Tax Consolidation changes
The Government has announced three new measures designed to modify, broaden and defer certain previously announced integrity measures within the tax consolidation regime.
Integrity measures for liabilities from securitised assets
The first is an extension of measures concerning the recognition of liabilities for non-financial institutions arising from securitisation arrangements for the purposes of the entry and exit Allocable Cost Amount (ACA) calculations under the tax consolidation regime.
The measure relating to securitised assets was previously introduced in the 2014-15 Budget measure Closing the loophole in the consolidation regime – securitised assets which applied only to financial institutions.
When a company holds securitised assets, the accounting treatment requires that the company recognise the relevant liabilities in the financial statements without recognising the associated assets subject to the securitisation. This can create a tax advantage where the entity is entering or leaving a consolidated group. On entry, this results in an overallocation of entry ACA to the other assets held by the joining entity. On exit, the exit ACA may be understated.
To address the mismatch, the Government announced in the 2014-2015 Budget that financial institutions that held securitisation arrangements would be prevented from including the value of the securitised liabilities in their entry and exit ACA calculations unless the securitised asset is also recognised. The Budget announcement extends these amendments to apply to all entities, not just financial institutions.
The amendment will apply to arrangements that commence from Budget night. In addition, the Government announced that transitional rules will apply to arrangements entered into prior to 3 May. These transitional rules have not yet been released.
Removal of deferred tax liabilities
The tax consolidations regime’s treatment of the deferred tax liability will be amended by removing adjustments to deferred tax liabilities from the consolidation entry and exit tax cost-setting rules.
These changes will apply to entities that join or leave a tax consolidated group after the date amending legislation is introduced in Parliament.
Currently there is a commercial/tax mismatch under the consolidation entry and exit tax cost-setting processes for deferred tax liabilities which gives rise to integrity risks and uncertainty. This measure will more closely align the commercial and tax outcomes, reduce complexity and improve the integrity of the consolidation regime.
Removing the double benefit of deductible liabilities
The Government will modify a previously announced 2013-14 Budget integrity measure that prevents a consolidated group from obtaining a double tax benefit when an entity with deductible liabilities joins the group. The modifications mean that a consolidated group that acquires a subsidiary with deductible liabilities will no longer include those liabilities in the consolidation entry tax cost setting process. This removes the double tax benefit. The start date for this measure has also been deferred from 14 May 2013 to 1 July 2016.
The previous 2013-14 Budget measure required the consolidated group to recognise an additional income amount over the first four years after acquiring an entity with deductible liabilities. The modified approach of denying an increase in the consolidated entry cost setting process will result in lower depreciation allowances over a longer period of time.
These announcements represent further changes to strengthen the consolidations regime. While they are essentially technical amendments, the lack of detail provided and the Government’s inability to quantify the revenue gain from these measures is a concern. For several years, integrity amendments have been announced without further detail or quantification of the financial impacts. This makes compliance difficult for taxpayers and increases the risks associated with acquisitions and disposals as there is greater tax uncertainty for entities entering or leaving consolidated tax groups. Worse still, many of the previously announced amendments have not yet been legislated. Some of the amendments in earlier budgets remain as draft legislation and consultative documents. We can only hope these announcements do not suffer a similar fate.