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Tax consolidation regime put on hold

CHANGES to the tax act to allow groups of wholly owned companies to be treated as single tax paying entities have been deferred for a year.

Called the Consolidation Regime, the change to the tax act was due to come into effect from July 1 but the pace of change to the tax system has caused its deferral.

An Australian Tax Office spokesperson said while some large businesses were prepared for the consolidation regime, consult-ation showed the majority of business — particularly small and medium-sized enterprises —were not.

The regime’s deferral has been well received.

An exposure draft, released on December 8, was the only step the Government and the ATO had taken towards putting the regime into law.

The Simplified Tax System, the Unified Capital Allowance Sys-tem, Thin Capitalisation Arrange-ments and the Debt/Equity Test will still begin on July 1.

The Simplified Tax System gives eligible small businesses with a cash basis of recognising income and deductible expenses simpler depreciation and trading stock rules.

The Unified Capital Allowance System is expected to reduce compliance costs by simplifying the amortisation regimes. It will also recognise capital allowance blackhole expenses.

Thin Capitalisation Arrange-ments are designed to prevent multinational corporations allocating a disproportionate amount of their debts to their Australian operations.

The Debt/Equity Test establ-ishes a basis for classifying instruments that are part debt and equity as either debt or equity.

With the deferral of the Consolidations Regime, the change to the tax law will depend on whether the Federal Govern-ment is re-elected.

Announcement of the Consolidation Regime — proposed in the Ralph Report of Taxation — was well received by the big end of town.

The regime obviously affects conglomerates such as BHP and Wesfarmers but there are some small businesses that operate business units as subsidiaries and will be drawn in.

It allows a group of wholly owned companies to lodge one tax return. All transactions between group companies would be ignored for tax purposes.

The regime is designed to cut down double deductions and double taxing.

Companies now have an extra year to decide whether they will consolidate for tax purposes or not.

Those not consolidating will lose three tax benefits – the ability to transfer tax losses between group companies, the inter-corporate dividend rebate and the ability to transfer assets tax-free under capital gains tax “rollover” relief.

Ernst and Young tax partner Ian Crisp said the ATO had the Consolidations Regime was designed to cut compliance.

“It’s hard to see how that could be the case given the complexity of the law,” Mr Crisp said.

“Grouped companies will have only one tax return but the calculation to get there is quite hard.”

Mr Crisp said the Consolidations Regime would be an all or nothing approach.

“You can’t choose which companies in the group that you consolidate.

Chamber of Commerce and Industry business and financial consultant John Anderson said the Chamber agreed with the deferral.

“While we believe it’s necessary to keep driving tax reform, we realise there are people on both sides that are not ready,” Mr Anderson said.

“Businesses, small businesses in particular, are confused with the changes that are being made.”

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