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Australia: Government winds back tax consolidation opportunities

The Australian government has announced significant changes to the way the tax consolidation rules work for company groups.

The latest measures operate to wind back the rights to future income (RTFI) and residual asset tax cost setting rules introduced by the same government only 18 months ago.

The changes impact groups of companies that elected to apply the tax consolidation rules, and particularly those groups who have acquired or merged with other companies since July 1 2002.

The RTFI and residual tax cost setting rules had operated to provide significant opportunities to claim tax deductions for the tax cost pushed down to various contractual assets held by a company which was acquired by a tax consolidated group. The government announced that the significant revenue cost of these changes was largely unanticipated and has therefore acted to restrict those measures both prospectively and retrospectively.

Adverse impact

A number of companies relied on the previous law and recognised the benefits in their accounts; in results announcements, in making investment decisions, or in paying dividends. While some claims will be protected where a group has lodged a claim and received a refund before March 31 2011, or received an Australian Taxation Office (ATO) ruling, most companies will not be so lucky.

Different rules for different periods

The measures contain three sets of rules covering transactions in the following periods:

  • July 1 2002 to May 12 2010 – the rules will broadly reinstate the old (pre-2010) rules (with some exclusions) while providing a specific deduction for accrued income;
  • May 13 2010 to March 30 2011 – the rules will broadly protect companies that entered into transactions during this period and who therefore relied on the law in place at the time. In particular, deductions will be available over the lesser of 10 years or the life of a contract for the cost allocated to RTFI contracts (with some exclusions);
  • Post March 30 – a much narrower set of rules apply on a prospective basis chiefly aimed at aligning the outcomes of a share purchase and a direct business asset purchase.

Other changes

A specific tax deduction will be provided for the reset tax cost of consumables in relation to all periods.

Many of the assets carved out of the above rules will be deemed part of the general goodwill of the group.

In many cases, these changes will shift the tax outcomes of share vs asset acquisition decisions back in favour of direct asset deals.

Ian Farmer (, Sydney
Tel: +61 2 8266 2802 Fax: +61 2 8286 2802

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