays the state $15 million in royalties for coal supplied by the partnership. The payment is made in her capacity as a partner, so is taken to be a payment by the partnership, and generates a royalty credit for the partnership.

Unincorporated associations

16.51 Any doubt about the entity status of unincorporated associations is dealt with by attributing to the association the acts and omissions of the members of the committee of management of the association when they act in that capacity. [Subsection 220-10(1)]

Joint ventures are not unincorporated associations

16.52 Some have argued that a joint venture could be an unincorporated association, a term which is not defined in the income tax law. A 'joint venture' is an arrangement under which two or more parties conduct a single enterprise but do not share in its profits. Instead, they share in the output of the enterprise. In the context of mining, a joint venture would involve the joint venturers dividing the resources they jointly extract before each of them sells its own share.

16.53 The MRRT law does not treat joint ventures as entities; it treats each joint venturer as having its own mining project interest or pre-mining project interest, giving rise to a separate MRRT liability. [Subsection 220-10(2)]

Trusts

16.54 Like partnerships and unincorporated associations, trusts are also not legal persons. A trust is a relationship between a trustee and the objects of the trust in respect of particular property. But, unlike partnerships and trusts, the income tax law makes clear that the legal person who is acting as the trustee is an entity in its capacity as a trustee that is separate from its status as an entity in its own capacity (see subsections 960-100(2) and (3) of the ITAA 1997). In other words, the trust and the trustee are equated as an entity for income tax purposes and there is no room for doubt about the status of the trust. Accordingly, there is no doubt that trusts are entities for the purposes of the MRRT law and so no need for additional provisions to remove any doubt.

Responsibility for partnerships, trusts and unincorporated associations

16.55 Although the MRRT law works by imposing obligations on partnerships, trusts and unincorporated associations as entities, these obligations cannot be enforced against those entities because they have no legal personality. That is, because they are not legal persons, they cannot be sued and cannot be penalised.

16.56 To overcome this, taxation laws usually attach the liability for not satisfying the obligations of these entities to someone who is a legal person and is broadly responsible for the actions of the entity.

16.57 For a partnership, those legal persons are the partners. For a trust, it is the trustee (or the trustees if there is more than one), and for an unincorporated association, it is the members of the association's committee of management.

16.58 Provisions having that effect already exist for the purposes of attaching liability for satisfying the obligations of partnerships and unincorporated associations under indirect tax laws (such as the GST) and under Schedule 1 to the TAA 1953 (see Division 444 of Schedule 1 to that Act).

16.59 Those provisions are extended so that they also apply for the purposes of the MRRT law. [Schedule 1 to the MRRT (CA & TP) Bill, items 34 to 43, subsections 444-5(1), (1A), (1B) and (2), 444-10(1) to (3) and (5), 444-15(1), 444-30(1) to (3), and 444-70(1) and (2), and section 444-1 of Schedule 1 to the TAA 1953]

16.60 In the case of unincorporated associations, the existing provisions are amended to make explicit that, for the purposes of the MRRT law, the members of the committee of management are jointly and severally responsible for paying the MRRT liabilities of the association. This is implicitly already the position for unincorporated associations but it is not explicit as it is for, say, partnerships. The amendments put the point beyond doubt. [Schedule 1 to the MRRT (CA & TP) Bill, item 36, subsections 444-5(1A) and (1B) of Schedule 1 to the TAA 1953]

Trustees are responsible for MRRT obligations of trusts

16.61 Consistent with this approach, the law is also amended to attach the liability for satisfying the MRRT obligations of a trust to the trustees of the trust. The amendment reproduces, in modern language, a provision that has a similar effect for the purposes of the MRRT law as section 254 of the Income Tax Assessment Act 1936 has for income tax purposes. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, section 444-120 of Schedule 1 to the TAA 1953]

16.62 Any obligation imposed by the MRRT law on a trust is imposed on the trustees of the trust. This covers obligations such as lodging MRRT returns, answering requests for information from the Commissioner and providing information to entities to which the trust transfers a mining project interest. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(1) of Schedule 1 to the TAA 1953]

16.63 The obligation attaches to any trustees from the time the obligation arose until the time it is satisfied. This timing rule means that responsibility for satisfying the obligation attaches to any new trustee appointed before the obligation is satisfied. The obligation would also remain with any previous trustee back to the time the obligation arose. This ensures that there is always someone responsible for satisfying the obligations of the trust and that a trustee cannot avoid responsibility by the simple expedient of resigning. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(1) of Schedule 1 to the TAA 1953]

16.64 The trustees are also responsible for paying amounts that are required to be paid under the MRRT law, such as the MRRT itself, instalments of MRRT, and any penalty and interest charges that arise in relation to the MRRT. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(2) of Schedule 1 to the TAA 1953]

16.65 If more than one trustee is liable for paying those amounts, they are jointly and severally liable for paying them. That means that the Commissioner could sue any of them for payment of the amount or could sue them as a group. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(3) of Schedule 1 to the TAA 1953]

16.66 In suing for amounts owed by a trust, the Commissioner is not limited to recovering against the personal assets of the trustees. He or she can also take action directly against the trust assets. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(4) of Schedule 1 to the TAA 1953]

16.67 Trustees who use their own assets to pay amounts in relation to an obligation of the trust that they are required to satisfy are entitled to be indemnified from the assets of the trust. This reflects the fact that the liability arises in the proper performance of the trustee's obligations as trustee. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(5) of Schedule 1 to the TAA 1953]

16.68 Offences against the MRRT law that are 'committed' by the trust are taken to have been committed by the trustee. This reflects the fact that the trustee is responsible for satisfying the trust's obligations, so that the failure to satisfy those obligations is the trustee's failing. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(6) of Schedule 1 to the TAA 1953]

16.69 Trustees who can prove that they were not knowingly concerned in, or party to, an act or omission of the trust that gave rise to an offence, and did not aid, abet, counsel or procure the act or omission, have not committed an offence. However, they could, of course, still be responsible for satisfying the obligation. [Schedule 1 to the MRRT (CA & TP) Bill, item 44, subsection 444-120(7) of Schedule 1 to the TAA 1953]

Application and transitional provisions

Consolidation

16.70 A group can make a decision to consolidate for MRRT purposes at any time after it satisfies the pre-conditions (including the requirement that it already be consolidated for income tax purposes). Normally, the decision applies for the date on which the group makes that choice.

16.71 However, as a transitional rule, a group can choose to apply its consolidation decision back to the earlier of:

•

when it first satisfied the pre-conditions; and

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2 May 2010.

That allows the group to be consolidated for MRRT purposes during the period before 1 July 2012 when it undertook activities that affect the operation of the MRRT from 1 July 2012. That can have substantial compliance benefits for the group in accounting for its activities during that pre-MRRT period. [Schedule 4 to the MRRT (CA & TP) Bill, item 13]

16.72 The choice has to be made on 1 July 2012 (or within such further time as the Commissioner allows) and notified to the Commissioner within 21 days of being made. This ensures that, from the start of the MRRT on 1 July 2012, the Commissioner is in a position to take the pre-MRRT period into account in applying the MRRT law to the group. [Schedule 4 to the MRRT (CA & TP) Bill, item 13]

Consequential amendments

Consolidation

Notes about the link between income tax and MRRT consolidation

16.73 Some notes are added to the consolidation provisions in the income tax law to alert readers to that fact that a choice to consolidate a group for income tax purposes is a prerequisite for it to consolidate for MRRT purposes. [Schedule 3 to the MRRT (CA & TP) Bill, items 40 to 43, subsections 703-50(1) and 719-50(1) of the ITAA 1997]

Joint and several liability

16.74 Under the income tax law, income tax liabilities are imposed on the head company of a consolidated group or MEC group. However, the members of the group are jointly and severally liable for paying those liabilities if the head company does not pay them on time (see Division 721 of the ITAA 1997).

16.75 The tax-related liabilities for which the members can be jointly and severally liable are listed in the table in subsection 721-10(2) of the ITAA 1997.

16.76 That table is amended so that the tax-related liabilities include liabilities arising under the MRRT law. The relevant MRRT liabilities are:

•

the liability to pay MRRT itself;

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the liability for shortfall interest charge on unpaid MRRT;

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the liability for paying MRRT instalments; and

•

the general interest charge that applies when a head company chooses too low an instalment rate.

[Schedule 3 to the MRRT (CA & TP) Bill, item 44, subsection 721-10(2) of the ITAA 1997]

16.77 The members of a consolidated group or a MEC group only become jointly and severally liable for those MRRT liabilities if the group has chosen to consolidate for MRRT purposes. [Schedule 3 to the MRRT (CA & TP) Bill, item 45, subsection 721-10(4) of the ITAA 1997]

16.78 The result is that Division 721 applies to impose joint and several liability in relation to MRRT liabilities on the members of a group that has consolidated for MRRT purposes in the same way as it does for the other liabilities listed in that table.

16.79 The provisions allocating group liabilities among the members of a group when the head company fails to pay them allow for tax sharing agreements to limit each member's share of the group liability (see sections 721-25 to 721-40 of the ITAA 1997). Those provisions also apply for group liabilities under the MRRT law.

16.80 A pre-condition for those provisions applying to a particular group liability is that the shares under the agreement represent a reasonable allocation of the liability. In deciding whether the shares are a reasonable allocation for income tax purposes, the amount of the liability is reduced by any credit the head company is entitled to for its income tax assessment for payments of income tax instalments (see subsection 721-25(1A)). When working out whether there is a reasonable allocation of liability for MRRT, a similar provision also reduces the liability by the amount of any credits the head company is entitled to for paying MRRT instalments. [Schedule 3 to the MRRT (CA & TP) Bill, items 46 and 47, subsections 721-25(1AA), (1B), (2) and (3) of the ITAA 1997]