In the third of a four-part series on business tax planning, Mark Beyer looks at the new consolidation regime.
ONE of the major tax planning decisions facing large and mid-sized businesses this year is whether to adopt the new consolidation regime.
Consolidation is designed for groups with a head company and at least one other wholly-owned entity, which can be a company, trust or partnership.
It enables such groups to lodge a single income tax return and pay a single set of PAYG instalments, although accounts still need to be prepared for each entity in the corporate group.
The new regime also replaces the existing grouping rules, which end for most taxpayers on June 30.
The grouping rules provided significant flexibility for larger corporate groups.
For instance, they allowed profits and losses to be transferred between group companies and assets to be transferred between group com-panies without any tax implications.
The Australian Tax Office has stated that it expects most large corporate groups will adopt the new regime.
However, smaller business groups may also elect to consolidate.
In practice there has been slow take-up.
A recent survey by Ernst & Young found that Australian companies did not believe the much-heralded benefits of consolidation are being fully achieved.
It also found the transition to the new arrangements, which Ernst & Young described as the single most extensive change to Australia’s corporate tax system in a decade, was proving challenging.
“The survey indicates the consolidation provisions are complex and do not appear to have achieved the simplified approach to taxing corporate groups promised by the Ralph Report,” Ernst & Young tax partner Trevor Hughes said.
“Uncertainty in some areas of the law continues to cause delays in implementing and assessing the new regime.”
Horwarth Perth tax partner Peter Moltoni urged businesses to be wary about going into the consolidation regime, which he described as “exceptionally complex”.
He said the introduction of consolidation was driven by large corporate groups with multiple subsidiaries.
“If you can avoid consolidating, then I would strongly recommend that you don’t consolidate,” Mr Moltoni said.
Most smaller businesses will be unaffected by the new rules since they mostly use entities such as partnerships and trusts with individual beneficiaries.
Corporate groups with a handful of subsidiaries are borderline cases.
“If your subsidiaries are profitable and you are unlikely to move assets between the group companies, it is unlikely to provide any benefits,” Mr Moltoni said.
“It works if some subsidiaries make losses and some make profits and you want to put them together to pay tax on the net position.”
KPMG partner middle market advisory Graeme Sheard said the withdrawal of the grouping rules would drive many corporate groups to consolidate.
He said one of the key issues for companies considering whether to consolidate was the transitional rules.
Companies that consolidate prior to June 30 2004 have more flexibility in the valuation of subsidiaries, which in turn affects their ‘loss recoupment factors’.
“If you have not consolidated and you incur losses, you run the risk of not being able to recoup those losses in a tax-effective manner,” Mr Sheard said.
The Australian Taxation Office has announced that it is being “particularly vigilant in checking the transition to the consolidation regime, as some large taxpayers may seek to reorganise their business activities to use previously ‘trapped’ losses or to inappropriately recoup prior year losses,” it said.
“We have seen evidence of early restructuring to maximise benefits, such as creating new ‘head entities’ to allow potentially significant asset revaluation benefits.
“We will focus on identifying restructures that are contrary to the intent of the Government’s policy.”
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