The Commonwealth Government introduced consolidated income taxation of corporate groups – that is, taxing wholly-owned groups as single entities – on 1 July 2002 as part of the Business Tax Reform package. Before the introduction of consolidation, the income tax system treated each company in a wholly-owned group as a separate entity (subject to certain grouping provisions).
Any eligible business group can consolidate regardless of size. If a business consists of two or more eligible entities (for example, one company wholly owns another company), it can choose to consolidate. The head of a consolidatable group must be a company – it cannot be a trust or partnership.
The benefits of consolidation for a particular group will depend on factors such as the extent and current utilisation of group losses and franking credits, as well as compliance cost savings related to accounting for intragroup transactions and meeting multiple PAYG installment obligations.
Consolidation involves treating the wholly-owned group as a single tax entity, with the subsidiary members treated as parts of the head company. Intragroup transactions are disregarded for income tax purposes.
This:
- allows pooling of losses and credits – simplifying obligations and delivering cost savings for consolidated groups
- eliminates many complex provisions applying to intragroup transactions, such as:
- deemed dividend rules
- rules for determining capital gains and losses
- franking rules in relation to intragroup dividends
- formal requirements for intragroup transfers
- related anti-avoidance rules
- reduces impediments to group restructuring and allows:
- movement of assets between group entities to be disregarded for income tax purposes with no formal rollover requirements
- buying back shares without triggering a capital gain or loss
- liquidating a member entity without triggering a deemed dividend or a capital gain or loss.
Once you have formed a tax consolidated group you should consider a tax sharing agreement and tax funding agreement.
If you require assistance, please contact us on (02) 8264-0755
All representations and information on this site is general in nature and should not be relied upon as advice. If you require specific advice please contact us.