• Consolidated groups

    The 'single entity rule' means that the general value shifting regime (GVSR) has no impact for equity and loan interests of one group member in another within consolidated and multiple entry consolidated (MEC) groups during consolidation. Under the single entity rule, subsidiary members of a consolidated or MEC group are treated, for certain purposes, as parts of a head company rather than as separate entities for income tax purposes.

    Value shifts between group members are addressed by the leaving tax cost reconstruction rules for such interests. Interests held by non-group members in a consolidated or MEC group, and interests held by consolidated or MEC group members in non-group members, are potentially subject to the GVSR (or the new 'loss reduction method').

    Example: consolidation and value shifting

    Example: consolidation and value shifting

    • 'Ball Co' is the head company of a consolidated group including subsidiary members 'Bat Co' and 'Stump Co'. Ball Co also has an interest (90%) in 'Violin Co' (non-group member).
     
    • The GVSR has no application to the transfer of an asset from Stump Co to Bat Co at less than market value. The tax cost of Ball Co's shares in Stump Co or Bat Co are reconstructed on the basis of the assets in the company when it leaves the group under the consolidation rules.
     
    • Special rules (the loss reduction method) may also apply to prevent a loss made on a loan by Violin Co to Stump Co unless the loss could be shown to be attributable to something other than losses or indirect value shifts involving the group.
     
    • However, the normal rules may apply where an asset is transferred from Violin Co to a consolidated group member for less than market value. Ball Co's shares in Violin Co (not being a group member) are not subject to consolidation reconstruction rules, but could be affected by the indirect value shifting rules.
     

    The interaction of the GVSR with consolidation is explained in detail in section 5 of the Guide to the general value shifting regime.

      Last modified: 03 Feb 2016QC 16827