BDO Comments on Government consultation on Integrity Measures

12 September 2017

The Government has released draft tax consolidation legislation for consultation. These measures restore integrity to the tax consolidation rules, making sure they are operating as intended and providing appropriate tax outcomes.

BDO Tax Partner, Mark Molesworth commented: “These amendments deal with the process that is gone through to ‘reset’ the value of assets when entities join or leave income tax consolidated groups,” he said.

“The most significant of the amendments with the widest likely application is the exclusion of deductible liabilities from this calculation. This will have an immediate impact on all consolidations that have taken place since 1 July 2016.

“In effect, the amendment will disadvantage companies that have been consolidated since this time – which is likely to lead to higher tax outcomes for such consolidated groups.

“In many cases, particularly for innovative and early stage businesses, the largest liabilities on the balance sheet are deductible in the future (eg annual leave liabilities and provisions to do with ‘making good’ leased premises). Therefore we expect this measure to have an impact on decisions about the acquisition of such companies.”

“The other amendments are very technical in their nature and less likely to be run across in most transactions. One point of some concern with these other amendments is the disparate start dates for the application of the amendments (at least five different dates between May 2013 and the date that the proposed bill is introduced). This leads to a confusing multitude of potential applications of the new law.”

The Bill contains six measures designed to remove anomalous tax outcomes that arise under the tax cost setting rules when an entity leaves or joins a tax consolidated group. These measures:

  • prevent a double benefit from arising in relation to deductible liabilities when an entity joins a consolidated group;
  • ensure that deferred tax liabilities are disregarded;
  • remove anomalies that arise when an entity holding securitised assets joins or leaves a consolidated group;
  • prevent unintended benefits from arising when a foreign resident ceases to hold membership interests in a joining entity in certain circumstances;
  • clarify the outcomes that arise when an entity holding financial arrangements leaves a consolidated group; and
  • clarify the treatment of intra‑group liabilities when an entity leaves a consolidated group.

Click here for the Exposure Draft and Explanatory Memorandum on the Treasury website.   These measures address concerns raised in the Board of Taxation’s post-implementation review of the consolidation rules.