Australia Improves Corporate Consolidation Regime

by Mary Swire, Tax-News.com, Hong Kong

14 May 2007

The Australian government has announced a package of improvements to the income tax law affecting consolidated groups and multiple entry consolidated groups (MEC groups). The improvements aim to ensure the law operates effectively and will reduce compliance costs for consolidated groups and MEC groups.

Under the consolidation regime, which was introduced from 1 July 2002, wholly-owned groups are taxed as a single entity. Over time, taxpayers and the Australian Taxation Office have identified certain aspects of the consolidation regime that are producing inequitable outcomes or imposing excessive compliance costs.

The package clarifies the application of the income tax law for consolidated groups and MEC groups in two ways.

First, it modifies the consolidation tax cost setting rules, which set the costs of a joining entity’s assets for income tax purposes, to ensure that they operate effectively.

Second, it clarifies interactions between the consolidation provisions and other parts of the income tax law, including interactions with the capital gains tax regime and the uniform capital allowances system.

Some of the changes apply from the commencement of the consolidation regime because they clarify the operation of the law and ensure that it operates effectively. Other changes apply prospectively.

The government said it will consult with stakeholders on the development of legislation to implement the package.

Minister for Revenue and Assistant Treasurer Peter Dutton has also announced that the government will not proceed with the proposed reforms to the taxation treatment of finance leases between taxable entities.

The Government previously announced its in-principle agreement to the Review of Business Taxation recommendations to change the income tax treatment of finance leases between taxable entities. The Review proposed to apply a sale and loan treatment to certain finance leases, subject to further review.

However, after consulting with business, the government has decided not to proceed with the Review’s recommendations.

The long-standing income tax treatment of finance leases between taxable entities will remain undisturbed. Consequently, finance leases will be excluded from the scope of the proposed taxation of financial arrangements legislation.

’This will assist small businesses as it will ensure that they will continue to have access to a broader range of asset financing options,’ Peter Dutton said.

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