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Chapter 26: A framework for consolidation

Policy objective

Taxing groups as a single entity would be a progressive step towards a fairer, simpler taxation regime for companies and trusts. The proposals in this chapter provide the building blocks for most of the consolidated taxation regime. They are based on six design principles which facilitate simplification while protecting the tax revenue base.

Framework design principles
Principle 1

Consolidation to be optional, but if a group decides to consolidate, all its wholly owned Australian resident entities must consolidate.

Principle 2

Consolidated groups to be treated as a single entity.

Principle 3

Current group provisions to be repealed.

Principle 4

Individual entity losses and franking account balances able to be brought into the consolidated group.

Principle 5

Carry-forward losses and franking balances to remain with the consolidated group on an entity’s exit.

Principle 6

Provisions to be established for determining the cost bases on exit.

Group consists of all wholly owned entities of the head entity.

Inclusion of discretionary and hybrid trusts depends on situation.

Family trusts and companies consolidate under general entity consolidated regime or modified trust loss measures.

Decision to consolidate is irrevocable.

Accounting treatment for consolidated group based on control test.

Issues
- benefits of single entity treatment;
- tax attributes to apply on entry and exit;
- effect on characterisation of transactions;
- implications for international taxation; and
- implications for CGT regime.
Why repeal current group concessions?

- Consolidation would replace grouping provisions. Grouping provisions have problems: integrity issues; and compliance costs.
- Should tax either as single group or as separate entities.

How would non-electing groups be taxed?

- Taxed as separate entities.

How would entities bring in carry-forward losses on entry into a consolidated group?

Option 1   Do not allow losses into a consolidated group, apart from two limited (transitional) cases.
Option 2   Allow
carry-forward losses to be brought into a consolidated group subject to a modified same business test.
Option 3   To reduce revenue costs, add a further test to
Option 2.
Option 4   Allow a specific proportion of the loss to be brought in.
Option 5   Quarantine carry-forward losses within a group.
Option 6   Leave entities outside the group.

What franking credits and foreign tax credits could entities bring into a consolidated group?

- No limitations.

What carry-forward losses could entities
take when exiting a consolidated group?

- None.

What franking credits and foreign tax credits could entities take when exiting a consolidated group?

- None.

See Chapter 27.