Taxman Offers Choice: Consolidate or Perish; the New Consolidation Rules Are Supposedly Optional for Australian Companies, but Those Who Don't Use Them Could Find Themselves at a Serious Tax Disadvantage. (Tax and Law Australia)

Article excerpt

In keeping with the taxman's all-inclusive approach to consultation, the tax policy makers recently took it to the streets--quite literally--with a series of road shows to promote the Federal Government's new consolidation laws.

The push for street cred is what Minister for Revenue, and Assistant Treasurer, Senator Helen Coonan recently described as the "new inclusive way of the Australian Taxation Office to roll out complex tax legislation".

The consolidation measure, she added, has been "eagerly anticipated by big and small business". In reality there is not a lot of benefit for small business in consolidation, which generally views it as a necessary evil in order to retain access to carry-forward losses.

The consolidation measure has its genesis in the so-called Ralph review of business taxation (Chapter 15: Taxing entity groups on a consolidated basis).

The review, headed by prominent businessman John Ralph, aimed to tidy up aspects of consolidation in relation to franking credits and carry forward losses.

The review established six key principles:

> consolidation is optional, but if a group decides to consolidate, all its wholly owned Australian resident group entities must consolidate;

> consolidated groups of wholly owned Australian entities with a single common head entity will be treated as a single entity;

> the current grouping provisions will be repealed;

> losses and franking account balances of entities entering a consolidated group generally will be able to be brought into the consolidated group;

> losses and franking balances will remain with the consolidated group on an entity's exit; and

> the tax values of assets and liabilities on exit will be established according to the asset-based model.

Motivation for the consolidation measure, as a matter of policy, may be ascribed to two main drivers. First, there was a clear signal given to Ralph by business that this was a measure to simplify the tax compliance process.

In her announcement address, Senator Coonan gave an example of a group of 40 companies, in which the benefit from consolidation is that the head company provides the only tax return, rather than each company being required to provide a tax return.

Of course, to the extent that completing a tax return is simply the icing on the accounting cake, then there is little cost saving in this respect.

A related aspect of the simplification benefit is that assets and losses may be transferred within the group, free of some of the rules that apply at present.

The transfer of losses is a double-edged issue, however, in that if a group does not elect to be treated under the consolidation measures then it will lose the capacity to transfer losses.

The corollary of introduction of the new measure is that the existing grouping rules will terminate from 1 July 2002. When an entity has a substituted accounting period, the new measure commences with the first income year starting after 1 July 2002.

The other key driver for consolidation is the taxman's perceptions of revenue threats. The relevant perception is that revenue is at risk because the existing grouping provisions for wholly owned groups provide opportunities for tax avoidance through artificial arrangements.

Yet the measure is mooted to save business approximately $1 billion over three years. On being questioned as to the source of those savings, Senator Coonan, in releasing the draft legislation, appeared to suggest that it was a saving in compliance costs.

Not all the reception for the consolidation measure has been by way of unbridled enthusiasm. In its response to the draft legislation, the Taxation Institute of Australia was disappointed the Government ignored its suggestion of continuing with the current system in parallel with the new rules for an additional twelve months. …