Tax Brief. 15 December Tax Consolidation: Transitional Elections to be Finalised by 31 December More Changes Introduced

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1 Tax Brief 15 December 2004 Tax Consolidation: Transitional Elections to be Finalised by 31 December More Changes Introduced STOP PRESS 20 DECEMBER 2004 On Monday 20 September 2004, the Minister for Revenue and Assistant Treasurer announced that a further extension until 31 December 2005 would be allowed for making the elections referred to in our Tax Brief of 15 December 2004 Elections The tax consolidation rules provide for many elections of a transitional nature. Originally, these elections were irrevocable but the Government amended the law in early 2004 to allow a number of elections to be made or revoked by the end of 31 December The Government is currently being asked by professional bodies to extend the revocation date by another year but no further extension has yet been announced. Hence it is now wise: to review whether some elections already made are still appropriate; and to take this opportunity to make decisions before the cut-off date of 31 December The following elections are subject to this 31 December 2004 deadline: to retain the existing tax cost of a subsidiary s assets; to utilise certain losses over three years rather than under the available fraction method; to utilise value donor concessions to increase the available fraction for a bundle of losses; to waive the capital injection rules; and to cancel the transfer of a pre-consolidation loss to the head company of a consolidated group or MEC group.

2 A brief description of each of these elections is provided below. Each of the elections/revocations has its own special conditions so that a particular consolidated group may be able to make or revoke some of the elections but not others. There are also some elections that remain irrevocable, in particular, the choice to consolidate. Stick or Spread on Tax Cost of Assets Transitional groups have the choice on a subsidiary by subsidiary basis to stick with current cost bases for assets as at the consolidation date or to adopt the allocable cost amount calculation which spreads the cost of shares in a subsidiary over its assets for tax purposes on entering consolidation. As with the initial Stick or Spread election, there is no need to formally notify the Commissioner of the revocation or amendment of these choices. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December Note that a change to these elections may require the amendment of any consolidated group income tax returns that were lodged based on the previous elections. Spreading of Losses The utilisation of losses that satisfy the continuity of ownership test and were incurred in income years ending on or before 21 September 1999 may by election in the transitional phase be spread over three years rather than be subject to the available fraction method. This choice will usually be made when it is likely that such losses otherwise will take more than three years to recoup. As with the initial election on losses, there is no need to formally notify the Commissioner of the revocation or amendment of any of those elections. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December Note that a change to this election will mean that the relevant losses will need to be disclosed in a different section of the Consolidated Groups Losses Schedule when preparing the head company s next income tax return. Value and Loss Donation For the purpose of calculating the available fraction which determines the rate at which tax losses incurred before consolidation can be used in a consolidated group, it is possible in the transitional phase to donate value and losses from one company in a group to another if the losses could have been transferred under the previous grouping rules. The purpose of making these elections again is to increase the rate at which past losses can be used in consolidation. As with the initial election to donate value and losses (if any), there is no need to formally notify the Commissioner of the revocation or amendment of any of those 2Tax Consolidation: Transitional Elections to be Finalised by 31 December More Chan

3 elections. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December Note that a change to this election will mean that the relevant losses will need to be disclosed with the new available fraction attributable to them in the Consolidated Groups Losses Schedule when preparing the head company s next income tax return. Waiver of Capital Injection Rules The capital injection rules limit the rate at which tax losses can be recovered. The rules can be waived by election if the entities involved can use the value donor rules to achieve a similar result. As with the initial election to waive the capital injection rules, there is no need to formally notify the Commissioner of the revocation or amendment of any of those elections. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December Note that a change to this election will mean that the relevant losses will need to be disclosed with the new available fraction attributable to them in the Consolidated Groups Losses Schedule when preparing the head company s next income tax return. Cancellation of Losses It is possible to cancel tax losses when an entity enters into consolidation. This can have beneficial effects under the cost setting rules and also on the available fractions achieved by value donation. This election might be made if it is expected that certain losses are unlikely to be recovered in a reasonable period of time or have very low available fractions and are practically useless. A similar election for cancellation of losses is available in relation to MEC groups. This is not strictly a transitional measure as it is available to companies joining consolidated groups after the transition period. What is different in transition is the capacity to revoke or make elections of this kind up to 31 December As with the initial election to cancel the transfer of losses, there is no need to formally notify the Commissioner of the revocation or amendment of any of those elections. However, as the choice may impact on the allocable cost amount ( ACA ) of the relevant subsidiary members and some of those relevant subsidiary members may have left the group the revocation or amendment must be agreed to by any relevant subsidiary members that have since left the group. Accordingly, the head company of a consolidated group should document their agreement to the revocation or amendment of a choice to cancel losses on or before 31 December Where the revocation or amendment affects subsidiary members that have left the group, the head company and that entity should enter into an agreement to that revocation or amendment before 31 December Tax Consolidation: Transitional Elections to be Finalised by 31 December More Chan

4 Note that a change to this election will mean that the cancellation or reestablishment of any losses will need to be disclosed in the Consolidated Groups Losses Schedule when preparing the head company s next income tax return. Further, if the head company wishes to utilise any re-established loss in a previous income year, the head company will have to lodge an amendment request with the Commissioner. Changes to the Consolidation Law Further changes to the income tax law are contained in the following bills that were recently introduced into Parliament: Taxation Laws (2004 Measures No 6) Bill 2004 The 2004 Measures No 6 Bill contains the following changes that: ensure that an insolvent entity can still be a subsidiary member while in external administration; ensure that ACA is correctly allocated to the assets relating to finance leases, and describe how that ACA should be treated; ensure the appropriate amount of mining and software-related capital expenditure will be deductible for the head company in the future, as a result of amounts of ACA being allocated to assets obtained or created via that expenditure; describe how a head company is to deduct ACA that has been allocated to low-value pools; alleviate the notice requirements under the inter-entity loss multiplication rules during the transitional period for entities that are in the same consolidatable group; further clarify the treatment of profits for the purposes of Step 3 of the ACA calculation, and tax liabilities for the purposes of Step 2 of the ACA calculation; provide a head company with choices in relation to the following (which are related to international tax), such that any previous choices made in relation to them are not automatically inherited under the entry history rule : attribution of income in respect of controlled foreign corporations, foreign investment funds and foreign limited partnerships; valuation of interests in foreign investment funds that are trading stock; functional currency rules; reinsurance with non-residents; 4Tax Consolidation: Transitional Elections to be Finalised by 31 December More Chan

5 short-term forex realisation gains and losses; and rules about disregarding certain forex realisation gains and losses. Taxation Laws (2004 Measures No 7) Bill 2004 The 2004 Measures No 7 Bill contains the following changes that: require that, for certain liabilities, the same amount to be taken into account in the exit ACA calculation as was taken into account for that liability in the entry ACA calculation; ensure that there is no double reduction for the same economic loss where that loss reduced the retained profits of an entity (reducing Step 3 of the ACA calculation), and also produced a tax loss (reducing the ACA calculation via either Step 1 or 5); provide tests that must be passed before head companies can claim bad debt deductions in relation to amounts owed to subsidiary members; and relate to the application of the consolidation regime to life and general insurance companies, including measures to deal with intra-group policies. 5Tax Consolidation: Transitional Elections to be Finalised by 31 December More Chan

6 For further information, please contact Sydney Richard Hendriks Andrew Mills Andrew.Mills@gf.com.au G&F document ID _15.docx These notes are in summary form designed to alert clients to tax developments of general interest. They are not comprehensive, they are not offered as advice and should not be used to formulate business or other fiscal decisions. Liability limited by a scheme approved under Professional Standards Legislation Greenwoods & Freehills Pty Limited (ABN ) Sydney ANZ Tower, 161 Castlereagh Street, Sydney NSW 2000 Australia Ph , Fax Melbourne 101 Collins Street, Melbourne VIC 3000, Australia Ph Fax Perth QV.1 Building, 250 St Georges Terrace, Perth WA 6000, Australia Ph Fax Tax Consolidation: Transitional Elections to be Finalised by 31 December More Chan