Tax consolidated group restructures and transition rules

Restructure rules and transition rules for tax consolidated groups

The Pillar Two rules contain specific provisions dealing with acquisitions and internal restructures. This page covers 2 categories of rules that can affect how Pillar Two attributes are treated for tax consolidated groups when calculating a jurisdiction's effective tax rate (ETR). These are the group restructure rules and related transition rules. This page does not cover every aspect of those rules in detail. It focuses on implications for tax consolidated groups where restructures have occurred.

There are other rules, including in Chapter 3 (GloBE income or loss), Chapter 4 (adjusted covered taxes and deferred tax adjustments), Chapter 5 and Chapter 8 (safe harbours) of the Australian Minimum Tax Rules that determine how Pillar Two tax attributes are recognised, measured, and taken into account for ETR purposes. For more details on these topics, refer to the Australian subordinate legislation Taxation (Multinational–Global and Domestic Minimum Tax) Rules 2024External Link (Australian Minimum Tax Rules).

Table 1: Overview of Pillar Two transition rules and restructure rules

Category	Application	Materials	Provision
Transition rules	Applies to group restructures that occur during pre-transition years. Modify or recompute tax attributes in the transition year.	Chapter 9 of the Taxation (Multinational-Global and Domestic Minimum Tax) Rules 2024 (Australian Minimum Tax Rules), based on Chapter 9 of the Organisation for Economic Co-operation and Development (OECD) Model GloBE Rules (20 December 2021)External Link (GloBE Rules) and accompanying commentary.	Section 9-5 baseline transition rule (Article 9.1.1) Subsection 9-5(3) transition year integrity rule (Article 9.1.2) Section 9-15 transition year asset transfer integrity rule (Article 9.1.3)
Group restructure rules – transfers of ownership interests	Applies when constituent entities join or leave a multinational enterprise group (MNE group).	Chapter 6 of the Australian Minimum Tax Rules, based on Article 6.2 of the GloBE Rules and accompanying commentary.	Section 6-30 ownership interest transfer rule (historical carrying value rule) (Article 6.2.1(c)) Section 6-50 deemed asset transfer rule Article 6.2.2)
Group restructure rules – asset transfers	Applies upon election of filing constituent entity when eligibility conditions are met upon a trigger event.	Chapter 6 of the Australian Minimum Tax Rules, based on Article 6.3.4 on the GloBE Rules and accompanying commentary.	Section 6-70 fair value adjustments (Article 6.3.4)

This guidance covers group restructure and related transition rules as enacted, read consistently with the GloBE Rules, commentaryExternal Link to the GloBE Rules, and agreed Administrative Guidance. Certain elements of that OECD guidance have not been fully incorporated into Australian law as at the date of publication, including aspects of the January 2025 Administrative Guidance Article 9.1 of the GloBE RulesExternal Link (published 15 January 2025).

Interaction between accounting and Pillar Two

While the ATO does not determine how tax effect accounting is applied under accounting standards, the Pillar Two ETR calculation incorporates certain accounting concepts in the Australian Minimum Tax Rules, such as deferred tax expense, deferred tax assets, deferred tax liabilities, carrying values and tax basis. This is explained below as general background information.

In the general case, Pillar Two requires the calculation of a jurisdiction's ETR for a fiscal year. The ETR aggregates the results of constituent entities in the MNE group located in the relevant jurisdiction. The jurisdictional ETR is determined under section 5-5 and is broadly: 

ETR = (sum of adjusted covered taxes of each constituent entity of the MNE group located in the jurisdiction ÷ net GloBE income)

Adjusted covered taxes (Pillar Two)

The numerator aggregates the adjusted covered taxes of each constituent entity located in the jurisdiction. The adjusted covered taxes of a constituent entity is determined under section 4-5 and is broadly:

Adjusted covered taxes = accrued current covered tax expense + additions to covered taxes − reductions to covered taxes + total deferred tax adjustment amount + certain equity adjustments

The adjusted covered taxes includes an adjustment for the total deferred tax adjustment amount under paragraph 4-5(b). The total deferred tax adjustment amount is determined under section 4-85 and is broadly:

Total deferred tax adjustment = deferred tax expense accrued in its financial accounts + / - specific adjustments (and recast if required)

The accrued deferred tax expense will generally be the deferred tax expense amount in the accounts (to the extent it relates to covered taxes and amounts included in GloBE income or loss).

Deferred tax expense (accounting) and DTAs and DTLs

Accounting deferred tax expense is driven by movements in deferred tax assets (DTAs) and deferred tax liabilities (DTLs) for an accounting reporting period. DTAs and DTLs reflect differences between the accounting carrying value and the tax basis of assets and liabilities. In simplified terms: 

Deferred tax expense = (closing DTL − opening DTL) − (closing DTA − opening DTA)

DTA/DTL = (carrying value − tax basis) × tax rate

The deferred tax adjustment amount under section 4-85 will be the deferred tax expense in the accounts, adjusted in certain cases so that instead of using the movements in accounting DTA and DTLs, it takes into account the movements in GloBE DTA and DTLs: 

Recast deferred tax expense = (closing GloBE DTL − opening GloBE DTL) − (closing GloBE DTA − opening GloBE DTA)

GloBE income or loss

The denominator of the jurisdictional ETR calculation is the net GloBE income of the MNE group for the jurisdiction. Net GloBE income is the GloBE income or loss (determined under section 3-5) of all constituent entities located in the relevant jurisdiction aggregated under section 5-15.

At a high-level, GloBE income or loss is derived from the profit and loss recorded in the accounts (accounting profit), subject to Pillar Two adjustments. These adjustments include, but are not limited to, adjustments under subsection 9‑15(2) and section 6‑30 that apply where certain acquisitions and restructures have occurred. If an acquisition or restructure has occurred, you should consider whether any depreciation, amortisation and gain or loss amounts recorded in the accounts needs to be adjusted, when calculating GloBE income or loss.

How to determine Pillar Two tax attributes

Pillar Two tax attributes can be affected by the transition rules and the group restructure rules, which affect the calculation of adjusted covered taxes and GloBE income or loss, as explained above. These Pillar Two tax attributes include:

• GloBE DTA
• GloBE DTL
• GloBE carrying value of assets and liabilities.

In explaining how these rules operate, this guidance uses the following key terms.

Table 2: Key terms

Term	Explanation
Accounting DTAs and DTLs	The DTAs and DTLs reflected or recorded in the financial accounts generally under accounting standards used to prepare the consolidated financial statements of the UPE.
Transition year tax attributes: Transition year DTAs Transition year DTLs	The opening DTA and DTL balances in the transition year as adjusted from accounting DTAs and DTLs under the transition rules and the group restructure rules.
GloBE DTAs and DTLs	The DTAs and DTLs to be taken into account for Pillar Two calculation purposes, modified from accounting DTAs and DTLs in-line with Pillar Two rules, including the transition rules and the group restructure rules.
Accounting carrying value	The asset or liability carrying value as reflected or recorded in the financial accounts under accounting standards used to prepare the consolidated financial statements of the UPE.
GloBE carrying value	The modified asset or liability carrying value taken into account for Pillar Two calculation purposes.

Transition rules and group restructure rules

The transition rules set the opening DTA and DTL balances in the transition year (transition year tax attributes), for the purpose of calculating the total deferred tax adjustment amount in that fiscal year and later fiscal years. Broadly, the transition year for a jurisdiction is the first fiscal year that the MNE group comes within the scope of the GloBE Rules in respect of the jurisdiction. OECD guidance clarifies that, for the purposes of the transition rules in Article 9.1, the transition year does not include a fiscal year to which the transitional CBC reporting safe harbour applies.

The transition rules include the following:

• Section 9-5 baseline transition rule – broadly, this rule allows MNE groups to take into account the accounting DTAs and DTLs reflected in the financial accounts as at the beginning of the transition year (Article 9.1.1 of the GloBE Rules). These attributes may still be subject to some adjustments, including recasting to 15% if recorded at a rate exceeding 15%
• Subsection 9-5(3) baseline integrity rule – disregards accounting DTAs that arise from transactions occurring between 1 December 2021 and the beginning of the transition year that relate to permanent differences between GloBE income or loss and taxable income (Article 9.1.2 of the GloBE Rules)
• Section 9-15 asset transfer integrity rule – generally applies to reset the accounting carrying value of assets acquired through intra-group asset transfers that occurred after 1 December 2021 and before the transition year of the disposing entity (Article 9.1.3 of the GloBE Rules).

The group restructure rules can also have an impact on the transition year tax attributes. Those explained in this guidance are:

• Section 6-30 ownership interest transfer rule – limits the accounting carrying values recognised where an entity becomes a group entity of the MNE group (Article 6.2.1(c) of the GloBE Rules)
• Section 6-50 ownership interest transfers deemed as transfers of assets and liabilities – treats certain transfers of ownership interests in an entity as deemed transfers of underlying assets and liabilities (Article 6.2.2 of the GloBE Rules)
• Section 6-70 fair value adjustments election – election has the effect of recognising assets and liabilities at fair value for the purpose of GloBE computations.

Section 9-5: Baseline transition rule

As a simplification measure, the transition rule in section 9-5 allows opening accounting DTAs and DTLs to be brought into the transition year for Pillar Two purposes, subject to certain exceptions and modifications.

For these DTAs and DTLs, the transition rule sets the transition year tax attributes as the lower of the DTAs and DTLs recorded or disclosed in the financial accounts of the constituent entity, or these amounts re-casted to 15%.

Specific adjustments which are normally required during the transition year and subsequent fiscal years, such as dealing with recapture DTLs or excluding DTAs for items excluded from GloBE income, are not needed for transition year attributes.

Exceptions and clarifications include the following:

• tax losses – as an exception, accounting DTAs relating to eligible tax losses may be recast at 15% for Pillar Two purposes even where these are recorded at below 15% in financial accounts
• recognition standards – transition year tax attributes do not include accounting DTAs that cannot be reflected or disclosed under the acceptable or authorised financial accounting standards used to compute financial accounting net income or loss (FANIL) of the constituent entity that is located in the jurisdiction
• unbooked DTA – transition year tax attributes include DTAs that were not recognised by the MNE group due to an accounting recognition adjustment or valuation allowance
• pre-transition year acquisitions to which section 6-30 applies – transition year tax attributes brought in under section 9-5 are determined under section 6-30
• subsection 9-5(3) and section 9-15 – baseline integrity rule and asset transfer integrity rule.

Subsection 9-5(3): Baseline integrity rule

Transition year DTAs are subject to an integrity rule contained in subsection 9-5(3), which limits the recognition of accounting DTAs that arise due to permanent differences between GloBE income or loss and taxable income.

DTAs in scope of this rule must arise in respect of items excluded from the computation of GloBE income or loss and must relate to a transaction that occurred after 30 November 2021, and before commencement of the transition year (referred to as the 'window period' hereafter).

The effect of subsection 9-5(3) is to exclude reversals of accounting DTAs from the total deferred tax adjustment amount for a fiscal year that is a transition year or a subsequent fiscal year.

Accounting DTAs that may be covered by this rule include:

• DTAs on items that would be expressly excluded under Chapter 3 of the Australian Minimum Tax Rules (for example, a DTA in respect of an excluded equity gain or loss)
• DTAs attributable to non-economic expenses or losses for tax purposes (for example, a DTA in respect of a tax loss in a fiscal year prior to the transition year with respect to tax depreciation deductions in excess of an asset's cost).

The rule has broad application. Unless the DTA relates to an item that is specifically carved out from scope, the rule applies to deny the 'bringing in' of accounting DTAs, other than those relating to a recognition of timing differences between items of income or expense that would be included in GloBE income or loss and taxable income.

The January 2025 OECD Administrative Guidance Article 9.1 of the GloBE RulesExternal Link (published 15 January 2025) provides further explanation of the scope of Article 9.1.2. Among other things, the guidance:

• provides an expansive interpretation of the term 'transaction', to include certain arrangements such as an agreement, ruling, decree or grant with governments (defined as government arrangements), retroactive elections and the enactment of a corporate income tax regime
• clarifies that Article 9.1.2 does not apply to a DTA relating to a transaction that results in an entity becoming a group entity of an MNE group, to which Article 6.2.1(c) applies (section 6-30 of the Australian Minimum Tax Rules)
• clarifies that Article 9.1.2 does not apply to certain tax credits that arise independently of a government arrangement, as defined in that guidance.

Section 9-15: Asset transfer integrity rule

Pre-transition year intra-group asset transfers

Section 9-15 applies to transfers of assets (other than inventory) between members of an MNE group that occur after 30 November 2021 and before the transition year of the disposing constituent entity.

This rule requires the acquiring constituent entity to treat the transferred asset as having been acquired for an amount equal to the carrying value in the hands of the disposing constituent entity upon disposition for Pillar Two purposes.

The GloBE carrying value as at the beginning of the transition year is the accounting carrying value upon disposition, adjusted for subsequent capitalised expenditure, depreciation and amortisation amounts after the transaction and before beginning of the transition year.

As a result, the acquiring constituent entity may need to make adjustments in the calculation of GloBE income or loss, including recalculating the:

• amortisation or depreciation expenses recorded in the accounting profit using the GloBE carrying value
• gain or loss on a subsequent sale of the asset using the GloBE carrying value.

Extended scope for other transactions

The transition year asset transfer integrity rule applies to a broad range of transactions (including the transfer of rights to an item of economic value) that occur or are deemed to occur in relation to an asset, if that transaction is treated as, or in a similar manner to, a sale of assets from an accounting perspective.

The extended scope of this rule includes:

• transactions where the disposing entity recognises an amount of income reflecting the consideration for the transfer and the acquiring entity creates or increases the accounting carrying value of the transferred assets
• transactions where the acquiring entity records the accounting carrying value of the asset at cost and also recognises a DTA based on the differences between the carrying value of the asset and its tax basis. The recognition of a GloBE DTA has a similar effect as an increase to the asset's GloBE carrying value to fair value, as the eventual unwind of the GloBE DTA would shelter low taxed income of the constituent entity from top-up tax
• transfers or deemed transfers of assets within the same entity (same entity transactions). An example of a same entity transaction is a relocation or migration of an entity, where the entity records an increase in tax basis or accounting carrying value of its assets. The same entity transaction rule also applies in instances where there is a change in the method for accounting for an asset to fair value accounting, resulting in the recognition of an accounting gain or loss from fair value changes and a corresponding increase or decrease to the accounting carrying value of the asset.

Therefore, transactions and corporate restructurings that are accounted for similar to an asset transfer (that is, where the MNE group creates or increases the accounting carrying value of an asset), regardless of their form and whether they take place within an entity or between entities, may constitute a 'transfer of assets' under section 9-15. This rule applies to cross-border and domestic transfers or deemed transfers. While this rule is broad in scope, its application is limited to transactions between entities that would have been constituent entities of the same MNE group had the Australian Minimum Tax Rules applied to the MNE group immediately before the transfer. This rule does not apply to transactions that result in entities becoming group entities of MNE group.

Extended scope to DTAs – transactions accounted at cost

The transition year asset transfer integrity rule also applies to limit or exclude accounting DTAs arising as a result of transactions accounted for at cost. The GloBE DTA or DTL is calculated as the lower of:

1. the minimum rate multiplied by the difference between the tax basis of the asset and the GloBE carrying value of the asset, as determined under the asset transfer integrity rule based on the accounting carrying value of the disposing entity
2. for GloBE DTAs, the sum of the following amounts
   1. tax paid by the disposing entity in respect of the transaction
   2. the amount of the DTA that would have been taken into account under the transition rules but was reversed or not created because the gain of the disposing entity was included in the taxable income of the entity (other tax effects)
   3. the amount of covered taxes paid in respect of the transaction that would have been allocated to the disposing entity under Part 4-3 of the Australian Minimum Tax Rules.

If the disposing entity is part of a tax consolidated group, taxes paid by that group and other tax effects of the group in relation to the transaction are to be taken into account in determining the amount of a GloBE DTA allowed under this rule.

These GloBE DTAs are recognised at the amount described above regardless of whether an accounting DTA would be recognised by the acquiring constituent entity under the relevant accounting standard. The GloBE DTA is computed irrespective of the amount reflected or recorded in the financial accounts of the acquiring entity at the beginning of the transition year.

The creation of GloBE DTAs under the transition year asset transfer integrity rule does not reduce the adjusted covered taxes of the acquiring constituent entity. GloBE DTAs are adjusted subsequently in proportion to the decrease in the GloBE carrying value of the asset due to for example depreciation, amortisation, and impairment.

Transactions accounted for at fair value

These consequences do not apply to assets for which a filing constituent entity has made an election under subsection 9-15(7). That election can be made if, after the transaction, the acquiring entity accounts for the asset at fair value and it would otherwise be entitled under the asset transfer integrity rule to take into account a DTA equal to the minimum rate multiplied by the difference between the GloBE carrying value of the asset and its tax basis.

Where an election applies, an MNE group is permitted to use the accounting carrying value of the asset of the acquiring entity for GloBE computational purposes, instead of using the disposing entity's carrying values.

In this case, there will no GloBE DTA arising from the transaction if the acquiring entity's accounting carrying value and tax basis of the asset are the same amount at the beginning of the transition year. If the tax basis varies, giving rise to an accounting DTA, the usual accounting principles apply in respect of the use of that DTA in the GloBE computations.

Examples of the interaction between the baseline integrity rule, asset transfer integrity rule and the ownership interest transfer rule follow:

• Scenario 2 – Transactions entered into between 1 December 2021 and beginning of transition year – acquisition of target entity that becomes a constituent entity
  • Example 2 – Acquisition of 100% ownership interest in an entity by Australian TCG from third party vendor during the window period.
• Scenario 3 – Transactions entered into between 1 December 2021 and beginning of transition year – group entity transaction
  • Example 3 – Acquisition of ownership interest in a group entity by Australian TCG during the window period from another group entity
  • Example 4 – Acquisition of ownership interest in a group entity by Australian TCG during window period from a third party.

Section 6-30: Ownership-interest transfer rule

Part 6-2 of the Australian Minimum Tax Rules applies where, as a result of transfer of ownership interests, an entity becomes, or ceases to be, a constituent entity of an MNE group.

Section 6-30 (Article 6.2.1(c) of the GloBE Rules) provides that, in cases where the target entity becomes a constituent entity of an acquiring MNE group, the GloBE income or loss and adjusted covered taxes of the target entity are to be determined using the target's historic accounting carrying values of assets and liabilities in accordance with the acceptable financial accounting standard (or authorised financial accounting standard, if applicable).

This rule is consistent with subsection 3-10(4) (Article 3.1.2 of the GloBE Rules) which prohibits taking into account purchase price accounting (PPA) adjustments that are recorded in the accounts of the target constituent entity, or the consolidated financial statements, in these circumstances.

The exclusion of purchase accounting adjustments in determining GloBE income and adjusted covered taxes applies to transactions occurring in any fiscal year. That is, it can apply to transactions in pre-transition years, the transition year, or in subsequent fiscal years.

There is an exception to this prohibition in certain circumstances where the transfer of ownership interests occurs prior to 1 December 2021. It is not reasonably practicable to determine the financial accounting net income or loss of the target entity in the absence of purchase accounting adjustments because the MNE group does not have sufficient records to do so.

In these limited circumstances, the GloBE carrying value of the assets and liabilities of the target entity is to be determined taking into account purchase accounting adjustments.

Scenario 1a: Transactions entered into before 1 December 2021

Where the relevant transaction has occurred prior to 1 December 2021 and is subject to section 6-30 of the Australian Minimum Tax Rules, the relevant GloBE DTAs and DTLs of the target entity that are to be brought into the transition year under subsection 9-5(1) (Article 9.1.1) must be based on the GloBE carrying value instead of the carrying value amounts used to determine the deferred tax expense accrued in the financial accounts, unless the exception relating to not having sufficient records mentioned above applies.

A DTA or DTL calculated in this way may be taken into account for the purposes of the transition year tax attributes even in cases where none is recorded for financial accounting purposes (for instance, where the carrying value amount in the financial accounts of the constituent entity is equal to the tax basis, but where the GloBE carrying value after applying section 6-30 differs).

Therefore, where there is a transfer of ownership interests resulting in an entity becoming a constituent entity of an MNE group, section 6-30 applies to determine the GloBE income or loss and adjusted covered tax of the target entity. The adjusted covered taxes of the target entity as at the beginning of the transition year (transition year deferred taxes) are determined based on the difference between the GloBE carrying value of the assets and liabilities (historic carrying value) and the tax basis of the assets and liabilities. Where the target entity becomes a subsidiary member of a tax consolidated group as a result of the acquisition and the entry tax cost setting rules contained in Division 705 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to it, the tax basis of its assets for this purpose is determined in accordance with those tax cost setting rules.

The transition integrity rules in subsection 9-5(3) and section 9-15 do not apply to transactions that were entered into prior to 1 December 2021. Therefore, for acquisitions before 1 December 2021, any DTAs or DTLs computed under section 6-30 based on the difference between the GloBE carrying value and tax basis of the target's assets and liabilities, are included in the transition year tax attributes. Reversals of the DTAs and DTLs in the transition year and subsequent fiscal years are included in the total deferred tax adjustment amount and adjusted covered taxes.

As the creation or initial recognition of these DTAs or DTLs occurred before the commencement of the transition year, any deferred tax expense relating to their creation or recognition does not impact adjusted covered taxes in the transition year.

Key questions for Scenario 1a

• Key Question: Where a target entity becomes a constituent entity of an MNE group as a result of a transfer of ownership interests in a transaction that occurred before 1 December 2021, are the transition year DTAs and DTLs of the target entity to be computed based on the difference between GloBE carrying values, determined using historic carrying values of the target entity, excluding purchase accounting adjustments, and the tax basis of the assets and liabilities?
  • Guidance: Yes.
• Key Question: Do the transition year integrity rules in subsection 9-5(3) and section 9-15 apply to transactions entered into before 1 December 2021?
  • Guidance: No.

Therefore, for transactions occurring before 1 December 2021, including a transfer of ownership interests that results in an entity becoming a constituent entity of an MNE group, as well as a choice to form a tax consolidated group, transition year DTAs are computed based on the difference between the GloBE carrying values (determined excluding PPA adjustments) of assets and liabilities and their tax basis.

Scenario 1b: Transactions entered into after commencement of the transition year

Transactions occurring after the commencement of the transition year, in which a target entity becomes a constituent entity of an MNE group, are also subject to section 6-30 of the Australian Minimum Tax Rules. For these transactions, DTAs and DTLs are also determined based on the difference between GloBE carrying values (determined using the historical carrying value of assets of the target, excluding purchase accounting adjustments) and their tax basis.

This GloBE treatment of calculating DTAs and DTLs may lead to the recognition of DTAs and DTLs in the GloBE computations where no accounting DTA or DTL is recorded for the transaction in the financial accounts of the constituent entity used in preparing the consolidated financial statements. In some other cases, it may require adjustments to accounting DTAs and DTLs, such that the adjusted amounts of DTAs and DTLs used for GloBE computations are based on GloBE carrying values.

The initial recognition of a GloBE DTA or DTL, or any adjustment to an accounting DTA or DTL to conform it to a GloBE DTA or DTL, is included in the total deferred tax adjustment amount determined under section 4-85 of the Australian Minimum Tax Rules. Therefore, it is included in adjusted covered taxes for the purpose of determining the ETR for the jurisdiction, for the fiscal year of transaction, subject to the usual eligibility rules and adjustments for deferred taxes. Similarly, reversals of GloBE DTAs and DTLs in the acquisition year and subsequent fiscal years under the relevant accounting standard are included in the total deferred tax adjustment amount and adjusted covered taxes.

 

Scenario 2: Transactions entered into between 1 December 2021 and beginning of transition year – acquisition of target entity that becomes a constituent entity

Subsection 9-5(3) of the Australian Minimum Tax Rules (Article 9.1.2 of GloBE Rules) does not apply to exclude DTAs arising from a transaction that is an acquisition of ownership interests in a target entity from a non-group entity that results in the target becoming a constituent entity of the MNE group. The non-application of subsection 9-5(3) in these circumstances extends to any DTAs arising under Australia's tax consolidation entry tax cost setting rules as a result of the target becoming a constituent entity of the MNE group.

Section 9-15 (Article 9.1.3) does not apply to such a transaction either. Section 9-15 applies to transfers of assets between entities that would have been constituent entities of the same MNE group assuming that MNE group had been subject to the GloBE Rules immediately before the transaction. It does not apply to a transaction with a non-group entity for the acquisition of ownership interests in a target entity that becomes a constituent entity as a result of the transaction.

Therefore, the relevant GloBE DTAs and DTLs of the target entity that are to be brought into the transition year under subsection 9-5(1) in these circumstances are to be calculated in the same manner as described in Scenario 1a (transactions entered into before 1 December 2021).

Key question for Scenario 2

• Key question: Do either of subsection 9-5(3) or section 9-15 of the Australian Minimum Tax Rules (Articles 9.1.2 and 9.1.3 of the GloBE Rules) apply to exclude DTAs at the beginning of the transition year relating to a window period transaction that is the acquisition of ownership interests in a target entity from a non-group entity that results in the target becoming a constituent entity of the MNE group?
  • Guidance: No. 

Scenario 3: Transactions entered into between 1 December 2021 and beginning of transition year – group entity transaction

Subsection 9-5(3) (Article 9.1.2) of the Australian Minimum Tax Rules has broad application. It can apply to exclude DTAs that arise as a result of an acquisition of ownership interests between 1 December 2021 and the beginning of the transition year (window period) by a member of a tax consolidated group in a target that was already a constituent entity of the applicable MNE group.

Where such a transaction occurs, the target's GloBE DTAs brought into the transition year under section 9-5 are to be determined based on the difference between the GloBE carrying value of the assets and liabilities and their tax basis. In some cases, the GloBE carrying values may differ from the accounting carrying values. This may occur if the target entity was initially acquired from a non-group entity in a transaction before the intra-group transfer, such that section 6-30 applies in respect of the initial acquisition to exclude purchase accounting adjustments.

However, the baseline integrity rule in subsection 9-5(3) will apply to exclude from the transition year tax attributes any such GloBE DTA, or part of a GloBE DTA, of the target that was created or increased as a result of the application of Australia's tax consolidation entry tax cost setting rules to the transaction.

The only carveout from Article 9.1.2 for DTAs arising from acquisitions of ownership interests is that included in the OECD's January 2025 Administrative guidance. That exception applies in respect of acquisitions of ownership interests in a non-group entity that result in that entity becoming a constituent entity of the MNE group, such that the transaction is subject to Article 6.2.1(c) (section 6-30 of the Australian Minimum Tax Rules).

Key question for Scenario 3

• Key question: Does subsection 9-5(3) of the Australian Minimum Tax Rules apply to exclude DTAs arising from a window period transaction that is the acquisition of ownership interests by a member of a tax consolidated group, in an entity that was already a constituent entity of the MNE group immediately prior to the transaction, where the transaction results in the target entity becoming a subsidiary member of a tax consolidated group?
  • Guidance: Yes.

The January 2025 OECD Administrative Guidance clarifies that the integrity rules in Article 9.1 not only apply to DTAs arising from commercial transactions but also to DTAs arising from governmental arrangements entered into in the window period and from similar events, such as retroactive elections made during that period. Similarly, these integrity rules also apply to exclude from the transition year tax attributes any DTAs arising, or increasing, as a result of a choice to form a tax consolidated group during the window period.

 

Section 6-50: Transfer of controlling interest deemed transfer of assets and liabilities

Eligibility conditions

Section 6-50 treats certain transfers of ownership interests as a transfer of assets and liabilities. It applies to acquisitions or disposals of controlling interests in a constituent entity. There are two eligibility conditions that must both be met for section 6-50 to apply. These are:

1. The jurisdiction in which the target entity is located must, for tax purposes, treat the acquisition or disposal of the controlling interest in the target in the same or similar manner as an acquisition or disposal of the underlying assets and liabilities of the target.
2. That jurisdiction imposes a covered tax on the seller of the controlling interest, based on the difference between the tax basis of the underlying assets and liabilities of the target and the consideration the seller received in exchange for the controlling interest, or the difference between that tax basis and the fair value of those assets and liabilities.

In an Australian income tax context, the first eligibility condition is met where the target entity becomes a subsidiary member of an Australian tax consolidated group of the buyer as a result of the transfer of a controlling interest. That is because, for Australian income tax purposes, the assets and liabilities of a joining subsidiary member are treated as forming part of the assets and liabilities of the head company of the tax consolidated group.

The second condition is met where a target entity leaves an Australian tax consolidated group as a result of a transfer of a controlling interest in the entity, provided that for Australian income tax purposes:

• The seller is required to compute the tax cost of membership interests in the target under Division 711 of the ITAA 1997, which sets the tax cost of those interests having regard to the cost of the target's assets and its liabilities.
• The seller computes a taxable gain or loss on the disposal based on the difference between the proceeds of the sale and the tax cost setting amount of the interests worked out under Division 711.
• That taxable gain or loss is included in the calculation of the seller's Australian taxable income or loss and is not, for example, disregarded, or subject to a CGT rollover.

Meeting the section 6-50 eligibility conditions

Therefore, the conditions for section 6-50 are met where, as a result of the transfer or a controlling interest in the target, the target ceases to be a subsidiary member of an Australian tax consolidated group of the seller and becomes a subsidiary member of an Australian tax consolidated group of the buyer, subject to the requirements outlined above about the application of Division 711 to the exit and the calculation and inclusion of the taxable gain or loss for the seller.

Section 6-50 does not apply in respect of a target entity where, for example, the target leaves an Australian tax consolidated group of the seller but does not become a subsidiary member of an Australian tax consolidated group of the buyer (for example, it instead becomes a standalone entity or the head company of a tax consolidated group).

Section 6-50 does not apply where the target is a head company of an Australian consolidated group, or a head company or eligible tier-1 (ET-1) company of a MEC group, of the selling group. Similarly, where the membership interests transferred by the seller are those in a head company or ET-1 company, section 6-50 will not apply in respect of any subsidiaries of those entities that leave the tax consolidated group as a result of that transfer. That is because the cost base of the membership interests in the head company, or ET-1 company, that are transferred is not worked out under Division 711, other than in cases where an ET-1 company is partly owned by members of the MEC group. The calculation of the seller's gain or loss on those membership interests under Australian income tax law is not calculated based on the difference between the tax basis and fair value of the underlying assets and liabilities of the head company, or ET-1 company, or their subsidiaries that leave with them.

Table 6: Application of section 6-50 to Australian tax consolidated groups

Item	Scenario 1	Scenario 2	Scenario 3
Disposition	Subsidiary member (other than ET-1 company) exits from tax consolidated group	No exit from tax consolidated group	Subsidiary member (other than ET-1 company) exits from tax consolidated group
Acquisition	Entry into tax consolidated group	Entry into tax consolidated group	No entry into tax consolidated group
Section 6-50 applies	Yes, subject to conditions outlined above	No	No
Details	Target entity ceases to be a subsidiary member of an Australian tax consolidated group of the seller, other than an ET-1 company, and joins another Australian tax consolidated group of the buyer.	Target entity that is not a subsidiary of an Australian tax consolidated group of the seller joins an Australian tax consolidated group of the buyer.	Target entity ceases to be a subsidiary member of an Australian tax consolidated group of the seller, other than an ET-1 company, but does not join an Australian tax consolidated group of the buyer.

Section 6-50 only applies to transactions entered into for a fiscal year that is the transition year or a subsequent fiscal year. Therefore, it does not apply to determine the GloBE attributes for the buyer if the transaction was entered into in a pre-GloBE fiscal year. However, these pre-GloBE transactions are still within scope of section 6-30.

Section 6-50 applies to determine the GloBE attributes of the buyer's or seller's applicable MNE group irrespective of whether the counterparty is also an applicable MNE group that is in scope of the GloBE Rules, provided the eligibility conditions mentioned above are met. Section 6-50 is not elective and applies mandatorily where the eligibility conditions are satisfied. Therefore, the normal GloBE treatment of transfers of ownership interests under section 6-30 does not apply in these cases.

Consequences of transfer treated as transfer of assets and liabilities

For the selling group

1. The financial accounting gain or loss on the transfer of the controlling interest is disregarded, as an excluded equity gain or loss.
2. The target is treated as disposing of its assets and liabilities to the acquiring MNE group. It is required to include a gain or loss, computed based on the difference between the consideration for the sale of the controlling interest and the GloBE carrying value of the target's assets and liabilities, in calculating its GloBE income and loss for the seller's MNE group.
3. The covered tax imposed on the seller's gain on the transfer that is treated as a sale of assets and liabilities of the target is included in the GloBE ETR computations of the seller's MNE group.
4. This GloBE income and adjusted covered taxes are included for the seller's MNE group in the jurisdiction of location of the target entity.

For the buying group

1. The GloBE carrying value of assets and liabilities of the target is based on the accounting carrying value determined in accordance with accounting standards after applying purchase price accounting. This means that subsection 3-10(4) and section 6-30 do not apply in this instance to disregard purchase accounting adjustments in determining the GloBE income and loss of the target in the buying group.
2. The GloBE deferred tax expense of the target will be computed based on the difference between the GloBE basis of its assets and liabilities, computed after taking into account purchase price and adjustments, and the tax basis of its assets and liabilities. The recognition and reversal of DTAs and DTLs in a fiscal year will be included in adjusted covered taxes of the buyer's MNE group.

Section 6-70: Fair value adjustments election

Eligibility for fair value adjustments election for transactions involving tax consolidated groups

The filing constituent entity of an MNE group may make an annual election, or a 5-year election, to apply a fair value adjustment, if certain conditions are met. An election can be made if, because of a triggering event, a constituent entity is required or permitted to adjust the basis of some or all of its assets, or the amount of some or all of its liabilities, to fair value for tax purposes in the jurisdiction in which it is located.

In an Australian income tax context, these eligibility conditions will be satisfied where a target entity joins an Australian tax consolidated group, and the tax basis of its assets is determined in accordance with the entry tax cost setting rules contained in Division 705 of the ITAA 1997. Similarly, those conditions will be satisfied where an election is made to form a consolidated group, or MEC group, and Division 705 applies to set the tax cost of the constituent entity's assets. In this regard, the condition in section 6-70 looks at the overall design of the tax cost allocation mechanism in a jurisdiction's tax laws. For example, it does not enquire as to whether the application of Division 705 in a particular fact pattern has, in practice, resulted in a tax basis of an asset that is equal to its fair value. Neither does section 6-70 require that the fair value determined for tax purposes is the same amount as the fair value adopted for financial reporting purposes.

Consequences of fair value adjustment election

Section 6-70 serves as a simplification for triggering events that do not meet the eligibility conditions in section 6-50. A section 6-70 election allows an MNE group to use the accounting values of assets and liabilities, determined on fair value basis, to calculate GloBE income rather than requiring GloBE attributes to be calculated using historic carrying values.

The constituent entity for which a subsection 6-70(2) election is made must include a gain or loss in its GloBE income or loss in respect of each of the constituent entity’s assets and liabilities.

That gain or loss is computed as the difference between the carrying value of the asset or liability for financial accounting purposes immediately before the triggering event, and its fair value immediately after the triggering event. If the triggering event arises from a GloBE reorganisation, the gain or loss must be adjusted to account for any non-qualifying gain or loss determined under section 6-65 of the Australian Minimum Tax Rules.

A gain or loss must be included in GloBE income or loss for all of the constituent entity’s assets and liabilities that are recognised in accordance with acceptable financial accounting standards. For example, the adjustment is not limited to the particular assets for which tax basis is adjusted under Division 705, it covers all accounting assets and liabilities.

The fair value of assets and liabilities immediately after the triggering events are determined in accordance with the applicable accounting standards used in preparing the consolidated financial statements of the UPE, including purchase accounting adjustments.

If the election is an annual election, the entire amount of the gains and losses calculated under section 6-70 is to be included in GloBE income or loss in the fiscal year in which the triggering event occurs. If the election is a 5-year election, one-fifth of that amount is included in the fiscal year in which the triggering event occurs and in each of the subsequent 4 fiscal years.

Where a fair value adjustment election applies, the post-triggering event accounting fair values of assets and liabilities are to be used in calculating the constituent entity’s GloBE income or loss after that event, including in subsequent fiscal years. Subsection 3-10(4) and section 6-30, which would otherwise require exclusion of purchase accounting adjustments, do not apply where the section 6-70 fair value adjustment election is made.

A section 6-70 election can only be made for a triggering event occurring in a transition year or a subsequent fiscal year. For instance, it can't be made for a triggering event that occurs in a pre-GloBE fiscal year, or in a fiscal year for which an MNE group has elected to apply the transitional CBC reporting safe harbour.

In relation to the deferred tax impact of the election, the June 2024 Administrative Guidance explains that:

• DTAs and DTLs of the constituent entity that existed prior to the triggering event must be fully reversed and included in adjusted covered taxes.
• Any accrual of accounting deferred tax expense as a result of the tax basis of the constituent entity’s assets or liabilities being reset to fair value for tax purposes should be excluded from adjusted covered taxes.
• The total deferred tax adjustment amount for the fiscal year in which the triggering event occurs and subsequent fiscal years are also to be recalculated based on the difference, if any, between the GloBE carrying values of the assets and liabilities determined under section 6-70, including purchase accounting adjustments, and their tax basis.

As noted above, the GloBE carrying values of assets and liabilities may, on some occasions, differ from their tax basis immediately after the triggering event. These differences may lead to the recognition of DTAs and DTLs in GloBE computations to the extent permitted under acceptable financial accounting standards.