Australia Reviews Consolidation Rules

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

04 April 2011

Uncertainty around the operation of the 'consolidation rights to future income and residual tax cost setting rules' has prompted Australian Assistant Treasurer, Bill Shorten, to commission the Board of Taxation to review the rules and clarify their scope.

The consolidation regime was amended last year to introduce the rights to future income rules and modify the residual tax cost setting rules. As a result of the amendments, if an entity that joins a consolidated group holds an asset that is a right to future income, then the tax cost allocated to the asset is deductible over the life of the relevant contract or 10 years (whichever is shorter).

The Board raised concerns with the Assistant Treasurer that, due to uncertainty in the scope of application of the rights to future income rules, tax deductibility may be argued for types of assets that were not contemplated when the rules were introduced. This could result in the rules having a substantially greater revenue impact than anticipated.

"The government is committed to maintaining the integrity, equity and fairness of the tax system. I thank the Board for bringing these concerns to my attention and have asked it to urgently review the rights to future income and residual tax cost setting rules," Shorten said.

The Board has been asked to examine the operation of the rules with a view to clarifying their scope. It may also propose changes to limit the scope of the rules, if necessary, and advise on the date of effect of those proposed changes (including whether they should apply retrospectively).

In undertaking the review, the Board has been told to consider:

• The taxation outcomes that arise when assets of the type that are covered by the rules are acquired directly by a company as part of a business acquisition outside of the consolidation regime;
• Whether there are any circumstances in which these tax outcomes should be different if these assets are held by a company that joins a consolidated group;
• If a difference in tax outcomes is warranted, the appropriate basis for recognizing the tax costs of any assets that should be treated differently on entry into a consolidated group; and
• The revenue impact of any changes to the rules it proposes.

In conducting the review, the Board is to seek public submissions and consult widely. It will report to the Assistant Treasurer by May 31, 2011, before completing its post‑implementation review of aspects of the consolidation regime.

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