Tax Brief - Consolidation Transitional Elections About to Expire - Again!!!

The tax consolidation rules provide for many elections of a transitional nature. Originally, these elections were irrevocable but the Government amended the law in early 2004 to allow a number of elections to be made or revoked by the end of 31 December 2004. On 20 December 2004, the Government announced that this period would be finally extended to 31 December 2005.

The Act giving effect to this extension, Tax Laws Amendment (2005 Measures No 5) Act 2005 completed passage through Parliament last week. Although further changes to consolidation retrospective to 1 July 2002 were announced by the Government on 1 December 2005, no mention was made of any further extension of the transitional elections. On 9 December 2005, the Minister for Revenue announced that the extension to 31 December 2005 had passed through the Parliament. We can assume that no further general extension will be forthcoming.

Hence it is now wise:

• to review whether some elections already made are still appropriate; and

• to take this opportunity to make decisions before the cut-off date of 31 December 2005.

The following elections are subject to this 31 December 2005 deadline:

• to retain the existing tax cost of a subsidiary’s assets;

• to utilise certain losses over three years rather than under the available fraction method;

• to utilise ‘value donor’ concessions to increase the available fraction for a bundle of losses;

• to waive the ‘capital injection’ rules; and

• to cancel the transfer of a pre-consolidation loss to the head company of a consolidated group or MEC group.

A brief description of each of these elections is provided below. Each of the elections/revocations has its own special conditions so that a particular consolidated group may be able to make or revoke some of the elections but not others. There are also some elections that remain irrevocable, in particular, the choice to consolidate.

Transitional groups have the choice on a subsidiary by subsidiary basis to stick with current cost bases for assets as at the consolidation date or to adopt the allocable cost amount calculation which spreads the cost of shares in a subsidiary over its assets for tax purposes on entering consolidation.

As with the initial Stick or Spread election, there is no need to formally notify the Commissioner of the revocation or amendment of these choices. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December 2005. It is not necessary to lodge a tax return by 31 December 2005 to make or revoke the election. Note that a change to these elections may require the amendment of any consolidated group income tax returns that were lodged based on the previous elections.

The utilisation of losses that satisfy the continuity of ownership test and were incurred in income years ending on or before 21 September 1999 may by election in the transitional phase be spread over three years rather than be subject to the available fraction method. This choice will usually be made when it is likely that such losses otherwise will take more than three years to recoup.

As with the initial election on losses, there is no need to formally notify the Commissioner of the revocation or amendment of any of those elections. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December 2005. It is not necessary to lodge a tax return by 31 December 2005 to make or revoke the election. Note that a change to this election will mean that the relevant losses will need to be disclosed in a different section of the Consolidated Groups Losses Schedule when preparing the head company’s next income tax return.

For the purpose of calculating the available fraction which determines the rate at which tax losses incurred before consolidation can be used in a consolidated group, it is possible in the transitional phase to donate value and losses from one company in a group to another if the losses could have been transferred under the previous grouping rules. The purpose of making these elections again is to increase the rate at which past losses can be used in consolidation.

As with the initial election to donate value and losses (if any), there is no need to formally notify the Commissioner of the revocation or amendment of any of those elections. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December 2005. It is not necessary to lodge a tax return by 31 December 2005 to make or revoke the election. Note that a change to this election will mean that the relevant losses will need to be disclosed with the new “available fraction” attributable to them in the Consolidated Groups Losses Schedule when preparing the head company’s next income tax return.

Waiver of Capital Injection Rules

The capital injection rules limit the rate at which tax losses can be recovered. The rules can be waived by election if the entities involved can use the value donor rules to achieve a similar result.

As with the initial election to waive the capital injection rules, there is no need to formally notify the Commissioner of the revocation or amendment of any of those elections. The head company of a consolidated group should document the revocation or amendment of a choice on or before 31 December 2005. It is not necessary to lodge a tax return by 31 December 2005 to make or revoke the election. Note that a change to this election will mean that the relevant losses will need to be disclosed with the new “available fraction” attributable to them in the Consolidated Groups Losses Schedule when preparing the head company’s next income tax return.

It is possible to cancel tax losses when an entity enters into consolidation. This can have beneficial effects under the cost setting rules and also on the available fractions achieved by value donation. This election might be made if it is expected that certain losses are unlikely to be recovered in a reasonable period of time or have very low available fractions and are practically useless. A similar election for cancellation of losses is available in relation to MEC groups. This is not strictly a transitional measure as it is available to companies joining consolidated groups after the transition period. What is different in transition is the capacity to revoke or make elections of this kind up to 31 December 2005.

As with the initial election to cancel the transfer of losses, there is no need to formally notify the Commissioner of the revocation or amendment of any of those elections. However, as the choice may impact on the allocable cost amount (“ACA”) of the relevant subsidiary members – and some of those relevant subsidiary members may have left the group – the revocation or amendment must be agreed to by any relevant subsidiary members that have since left the group. Accordingly, the head company of a consolidated group should document their agreement to the revocation or amendment of a choice to cancel losses on or before 31 December 2005. It is not necessary to lodge a tax return by 31 December 2005 to make or revoke the election. Where the revocation or amendment affects subsidiary members that have left the group, the head company and that entity should enter into an agreement to that revocation or amendment before 31 December 2005.

Note that a change to this election will mean that the cancellation or re-establishment of any losses will need to be disclosed in the Consolidated Groups Losses Schedule when preparing the head company’s next income tax return. Further, if the head company wishes to utilise any re-established loss in a previous income year, the head company will have to lodge an amendment request with the Commissioner.

Even after the announcements of 1 December 2005 of further retrospective changes to the consolidation regime, there is still a long list of outstanding issues to be resolved by the ATO and Treasury. The reason why the Government allowed elections to be made and revoked in the transitional period and extended that period is because groups do not know whether they are better off with an election or not if the ground rules keep changing on a retrospective basis to 1 July 2002. Hence while the Government is still making such announcements of legislative change, in fairness it is to be hoped that further limited extensions will be granted to the extent that future retrospective changes have direct impact on elections already made.

For further information, please contact,

Richard Hendriks
61 2 9225 5971
richard.hendriks@gf.com.au

Michael Moschner
61 2 9225 5969
michael.moschner@gf.com.au

www.gf.com.au