Australia: Tax consolidation rules: Potential risk areas
The tax consolidation rules should remain high on any Australian group's assessment of potential tax risks, particularly as we see the Australian Taxation Office (ATO) focus on reviewing prior year claims, and we still have a number of retrospective unenacted tax consolidation changes. In recent times the ATO has been very active in issuing detailed questionnaires to tax consolidated groups which it believes may have made claims affected by the provisions enacted in 2012 to retrospectively unwind the rights to future income (RTFI) and residual tax cost setting rules. Some of the issues the ATO is focussing on include:
Deductions claimed for non-contractual intangibles such as customer relationships;
Utilising a cost base, for capital gains tax (CGT) purposes, for the reset tax cost of non-deductible RTFI assets such as customer contracts (under the pre-rules);
RTFI deductions incorrectly claimed for any value attributable to a period beyond the time the relevant contract could be unilaterally cancelled by the customer; and
Any RTFI deduction claimed under the interim rules that contributed to a tax loss.
Groups are yet to see the legislative detail for the consolidation-related measures announced in the 2013-14 Federal Budget, which the new government confirmed on November 6 2013 will go ahead. This includes the following which are proposed to apply to transactions that take place after 7.30pm AEST on May 14 2013:
Future deductible liabilities (for example employee leave entitlements) of a joining entity will result in the head company of the joined group including a corresponding amount in its assessable income;
Non-residents will not be able to buy and sell membership interests between consolidated groups to allow the same ultimate owner to claim double deductions through the resetting of the tax cost of the assets of the relevant joining entity in cases where there has been no recognition of any gain on the transfer of the membership interests; and
Intra-group assets will no longer be recognised for purposes of applying principal asset test in working out whether an indirect Australian real property interest held by a foreign resident is subject to CGT.
Given the element of retrospectivity and lack of detail for these measures, it is hoped that they will receive top priority in terms of public consultation in coming months.
Those multinationals operating in Australia through a multiple entry consolidated (MEC) group will also need to keenly watch the outcome of last year's commissioned tripartite review, chaired by Treasury and involving the ATO and the private sector, to examine and implement policies to ensure that MEC groups and Australian consolidated groups compete on a level playing field. Any changes resulting from that review are intended to apply from July 1 2014, although we expect the government has reserved the right to take earlier legislative action if it becomes aware of aggressive tax minimisation practices over the course of its review.
We also expect to see a broader review of consolidation issues to be undertaken by the Australian Treasury in 2015.
Tom Seymour (firstname.lastname@example.org)
Tel: +61 (7) 3257 8623