Foreign income return form guide

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Chapter 5: Consolidation (consolidated income tax treatment for groups of entities)

Part 1 - Overview

For income tax purposes, consolidation is optional. However, if the head company of a wholly owned resident group decides to consolidate, all its wholly owned Australian resident group entities must become members of that consolidated group. 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 will apply to the wholly owned resident companies and their wholly owned resident subsidiary entities.

The following losses and tax attributes can generally be brought into a consolidated group and used by the group's head company:

  • losses (including foreign losses)
  • franking credits
  • excess foreign tax credits
  • attribution account surpluses, and
  • attribution tax account surpluses.

It is important to note that this chapter simply provides a summary of the provisions that relate to the application of income attributed from controlled foreign companies (CFCs) and included in the assessable income of a head company of a consolidated group. Detailed information on the operation of consolidation is contained in the Consolidated Reference Manual - see also Part 5 below.

Part 2 - Excess foreign tax credits

The new consolidation regime ensures that only the head company of a consolidated group includes the foreign income of the consolidated group in its assessable income. Therefore, only the head company needs to use foreign tax credits to reduce its Australian tax liabilities to avoid double taxation. To enable the head company of the consolidated group to access the excess foreign tax credits carried forward by subsidiary members, the excess credits are transferred to the head company. Generally, the head company can only use the transferred excess credits at the end of the income year after the year the entity joined the group; however, transitional rules will apply to groups that consolidate within the transitional period of 1 July 2002 to 30 June 2004.

Where an entity pays foreign tax on foreign income while it is a member of a consolidated group, the head company will be assessed on the foreign income and will be taken to have paid and been personally liable for the foreign tax paid by the subsidiary member.

Where an entity leaves a consolidated group it cannot take any excess foreign tax credits with it and 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 provisions relating to excess foreign tax credits became effective on 1 July 2002.

These provisions were contained in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 which received royal assent on 24 October 2002.

Part 3 - Attribution account surpluses and attributed tax account surpluses

During the period of consolidation, only the head company is required to operate attribution accounts and attributed tax accounts for the purposes of the CFC measures. Subsidiary companies transfer the pre-consolidation balances of their attribution accounts and attributed tax accounts to the head company to facilitate its use of any pre-consolidation surpluses during consolidation.

Once the account balances have been transferred to the head company of a consolidated group, the attribution and attributed tax accounts of subsidiary members become inoperative. However, the attribution and attributed tax account surpluses are transferred to the head company so that, to the extent that income had previously been attributed to the entity company. Subsequent distributions of income from an attribution entity, for example, a CFC, that had previously been attributed to the entity company, are not assessed to the head company.

When a company with an interest in a CFC leaves a group, a proportion of the attribution and attributed tax 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.

The provisions relating to attribution accounts and attributed tax accounts became effective on 1 July 2002. These provisions were contained in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 which received royal assent on 24 October 2002.

Part 4 - Elections

A proposed technical amendment is included in New Business Tax System (Consolidation and Other Measures) Bill (No. 2) 2002. The amendment deals with elections made under Part X (the CFC measures) of ITAA 1936 where entities become subsidiary members of a consolidated group and where members leave a group. The rules ensure that the entry history rule in Part 3-90 of ITAA 1997 does not adversely affect the head company's ability to make elections in relation to its interests in CFCs. Similarly, they ensure the exit history rule in Part 3-90 does not adversely affect the leaving company's ability to make elections in relation to interests in CFCs that the leaving company takes with it on exit.

Part 5 - More information on consolidation

The Consolidated Reference Manual (NAT 6835) provides detailed information on the operation of consolidation, including its practical impacts for business. It is available on the ATO website.

If you have tax technical queries, you may also phone the Business Tax Reform Infoline on 13 24 78 .

You can e-mail any enquiries to consolidation@ato.gov.au

ATO references:
NO NAT 1840

Foreign income return form guide
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