Foreign income return form guide 2009

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Chapter 5: Consolidation (consolidated income tax treatment for groups of entities)

Note: This chapter simply provides a summary of the provisions that relate to the application of income attributed from CFCs and included in the assessable income of a head company of a consolidated group. Detailed information on the operation of consolidation is contained in the Consolidation reference manual - see also ' More information on consolidation ' below.

Overview

For income tax purposes, consolidation is optional. However, if the head company of a wholly owned resident group decides to consolidate, all its wholly owned eligible Australian resident group entities must become members of that consolidated group.

The choice to consolidate is irrevocable. Once a group has consolidated it is treated as a single entity for income tax purposes.

Where a foreign company, either directly or through its wholly owned foreign group, has multiple entry points of investment into Australia through Australian resident companies, special multiple entry consolidated group rules apply to enable eligible wholly-owned resident companies and their eligible wholly-owned resident subsidiary entities to consolidate.

The following losses and tax attributes can generally be brought into a consolidated, or multiple entry consolidated group, and used by the group's head company:

• losses
• franking credits, and
• attribution account surpluses.

Foreign income tax offsets

The consolidation regime through the single entity rule ensures that only the head company of a consolidated group includes the foreign income of the consolidated group or multiple entry consolidated group in its assessable income. Once consolidated, only the head company is entitled to foreign income tax offsets for foreign income tax paid on an amount included in the head company's assessable income. The head company can use foreign income tax offsets to reduce its Australian tax liabilities that would otherwise be payable in respect of amounts included in the head company's assessable income to prevent double taxation of its worldwide income.

There are special transitional foreign income tax offset rules which apply to allow the head company to use pre-commencement excess foreign income tax credits - its own pre-commencement excess foreign income tax credits and any transferred pre-commencement excess foreign income tax from joining entities at the joining time, provided certain conditions are met.

Where an entity leaves a consolidated group or multiple entry consolidated group, it is only required to include foreign income in its assessable income for the period it is not a member of any consolidated group. The leaving entity will not have access to any pre-commencement excess foreign income tax credits from earlier years that it may have had before joining the consolidated or multiple entry consolidated group, or that arose to the head company during the entity's membership period after the leaving time.

Attribution account surpluses

Under consolidation, only the head company can operate attribution accounts for the purposes of the CFC measures.

Subsidiary members transfer the pre-consolidation balances of their attribution accounts to the head company, on formation or when the entity joins the consolidated group or multiple entry consolidated group, to facilitate its use of any pre-consolidation surpluses during consolidation.

The attribution account surpluses are transferred to the head company so that, to the extent that income had previously been attributed to the member entity, subsequent distributions of income from an attribution entity - for example, a CFC, that had previously been attributed to the member entity - are not assessed to the head company. Once the account balances have been transferred to the head company of a consolidated group, the attribution accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group or multiple entry consolidated group.

When an entity with an interest in a CFC leaves a group, a proportion of the attribution account surpluses that the head company has in relation to the interests in the CFC that leave the group with the leaving company will be transferred to the leaving entity.

Choices

Section 715-660 of the ITAA 1997 overrides the entry history rule in section 701-5 of the ITAA 1997 to permit the head company of a consolidated group or multiple entry consolidated group to remake certain normally irrevocable choices made by entities before they became subsidiary members of the group. These choices include all irrevocable declarations, elections, choices or selections provided for in Part   XI of the ITAA 1936 and the election to value all items of trading stock that are interests in an FIF at market value (rather than cost) under section 70-70 of the ITAA 1997. Any such choice (or the absence of it) by a joining entity is ignored for the purposes of the head company's income tax affairs. The head company may make the choice, if it is eligible.

Similarly, section 715-700 of the ITAA 1997 overrides the exit history rule in section 701-40 of the ITAA 1997 to permit an entity leaving a consolidated group or multiple entry consolidated group to remake similar choices made by the head company after the entity became a subsidiary member of the group. The head company's choice (or absence of it) is ignored for the purposes of the leaving entity's income tax affairs for income years ending after the leaving time. The leaving entity may make the choice, if it is eligible.

More information on consolidation

The Consolidation reference manual provides detailed information on the operation of consolidation, including its practical impacts for business. It is available on the Tax Office website.

If you have any queries, phone 13   28   66 .

You can email any enquiries to consolidation@ato.gov.au

More information

For more information or help in understanding your foreign income tax obligations phone:

13   28   61	-     for personal tax enquiries
13   28   66	-     for business tax enquiries

or visit www.ato.gov.au for easy access to a range of business and personal tax information, services and transactions with government.

The website contains information on the location of tax offices around Australia.

	If you do not speak English well, and want to talk to a tax officer, phone the Translating and Interpreting Service on 13   14   50 for help with your call.
	If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13   36   77 .
	If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300   555   727 .

ATO references:
NO NAT 1840