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.
There are special transitional foreign income tax offset rules which allow the head company to apply pre-commencement excess foreign income tax, including its own pre-commencement excess foreign income tax and any transferred from joining entities at the joining time, provided certain conditions are met.
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 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.