Chapter 6 Consolidation (consolidated income tax treatment for groups of entities)
This chapter provides a summary of the provisions that relate to the application of income attributed from CFCs and included in the assessable income of a head company of a consolidated group. For detailed information on the operation of consolidation, see Consolidation.
For income tax purposes, consolidation is the taxing of a wholly owned group of entities as a single entity. Consolidation is optional. However, if the head company of a wholly owned resident group decides to consolidate, all its wholly owned eligible Australian resident group entities must become members of that consolidated group.
The choice to consolidate is irrevocable; once a group has consolidated, it is treated as a single entity for income tax purposes.
Where a foreign company, either directly or through its wholly owned foreign group, has multiple entry points of investment into Australia through Australian resident companies, special multiple entry consolidated (MEC) group rules apply which may enable eligible wholly owned resident companies and their eligible wholly owned resident subsidiary entities to consolidate.
The following losses and tax attributes can generally be brought into a consolidated group or MEC group and be used by the group's head company, subject to any special rules which may apply:
- franking credits
- CFC attribution account surpluses
- post-FIF abolition surpluses.
Foreign income tax offsets
The consolidation regime through the single entity rule ensures that only the head company of a consolidated group includes the foreign income of the consolidated group or MEC group in its assessable income. Once consolidated, only the head company is entitled to foreign income tax offsets for foreign income tax paid on an amount included in the head company’s assessable income. The head company can use foreign income tax offsets to reduce its Australian tax liabilities that would otherwise be payable in respect of amounts included in the head company’s assessable income to prevent double taxation of its worldwide income.
Where an entity leaves a consolidated group or MEC group, it is only required to include foreign income in its assessable income for the period it is not a member of any consolidated group. The leaving entity will not be able to use any pre-commencement excess foreign income tax offsets it may have had before joining the consolidated group or MEC group, or any that arose to the head company during the entity’s membership period.
CFC attribution account surpluses
Under consolidation, only the head company can operate attribution accounts for the purposes of the CFC measures.
Subsidiary members (in this case, companies) transfer the pre-consolidation balances of their attribution accounts to the head company, on formation or when the company joins the consolidated group or MEC group, to facilitate its use of any pre-consolidation surpluses during consolidation.
The attribution account surpluses are transferred to the head company so that, to the extent that income had previously been attributed to the member entity, subsequent distributions of income from an attribution entity (for example, a CFC that had previously been attributed to the member entity) are not assessed to the head company.
Once the account balances have been transferred to the head company of a consolidated group or MEC group, the attribution accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group or MEC group.
When a company with an interest in a CFC leaves a group, a proportion of the attribution account surpluses that the head company has in relation to the interests in the CFC that leave the group with the leaving company will be transferred to the leaving company.
Section 715-660 of the ITAA 1997 overrides the entry history rule in section 701-5 of the ITAA 1997 to permit the head company of a consolidated group or MEC group to remake certain normally irrevocable choices made by entities before they became subsidiary members of the group. These choices include all irrevocable declarations, elections, choices or selections provided for in Part X of the ITAA 1936. Any such choice (or the absence of it) by a joining entity is ignored for the purposes of the head company’s income tax affairs. The head company may make the choice, if it is eligible.
Similarly, section 715-700 of the ITAA 1997 overrides the exit history rule in section 701-40 of the ITAA 1997 to permit an entity leaving a consolidated group or MEC group to remake similar choices made by the head company after the entity became a subsidiary member of the group. The head company's choice (or absence of it) is ignored for the purposes of the leaving entity's income tax affairs for income years ending after the leaving time. The leaving entity may make the choice, if it is eligible.
Post-FIF abolition surpluses
Under consolidation, only the head company can operate FIF attribution accounts for the purposes of avoiding double taxation where it receives a distribution or other attribution account payment from a FIF, or disposes of an interest in a FIF that it is taken to have held under the single entity rule in section 701-1 of the ITAA 1997.The pre-consolidation post-FIF abolition surplus balances of the FIF attribution accounts of subsidiary members of the group are transferred to the head company (or MEC group) at formation or when a subsidiary member joins the consolidated group (or MEC group). This ensures that distributions from FIFs are not taxed to the head company where the joining entity has already been subject to FIF taxation.
Once the post-FIF abolition surplus balances have been transferred to the head company of a consolidated group (or MEC group) the FIF attribution accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group (or MEC group).
When a company with an interest in a FIF leaves a group, a proportion of the head company’s post-FIF abolition surplus that the head company has in relation to the interests in the FIF that leaves the group with the leaving company are transferred to the leaving company.
More information on consolidation
For more information on the operation of consolidation, including its practical impacts for business: