Foreign investment funds guide

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Chapter 9: Consolidation (consolidated income tax treatment for groups of entities)

Overview

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

Once a group has consolidated the choice becomes irrevocable and the consolidated group is treated as a single entity for income tax purposes.

If 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 (MEC) group rules will be applicable to the wholly owned resident companies and their wholly owned resident subsidiary entities that elect to consolidate as MECs.

The following losses and tax attributes can generally be brought into a consolidated group (or MEC group) when the group forms or a subsidiary member joins the group, and used by the group's head company:

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

Note: This chapter provides a summary of the provisions on the application of income attributed from FIFs and included in the assessable income of a head company of a consolidated group. Detailed information on the operation of consolidation is in the Consolidation reference manual , which provides information on the operation of consolidation, including its practical effects for business. The manual and legislation are available on our website.

If you have tax technical queries, phone the Business Infoline on 13   24   78 or email us at consolidation@ato.gov.au

Foreign income tax offsets

The foreign income tax offset (FITO) rules have replaced the foreign tax credit system. For further information about the FITO rules, refer to the Guide to foreign income tax offset rules .

FIF attribution account surpluses

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

The pre-consolidation surplus balances of the FIF attribution accounts of subsidiary members of the group are transferred to the head company (or MEC group), at formation or when a subsidiary member joins the consolidated group (or MEC group). This ensures that distributions from FIFs are not taxed to the head company where the joining entity has already been subject to FIF taxation.

Once the FIF attribution account balances have been transferred to the head company of a consolidated group (or MEC group) the FIF attribution accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group (or MEC group).

When an entity with an interest in a FIF leaves a group, a proportion of the head company's FIF attribution account surplus that the head company has in relation to the interests in the FIF that leaves the group with the leaving entity are transferred to the leaving entity.

The date of effect of consolidation and the related provisions regarding FIF attribution accounts is 1   July 2002. These provisions are in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 .

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 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 a 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.

In the same way, 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 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.

ATO references:
NO NAT 2130