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Avoiding consolidation complacency

WHILE businesses operating through wholly owned group structures have been given one year’s grace from the new tax consolidation regime, advisers are warning against complacency.

They believe companies still need to be doing the ground work to put consolidation in place – such as finding out the value of each asset, what losses exist within the group structure, their franking balance and the profit of each entity.

All of these things need to be worked out as at June 30, in case the group finds some benefits from going into consolidation early.

PricewaterhouseCoopers tax partner John Murray said some companies could benefit from going into consolidation early.

“If a group can immediately gain access to losses within the group it should look to consolidate early,” Mr Murray said.

“However, in relation to losses, there are a whole range of pre-existing anti-avoidance rules that need to be taken into account.

“In other cases it might be better for a group to acquire or devolve entities or assets before going into consolidation.

“If ever there was a time to do due diligence and planning, then this is it.”

Under consolidation, any franking credits held within entities will become the property of the head entity

Tax consolidation will still come into effect from July 1 but the existing group structure tax rules will continue to operate until July 1 2003.

The potentially lucrative transitional rules that come with the introduction of tax consolidation will run until July 1 2004.

These transitional rules will allow companies to readjust the tax base of each asset and could result in some real cash gains.

However, the Federal Government has only released the rules that explain how to bring companies into a consolidated structure.

The rules do not as yet explain how to set up a consolidated group, and this is causing some problems for groups.

They still do not know how their group will look under the consolidation regime.

One of the Government’s stated purposes in providing the consolidation regime was that it would reduce the administrative cost for companies.

Instead of having to fill out a tax return for each entity, under consolidation a group will only have to file one tax return.

Most tax practitioners believe this is only a minor work saving because groups will still be forced to do all of the work to fill out a return for each entity.

Fortunately for most tax compliance-weary small businesses the tax consolidation measures will not affect them.

It is really only a concern for companies operating through fully-owned group structures such as Wesfarmers, which has had to contend with the stop-start way the Government has introduced its consolidation legislation.

Ernst & Young tax partner Peter Hills said groups would be required to collect extensive financial information for their consolidation resumes.

“They need to look at the market values of their assets on an asset-by-asset basis.

“Our general feeling is that a lot of companies have not been keeping records of basic cost data,” Mr Hills said.

He said much of the work facing companies considering consolidation came from getting the data necessary for the asset push down calculation.

This calculation helps companies decide how to best make use of the tax base readjustments allowed during the transitional period.

Mr Hills said companies then had to accumulate their loss information.

“The combination of the asset push down calculation and the losses information will help a group make the decision about whether it is better to go into consolidation earlier or not,” he said.

PricewaterhouseCoopers corporate finance partner Roger Port said some groups should consider what their competitors were doing.

“There could be some uplifting benefits for companies out of the transitional measures that could result in some real cash benefits,” Mr Port said.

“Companies need to be doing the work now to try and work out how to unlock those benefits.

“Like the GST and, to a lesser extent Y2K, if a company plans carefully it can make the most of the changes.”

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