• Protecting the corporate tax base from erosion and loopholes - closing loopholes in the consolidation regime

    These measures (described in the table below) address recommendations made by the Board of Taxation to improve the integrity of the consolidation regime. Other changes which are consistent with the Board’s recommendations are also being implemented. Exposure draft legislation and explanatory material was released on 28 April 2015.

    On 3 May 2016, the government announced in the 2016–17 Budget modifications to one of these measures. Modifications to the deductible/acquired liabilities measure 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, thus removing a double tax benefit. Also the start date for this measure is deferred from 14 May 2013 to 1 July 2016.

    The government also announced amendments to the consolidation regime to remove adjustments relating to deferred tax liabilities from the consolidation entry and exit tax cost-setting rules. Currently there is a commercial/tax mismatch under the consolidation entry and exit tax cost-setting processes for deferred tax liabilities. This gives rise to integrity risks and uncertainty. The change announced by the government will more closely align the commercial and tax outcomes, reduce complexity and improve the integrity of the consolidation regime. This change will apply to joining and leaving events under transactions that commence after the date amending legislation is introduced in Parliament.

    Details of the measures are provided below with their respective start dates.

    Closing loopholes in the consolidation regime

    Start date

    Removing a double benefit (or double detriment) that can arise in respect of certain liabilities held by a joining entity that is acquired by a consolidated group (the deductible/acquired liabilities measure)

    From 1 July 2016

    Removing adjustments related to deferred tax liabilities from the consolidation entry and exit cost setting process (the deferred tax liabilities measure).

    After the date amending legislation is introduced in Parliament

    Preventing the tax costs of a joining entity’s assets from being uplifted where no tax is payable by a foreign resident owner on the disposal of the joining entity in certain circumstances (the churning measure)

    On or after 14 May 2013

    Clarifying the operation of the Taxation of Financial Arrangements (TOFA) provisions when certain intra-group assets or liabilities that are, or are part of, a Division 230 financial arrangement emerge from a consolidated group because a subsidiary member leaves the group (the TOFA measure)

    On or after 14 May 2013

    Removing anomalies that arise when an entity leaves a consolidated group holding an asset that corresponds to a liability owed to it by the old group because the value of the asset taken into account for tax cost setting purposes is not always appropriate (the value shifting measure)

    On or after 14 May 2013

    Administrative treatment

    The ATO will accept tax returns as lodged during the period up until the proposed law change is passed by parliament. Past-year assessments will not be reviewed until the outcome of the proposed amendments is known. However, we may gather information to assist in managing the risk.

    After the new law is enacted, taxpayers will, where applicable, need to review their positions (including, where relevant, back to the first income year to which TOFA applied - the income year starting on or after 1 July 2009 on an elective basis, or 1 July 2010 on a mandatory basis).

    • Those taxpayers whose claims are in accordance with the new law when enacted do not need to do anything more.
    • Those taxpayers who applied the existing law and under-claimed according to the new law can seek amendments and, if a reduction in liability results, interest on overpayment will be paid.
    • Those taxpayers who applied the existing law and over-claimed according to the new law will need to seek amendments. No tax shortfall penalties will apply and any interest attributable to the shortfall will be remitted to nil up to the date of enactment of the law change.  
      • In addition, any interest accruing after the date of enactment will be remitted for taxpayers who actively seek to amend their assessments or revise their activity statements within a reasonable time after the enactment of the law change.
       
    • Those taxpayers who chose to anticipate the new law but find that this does not accord with the changes will need to seek amendments.  
      • If an increase in liability results, no tax shortfall penalties will apply and any interest accrued in respect of the amendment will be remitted to the base interest rate up to the date of enactment of the new legislative measure. In addition, the interest in excess of the base rate accruing after the date of enactment will be remitted for taxpayers who actively seek to appropriately amend their returns or revise their activity statements within a reasonable time after the enactment of the new law.
      • If a reduction in liability results, appropriate interest on any overpayment will be paid.
       

    See also

      Last modified: 11 May 2016QC 25222