NTLG Consolidation Sub-committee minutes - 28 June 2007

Meeting details

Venue:	Hotel Grand Chancellor 131 Lonsdale Street Melbourne
Date:	28 June 2007
Start:	10.00am	Finish:	2.00pm
Chair:	Linda Skinner	Facilitator:	Linda Skinner
Contact:	linda.skinner@ato.gov.au	Phone:	(03) 9285 1095

Attendees

Linda Skinner	Tax Office
Tom Meredith	Tax Office
Troy Czabania	Tax Office
Mike Slattery	Tax Office
Glenn Davies	Tax Office
Brett Tyers	Tax Office
Mark Lyburn	Tax Office
Anthony Marvello	Tax Office
Andy Milton	Tax Office
James Targett	Tax Office
Andrew Lindsay	Tax Office
Suzanne Trumble	Tax Office
Daryl Brigham	Tax Office
Karin Collinson	Tax Office
Gary Scanlan	Tax Office
Joseph Camenzuli	Tax Office
Lindsay Hanham	Tax Office
Carolyn Billett	Tax Office
Tony Regan	Treasury
Blair Comley	Treasury
Alexis Kokkinos	ICAA
Susan Cantamessa	ICAA
Sue Stroud	GE Money
Geoff Lehmann	TIA
Gordon Thring	CPAA
Richard Czerwick	ICAA
Peter Murray	TIA
Michael Charles	KPMG
Tony Stolarek	ICAA
Ken Spence	TIA
Richard Buchanan (for Richard Hendriks)	ICAA
Anne-Maree Wolff	MCA

Guests

Sid Hammell	Tax Office
Anna Nguyen	Deloitte Touche Tohmatsu Ltd
Enzo Coia	Shaddick & Spence

Apologies

Euan Campbell	Tax Office
Desmond Maloney	Tax Office
Ray Conwell	LCA
Frank Drenth	CTA
Richard Hendriks	ICAA
Lance Cunningham	NIA
Michelle de Niese	CTA
Matthew Hayes	TIA

^[H2]Agenda items

Disclaimer

NTLG Consolidation Sub-group agendas, minutes and related papers are not binding on the Tax Office or any of the other bodies referred to in these papers. The Commissioner of Taxation has instilled a more open philosophy and process with the National Tax Liaison Group and the sub-groups. As such, minutes of NTLG Consolidation Sub-group meetings will now be published well before the meeting date on which members accept or modify the minutes under normal meeting protocols. This version of the minutes is available for member associations to share more widely on the understanding that formal endorsement is yet to occur.

1.1 Introduction

The chair noted the apologies.

Members had no comments in relation to the minutes of the 23 November 2006 meeting. The minutes were received.

1.2 Update on action items discussed at November 2006 meeting

Action item	3/23Nov06 Clarification in relation to matters raised about the Charter
Update	The chair noted that the issue of 'conflict of interest' was addressed by the main committee at its meeting on 20 March 2007. The Charter has been clarified and placed on to the Tax Office website. She requested that any residual concerns in respect of the Charter be brought to the attention of the chair of the sub-committee.
Action item	4/23Nov06 Members to raise further priority issues Intra-group assets
Update	A phone hook-up was held 20 February 2007 with several intra group asset issues nominated. The Tax Office accepted agenda item 7 as the most strategic and systemic. That issue would be discussed in more detail at that part of the agenda. The other issues would be addressed at that part of the agenda dealing with the prioritisation of issues for the next six months.
Action item	6/23Nov06 Clarification on Tax Sharing Agreements (TSA) and the clear exit provisions
Update	The issue of Tax Sharing Agreements and the clear exit provisions were the subject of a discussion paper, which is addressed at item 3 .

1.3 Tax Sharing Agreements and the clear exit provisions

Gary Scanlan of Operations (Policy and New Measures) addressed this item.

Chapter 35 of Law Administration Practice Statement PS LA 2006/11 - the ATO Receivables Policy outlines the Commissioner's policy in relation to the collection of income tax liabilities of members of consolidated groups including the use of Tax Sharing Agreements (TSA).

A discussion paper on Amended assessments and Division 721 , which was distributed to sub-committee members on 5 April 2007, is available to download.

The paper examined the application of Division 721 and the issue of prospective due dates for amended assessments arising from the Review of Self Assessment (ROSA) changes.

The TIA and the ICAA have provided feedback in respect of the discussion paper which is available to download.

The main concerns addressed in this feedback related to:

¦ an exit of a subsidiary member between an earlier due date and the new due date of an assessment

¦ the position expressed in the discussion paper that there is only one liability and that each amendment is just a change in the quantum of the liability, and

¦ how clear exits are achieved in situations where a liability is amended.

Gary advised that the issue of administering Division 721 with its reference to a single due date has been referred to Treasury for consideration. Tony Regan stated that the matter was largely a collection issue and was currently under consideration.

Gary noted that the Tax Office considers that the private binding ruling regime can apply in respect of TSAs and that this would be determined on a case by case basis.

It was agreed that the Tax Office would provide a written response to the TIA and ICAA in respect of the feedback document. It was noted that Treasury is aware of the issues raised by the TIA and ICAA.

Action item	1/28JUN07 Written response to be provided to the TIA and ICAA in respect of the feedback document and the concerns of the TIA and ICAA are to be escalated to Treasury.
Responsibility	Gary Scanlan

1.4 When is a head company taken to 'hold' and 'use' a depreciating asset brought into the consolidated group by a member (NTLG issue 17.13)

James Targett of the Consolidation Centre of Expertise addressed this item.

The discussion paper, Tax consolidation and starting to 'hold' and 'use' a depreciating asset under Division 40 of the IncomeTax Assessment Act 1997 , considered at the meeting is available to download.

It was noted that the position adopted in the paper means that, if the joining time of the member was after 9 May 2006 (after the 2006 Budget), the 200% diminishing value rate could apply to the depreciating asset.

It was highlighted that the Government Announcement (Press Release No 50, of 8 May 2007) on changes to depreciation rates would need to be considered in relation to this issue.

Members asked whether the entry history rule could apply to enable continued access to the 200% diminishing value rate. Tony Regan responded that this is a matter of policy that is under consideration by Treasury.

The issue is finalised.

1.5 Subdivision 705-C for non-consolidated groups (NTLG issue 17.08)

Lindsay Hanham of the Consolidation Centre of Expertise addressed this item.

Lindsay informed the meeting that, whilst the Tax Office had not reached a final position, the current thinking is that, where a single entity purchasing a consolidated group chose to immediately form a consolidated group, Subdivision 705-C may apply. He said that this issue is on the Public Rulings Program with a Draft Taxation Determination being anticipated for release in September 2007.

1.6 Whether step 3A applies to a former member of a consolidated group (NTLG issue 17.15)

Lindsay Hanham of the Consolidation Centre of Expertise addressed this item.

The discussion paper, The operation of step 3A in section 705-93 and as modified by section 705-147 and section 705-227 , considered at the meeting is available to download.

Lindsay stated that the paper illustrates situations where step 3A should continue to apply (on an ongoing basis). The paper also outlines situations in which it is arguable that step 3A should not be reapplied. This matter has been raised with Treasury by external members.

In response to a query as to whether an interpretative solution was apparent in respect of this issue, Lindsay responded that there was none apparent. He also thought that consideration would have to be given to capital gains tax (CGT) event J1 issues with the work done on step 3A non-resident and head company roll-over adjustments.

1.7 Intra-group assets and the exit history rule (NTLG issue 17.10)

Joseph Camenzuli of the Consolidation Centre of Expertise addressed this item.

The discussion paper, Exit history rule and intra-group assets , considered at the meeting is available to download.

It was explained that this paper was prepared as a result of a hook-up, conducted in February 2007, in which members were invited by the Tax Office to identify significant intra-group asset issues they wished to have addressed. An outline of the paper was then provided.

Geoff Lehmann stated that section 701-75 of the ITAA 1997 may provide solutions for some exit issues but the provision would only assist when there was a mismatch between the deductions and income for the exiting entity and the consolidated group. He suggested that members should try to think of problems that would not be addressed by the operation of section 701-75 (for example, where issues related to characterisation of revenue or capital).

The chair advised that further work will be undertaken in relation to the issues addressed in the paper. In addition, a list will be developed of intra group asset/single entity rule issues that may be further considered. Members were invited to make further submissions, both in relation to identification of issues and interpretative views.

Action item	2/28JUN07 The Tax Office to supply a list of intra group and single entity rule issues identified, for discussion at the next sub-committee meeting.
Responsibility	Chair

1.8 Debt forgiveness and commonly owned groups (NTLG issue 17.14)

Suzanne Trumble of the Consolidation Centre of Expertise addressed this item.

The discussion paper, Commercial debt forgiveness, related companies and intra-group transactions , considered at the meeting is available to download.

The issues that were raised by members in respect of the issue and accompanying paper included the following.

¦ Whether there would be a problem with outcomes that could arise under the commercial debt forgiveness rules if there was a tax loss in the actual debtor company within the consolidated group.

¦ There might be instances in which the rules would not operate appropriately. On what basis could the rules be applied selectively (that is, when their application would not produce anomalous outcomes)?

¦ The rules in Part 3-90 were enacted after the commercial debt forgiveness rules so what impact did the later (consolidation) legislation have on the interpretation of the earlier law?

¦ Was an amendment to the law necessary, or was an interpretative approach available? One suggested approach was that the single entity rule is not an exception provision (to prevent the deduction for interest) - rather no loan or interest is recognised.

¦ Whether there was judicial authority that distinguishes the phrase 'taken to have' from the term 'deemed', and the impact, if any, of the distinction?

Mark Lyburn stated that the discussion on this issue highlighted the broader issue of third parties interacting with consolidated groups. Mark said that there was a role for sub-committee members to be involved in developing principles in respect of this broader issue.

It was noted that certain interactions between third parties and consolidated groups have been addressed in government announcements made in conjunction with the 2007 Budget. These announcements related to CGT event K6 and Division 115.

The chair advised that the issues in the discussion paper would be further reviewed taking into account the feedback that had been provided at the meeting. She invited sub-committee members to provide further input in respect of the broader issue of third parties interacting with consolidated groups.

Action item	3/28JUN07 Further discussion paper to be prepared for the next sub-committee meeting.
Responsibility	Suzanne Trumble

1.9 Same Business Test and consolidated groups (NTLG issue 1.03)

Anthony Marvello of the Losses and CGT Centre of Expertise addressed this item.

Anthony stated that Taxation Ruling TR 2007/2 was released recently and there had been a number of changes that took into account the feedback received on Draft Taxation Ruling TR 2006/D4.

He noted that the ruling provides that activities, undertakings and enterprises that take place within the consolidated group are relevant in characterising the business for the purposes of the same business test. He also noted that the Government announced (with the 2007 Budget) an intention to amend section 165-212E to clarify that the entry history rule is turned off for all the conditions in section 165-210.

It was noted by members that undertakings and actions are distinguished from transactions in the ruling, and the question was raised whether the Tax Office was intending to provide further clarification in respect of this matter. Anthony advised that, at present there is no intention to provide further guidance.

1.10 Large Business and International compliance update

Mike Slattery of Large Business and International (LB&I) addressed this item.

He stated that a prospective administrative change will require notification to the Commissioner of adjustments for errors in tax cost setting amounts addressed under Subdivision 705-E. He said that the notification requirement will apply from the time that the Draft Taxation Ruling in respect of errors is finalised and released.

The message on the Tax Office website will be updated to reflect this new requirement when the final ruling is released and a pro-forma notification document will be up-loaded in conjunction with this website update.

(Update: The finalised taxation ruling on errors together with the related web page messages and error notification form were released on 1 August 2007.)

In response to a query as to when a notification should take place, Mike stated that notification must be made by the head company as soon as practicable and without undue delay after becoming aware that the error is identified.

It was noted that the timing of CGT event L6 is the start of the income year in which the Commissioner becomes aware of the error.

Mike directed the sub-committee's attention to the Law Administration Practice Statement PS LA 2007/11 which provides direction to Tax Office staff on the administrative treatment of taxpayers affected by announced but unenacted legislative measures that will apply retrospectively, when enacted.

He noted that the administrative treatment by the Tax Office in relation to the May 2007 Budget announcements for the consolidation provisions is to apply the existing law until the proposed legislative change is enacted. That is, scenario one contained in paragraph 35 of the practice statement will apply.

Tony Stolarek said that this approach could provide some particular difficulties in relation to the straddle issues. On a separate matter, he asked whether an update of the Tax Office's compliance activities in respect of consolidated groups could be provided with the sub-committee meeting minutes. This was agreed to.

Action item	4/28JUN07 An update of the Tax Office's compliance activities in respect of consolidated groups will be sent to the members with the sub-committee minutes. Update: A document describing the Tax Office's compliance and activities in respect of consolidated groups has been sent to members and is available to download.
Responsibility	Mike Slattery

1.11 Treasury update/briefing on the Budget

Tony Regan presented the Treasury update.

In regard to the proposed legislative changes announced by the Government in December 2005, papers for consultation were released early 2007. It is expected there would be consultation regarding draft legislation in July/August 2007 and, if legislation is to be introduced in the spring sitting of Parliament, the earliest introduction was likely to be September 2007.

In regard to the proposed legislative changes announced in the Budget in May 2007, papers for consultation might be released in August 2007. He also advised that there will be consultation undertaken in respect of the Government announcement made on 27 October 2006 in respect of consolidated and multiple entry consolidated groups (conversions). He also informed the sub-committee that the non-operating holding company legislation had passed both houses of Parliament and he believed the legislation had received the Royal Assent on 27 June 2007.

1.12 Trusts joining and leaving a consolidated group during an income year

Glenn Davies of the Tax Counsel Network addressed this item.

The discussion paper, Trusts joining or leaving a consolidated group during an income year , considered at the meeting is available to download.

Glenn referred to the discussion paper and noted that there were issues related to the interaction of the consolidation legislation with Division 6 of Part III of the Income Tax Assessment Act 1936 (the trust provisions) especially where the trust was a member of a consolidated group for only part of its income year. While it seemed reasonably clear that the head company was directly assessed while the trust was a member of the group, it was less clear how pre-joining time trust section 95 net income was to be assessed.

For example, this raised the concept of present entitlement to a share of income of the trust estate and how it interacted with provisions such as sections 701-30 and 701-65 which work out the section 95 net income, but not the trust income, of a trust for a non-membership period, as if it were an income year for entity core purposes.

A trust is not itself a taxable entity - only the beneficiaries or the trustee (in some cases) are taxpayers in respect of the net income. Sections 701-30 and 701-65 ascertained a net income for the purposes of the non-membership period but there were difficulties in determining how the existing law brought that amount to tax. Difficult issues arose in relation to how the single entity rule affected the results (if at all). The discussion paper dealt with further issues such as those raised by Subdivision 716-A.

Glenn said that he has received feedback on the paper from the Trust Consultation Group which indicates that there are problems with spreading income and determining an appropriate split between the relevant taxpayers, and encouraged further feedback from the sub-committee members.

The sub-committee members were asked whether they would be willing to participate in a workshop to discuss the issues further and it was agreed that members would consult within their organisations to determine if they had a suitable representative to nominate.

A concern was raised as to whether significant resources should be invested in an issue where there may be limited cases in which the problem occurs. It was pointed out that the issue had been originally raised in this sub-committee. The Tax Office agreed to provide statistics covering trusts joining and leaving consolidated groups.

Action item	5/28JUN07 Interested parties to nominate any representatives to participate in a workshop with Glenn Davies and other Tax Office representatives to discuss related issues. Update: Nominations received and a workshop was held on 24 July 2007.
Responsibility	Members
Action item	6/28JUN07 Statistics to be obtained in respect of trusts entering and leaving consolidated groups. Update: The statistics for trusts entering and leaving consolidated groups have been obtained and are available to download.
Responsibility	Mike Slattery

1.13 Straddle contracts (NTLG issue 14.01a)

Glenn Davies of the Tax Counsel Network addressed this item.

He stated that Draft Taxation Determination TD 2005/D27 will be re-released as a draft for comment along with other Draft Taxation Determinations which will address associated issues such as identifying the relevant asset. There will be some limited consultation conducted with members of the sub-committee prior to the release of the draft determinations.

1.14 Other business

The ICAA had provided a list of issues on which they sought comment. Some of those issues were addressed under the compliance update ( agenda item 10 ).

The other issues raised included the following.

¦ The implications of the approach in ATO ID 2007/74, on the creeping acquisition of a consolidated group holding privatised assets. The Tax Office's interpretation results in the cap in section 705-47 applying, notwithstanding that the target and acquiring groups were only 'associates' because the method of acquisition was 'creeping'. The Tax Office advised that it would be writing to Treasury about this issue.

¦ 'Pending legislation should be reviewed in light of the 2007 budget announcements.' The ICAA is to provide further information.

¦ 'Division 125 demerger relief and CGT event L5.' The Tax Office agreed that the relief under the Division does not apply to CGT event L5. Members could consider making representations to government for the relief to be extended.

¦ Further guidance was sought on the application of CGT event L7 between 1 July 2002 and 8 May 2007 (when the Government announced it would be repealed). The Tax Office asked whether members wanted this issue considered as a priority issue (see next agenda item).

Subsequent to the meeting Alexis Kokkinos queried whether the Tax Office was considering issuing addenda for certain Taxation Determinations (for example TD 2005/53) where their application may be affected by measures announced in the 2007 Budget.

The chair noted that a review of the sub-committee's operations was required under the sub-committee's charter, and will be undertaken with members during the next six months.

Action item	7/28JUN07 The Tax Office to consider whether addenda are necessary on certain Taxation Determinations that may be affected by the 2007 Budget announcements.
Responsibility	Chair

1.15 Members views as to priority issues for June - November 2007

The chair referred to action item 4/23Nov06 (Members to raise further priority issues in relation to intra-group assets) and the phone hook-up that was held 20 February 2007.

A summary of the nominated issues (and one subsequently submitted by email) is attached:

In relation to the first issue, the Tax Office would further consider whether it would write to Treasury about these outcomes, after a more systemic review of single entity rule and intra-group asset issues, with sub-committee members.

The second issue has been dealt with by the issue of the final ruling (TR 2007/2).

The chair asked members to confirm whether they considered the potential application of Part IVA to intra-group dealings was one that was systemic and significant. It was generally agreed that the application of Part IVA depended on the facts and circumstances of each case, and the issue was not broadly significant.

The interaction between the history rule and the single entity rule was accepted as a priority issue and discussed at agenda item 7 .

The chair advised that the Tax Office did not plan a specific review of TDs 2004/33, 34 and 35. However it was noted that the outcomes in the determinations were consistent with, and depended on, the policy of the particular tax provisions that the single entity rule was considered in relation to. The chair noted again that a broader review of single entity rule and intra-group asset issues would be undertaken with the sub-committee in the future and invited members to nominate any additional systemic issues of concern.

The chair noted that a late reminder had been sent out for the nomination of priority issues for the next six months. No priority issues had been received, but could be submitted to the Tax Office in the next two weeks. If no further issues were nominated, the sub-committee agreed to concentrate efforts during the coming six months on the issues already identified.

In relation to the ICAA's request for additional guidance on CGT event L7 (agenda item 14 - other business) sub-committee members agreed that it may be beneficial to await the Treasury discussion paper (due August 2007) on the repeal of CGT event L7 before attempting to progress this issue further.

^[H18]Next meeting

The chair stated that the next meeting is scheduled for 21 November 2007.