Submission No. 236 Back to full list of submissions
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16 April 1999


The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place


Dear Sir

A Platform for Consultation Paper
Submission – Consolidated Taxation For Foreign-Owned Groups with Separate Entry Structures into Australia

Arthur Andersen’s clientele includes many multi-national corporate groups with major investments in Australia. As such, we have had substantial experience dealing with taxation issues encountered by foreign-owned corporate groups operating in Australia. This submission is directed at the specific difficulties which would be encountered under the proposed consolidation regime by multi-national corporate groups with separate entry structures into Australia.

As noted in the Foreword to the Platform for Consultation ("the Platform") of the Review of Business Taxation ("RBT"), the purpose of the Platform "is to put the issues out for discussion and deliberation, to facilitate effective consultation, and to consider how the national objectives and principles should be applied in the best overall interests of the country".

Accordingly, we have outlined below our views in relation to the proposed consolidation regime as it would apply to such multi-national corporate groups as described above, and suggestions to enhance the proposed regime’s effectiveness in achieving the above goal without undermining the attractiveness of Australia as an investment destination for overseas business.

In our view, the Platform has gone a long way towards identifying the relevant policy issues. (We have attached as Appendix 2 what the RBT perceives as being the problems in relation to taxation of wholly owned groups. We have included this appendix as a reference template to ensure that our submission takes account of those perceived problems.) We agree that these potential distortions within the current tax system exist, and support the RBT’s stance in seeking to address them. However, the framework for such a consolidated taxation system has, in our view, several features which clearly disadvantage international businesses operating in Australia through company groups.

The Framework – Adopt a "No Detriment" Concept

The proposed framework to introduce consolidated taxation as currently set out in the Platform raises serious issues in terms of increased real tax costs for foreign-owned groups. We believe that consolidated taxation should not result in any detriment to foreign-owned groups as opposed to domestically-owned entities. Such a detriment would be wholly at odds with the objective of increasing Australia’s international competitiveness by ensuring that tax motivations do not influence business decisions unnecessarily.

1. Non-Resident Parent as Holding Company for Australian Sisters

Currently, many international groups have more than a single entry point into Australia, mainly due to the separate operating and reporting responsibilities which exist in a diversified global business, or through global acquisitions which already have Australian subsidiaries.

By way of example, a multi-national group may have diversified over a long period of time into new areas in different countries by way of mergers and acquisitions. Expertise acquired through such transactions in relation to the production of certain items may be located in different corporate structures in separate countries. Accordingly, there may be separate chains of corporate groups in Australia (as well as other countries) engaged in different areas of business which are managed through separate centres of expertise overseas while within the same wholly owned worldwide group.

Based on Principle 1 of the framework, Australian "sister" companies owned by a foreign parent without a common Australian resident holding company would not be allowed to consolidate. Since Principle 3 requires the repeal of the current grouping provisions this would directly result in the inability to utilise a loss in a sister company when the companies have the same economic ownership. Accordingly, Australian tax paid would increase in a way which is inequitable from an international competitiveness perspective.

It is submitted that to divide the corporate groups for consolidation purposes in the manner contemplated would be inequitable for foreign-owned corporate groups who have structured, or wish to structure, their operations in Australia through multiple entry points. The effect will be to introduce into our tax system a non-neutrality in the commercial structuring of investments, which would be undesirable. These inequities currently exist in the context of the thin capitalisation provisions. We have attached as Appendix 3 a separate submission, including an example of the inequity referred to, on thin capitalisation. We have included the additional submission as, in our experience, these inequities are a current and ongoing cause of frustration for foreign investors who, as described above, do not have or do not wish to have a common holding company in Australia.

(Please note that our reason for separating the two submissions is in order to assist the secretariat of the RBT in the process of collating and classifying the submissions, ie thin capitalisation is not dealt with as a "consolidation regime" issue.)

We suggest that grouping for consolidation purposes should be on the same basis as under the current loss grouping provisions, ie there should be no detriment to a foreign-owned group merely because it has a non-resident parent rather than an Australian resident holding company. Furthermore, we suggest that the current inequities existing in relation to the application of the thin capitalisation provisions be removed by allowing equity to be consolidated on a group basis.

In recommending a limitation to consolidation by reference to a common holding company, we understand the Treasury and Australian Taxation Office have concerns in relation to the following matters.

Firstly, there is a concern that the authorities would be unable to verify 100% holdings outside Australia, particularly where the holdings are in countries without exchange of information agreements. However, as these agreements are present in relation to countries with which Australia has concluded double tax treaties, this concern can be more simply addressed. Namely, companies with common foreign ownership in a treaty country should be allowed to form a consolidated group on the same basis as the current grouping provisions. Only companies with common foreign ownership in non-treaty countries would be required to have a Australian resident holding company. It would seem fairly straightforward to also explore other certification-type procedures and/or appropriate compliance documentation to meet the Australian Taxation Office’s concern.

Secondly, there may be increased compliance costs due to increased complexity when calculating the equity cost base of an exiting group entity where there is an offshore holding company. It is submitted that the maintenance of the ability to group revenue and capital losses, as well as continued access to capital gains tax rollover relief would be more beneficial to companies compared to increased compliance costs on exit. Maintenance of this flexibility has a higher priority in the context of our need for international competitiveness.

2. Restructuring to insert an Australian resident holding company

In order to form a consolidated group to alleviate the above situation, companies would need to restructure to introduce a common Australian holding company. This is recognised in the Platform, with some suggestion that transitional rollover relief would be available for these restructures.

However, undertaking a restructure would involve the incurrence of costs. Furthermore, such costs may be non-deductible. In addition, there would also need to be State Government agreement in relation to confirming stamp duty exemptions for such a restructure. In the context of foreign owned groups, implementing restructures may also create foreign tax liabilities in the relevant foreign jurisdiction.

As a practical matter many corporate groups may not be in a position to restructure due to the foreign jurisdictional tax consequences or because of inherent reporting or other historical reasons for the existence of the structure referred to earlier. Such groups will therefore suffer the inequities in relation to not being able to group losses or obtain rollover relief for CGT asset transfers between the separate consolidated groups.

3. Increased foreign tax as a direct consequence

Under the proposed consolidation regime, the holding company of a consolidated group would be assessed to tax on group profits. Although this may not increase total Australian tax paid, where an Australian resident holding company structure is in place, no actual mechanism to allocate the tax to the individual companies will exist under the consolidation framework as currently set out.

This may create foreign tax credit utilisation problems in some countries. By way of example, the calculation of US foreign tax credits (under a consolidation regime where tax is assessed to one member) is based on a pro-rata apportionment to each "income company". This would result in lower foreign tax credits filtering through to the US parent, such that the tax liability of the US holding company will increase. Appendix 1 sets out an illustration of the above.

We suggest that, although tax payable will be calculated on a consolidated group basis as proposed, a system of "notional loss transfers" (or something else with a similar effect) be established so that individual "income" companies be assessed. This would allow the relevant "income" companies to factor in tax paid by the consolidated group, and remove the inequity to foreign holding companies arising from the current framework.

Alternatively, we submit that the consolidation framework ultimately adopted should be similar to that in New Zealand, which allows the loss grouping provisions to continue functioning where a group elects not to consolidate. Where Principle 3 (the repeal of current grouping provisions) is discarded, the perceived problems with integrity may be dealt with by way of stringent anti-avoidance measures against any manipulation or exploitation of the grouping provisions.

4. Increased foreign tax due to Controlled Foreign Company ("CFC") measures of other countries

In paragraphs 26.53 to 26.58, the Platform recognises that the current framework proposed may result in adverse tax consequences under the CFC measures of the country of residence of the foreign holding company. Two potential problems have been identified.

Firstly, income earned through inter-company transactions between companies in a consolidated group would be disregarded for the calculation of Australian tax. Where the foreign CFC measures impose tax on this amount, additional tax will arise to the foreign holding company.

Secondly, tax will be paid by the holding entity of a consolidated group under the current framework. Individual companies within the consolidated group may be regarded under the foreign CFC measures as not having paid Australian tax. Also, difficulties may arise in relation to the claiming of foreign tax credits for Australian tax paid by the holding company of a consolidated group against the (CFC attributed) income of each member company.

An allocation mechanism apportioning tax paid to the relevant "income" company should be included in the framework as submitted above in relation to the calculation of US foreign tax credits on dividends. This may support the position that the Australian CFCs have "paid tax" in respect of their income, no different to their treatment under the current grouping regime, for the purposes of the foreign CFC measures. However, in the absence of specific agreements between the international tax authorities, there is no certainty that the relevant foreign jurisdiction would adapt its CFC measures to accommodate the changes in Australia’s domestic taxation of company groups.

We submit that these international issues may be overcome, and Australia’s competitive profile maintained, by retaining the current grouping provisions so that foreign companies disadvantaged by the foreign CFC measures may choose not to form a consolidated group without being subject to a higher incidence of Australian taxation. As discussed above, more wide-reaching anti-avoidance provisions can be introduced to address the current "integrity" of the grouping provisions.

Otherwise, where the foreign CFC measures result in excessive additional tax as a result of the proposed Australian consolidation regime, international groups may seek to relocate their operations to, for example, New Zealand, which allows grouping outside the consolidation regime for company groups which do not consolidate.

Alternatives to Consolidation

We note that the objectives of consolidated taxation could be achieved in a simpler manner through legislative rewrite having regard to the policy framework set, and may in fact lead to a better outcome from an administrative and compliance perspective while at the same time achieving the integrity in the system that is currently suggested to be missing.

The reality would appear to be that the consolidation proposals would result in the same if not significantly greater compliance costs (except perhaps marginally for the Australian Taxation Office). One level of complexity would simply be replaced with another. Indeed, to the extent to which consolidation only applies to 100% owned groups, it could be suggested that the rules relating to streaming, stripping and buy-backs for example, would need to be retained.

In so far as the issues arising in the context of the Section 46 dividend rebate are concerned, a large number of the problems are brought about by the fact that the effectiveness of the intercorporate dividend rebate is reduced where loss entities are interposed between profitable entities. A system such as that which exists in New Zealand which allows deductions for expenditures incurred in deriving dividend income, whilst exempting the dividends received within a wholly owned group, would remove this impediment to dividend flows within wholly owned corporate groups. (Alternatively, if it is considered inappropriate to permit deductible expenses against exempt income, the same effect can be achieved through a zero tax rate on intercorporate dividends.) It is unnecessary for consolidation to be introduced to achieve this objective. Nor is it necessary for unfranked dividends to be taxed within a corporate group to achieve the stated objective, of one level of taxation at the entity level and one at the individual level.

In considering whether consolidation is the only approach that makes sense, one should have regard to regimes such as that which exists in New Zealand where the norm would appear to be that people do not elect for consolidation due to its complexity.

What alternatives could be examined? It would appear from the Platform that the main issues relating to integrity relate to loss duplication and loss cascading (as well as gain duplication). It would seem that a modified capital gains tax and income loss regime could be easily introduced to overcome these stated deficiencies.

A variety of issues remain to be resolved in the context of a new consolidation regime. We further recognise that some of the potential solutions involve a significant degree of complexity, and accordingly we have reservations about the possibility of solving all these issues in the current projected timeline (see below).



We believe that the proposed timing of implementation of the RBT measures, particularly in relation to preparing for and implementing such proposals, are cause for concern. The proposed consolidation regime is a fundamental feature of the proposed tax reform, and in its present form, several features of the regime require more detailed analysis.

Equally importantly, critical timing constraints exist due to the interaction of the proposed consolidation regime with changes to the dividend regime and, potentially, changes to the international tax regime.

In light of the above and the degree of complexity involved, and how fundamental the consolidation regime is to the overall new tax system, it would be inappropriate to rush any changes through just to meet the original timing deadlines.

* * * * *

We would be happy to discuss our submission in further detail with either you or your colleagues. To that end, please do not hesitate to contact Michael Wachtel or David Williams of this office.

Yours faithfully



Appendix 1

Proposed Consolidation Regime

Where a company in an Australian group makes losses, the implementation of the proposed consolidation framework (as currently set out) will lead to an increased tax burden to many Australian subsidiaries of foreign corporations or to their foreign parents. This is particularly so in relation to subsidiaries of US corporations. The example below demonstrates this.



  • three Australian trading companies with a "flow through" Australian holding company;
  • two of the subsidiaries are profitable, one incurs losses;
  • group policy of paying 50% of after tax profits as dividends; and
  • taxable income = NPBT.


Current Grouping Regime:

  • Group B and C, A pays 360 tax.
  • Group NPAT is 640 (1,000 – 360 + 500 – 500).
    Therefore, A pays 320 dividend to HC (50% x 640).
  • HC pays 320 fully franked dividend to US parent – no withholding tax ("WHT").
  • US parent tax credit is 180 (50% x 360).

Proposed Consolidation Regime:

A. Australian group elects not to consolidate:

  • No grouping permitted, so A pays tax of 360 and B pays tax of 180. Total tax is 540.
  • Group NPAT is 460 (1,000 – 360 + 500 – 180 – 500). However, to make the example simple, let’s assume C tax effects its loss, and hence group NPAT is 640 as before.
  • HC pays 320 fully franked dividend to US parent – no WHT.
  • US parent tax credit is 180.

B. Australian group elects to consolidate:

  • HC is assessed for 360 tax for the Australian consolidated group.
  • A pays 320 dividend to HC.
  • HC pays 320 fully franked dividend to US parent – no WHT.
  • Under US tax rules, the 360 Australian tax is pro-rated across income companies. Hence, A is allocated 240 tax and B is allocated 120 tax.
  • Therefore, the tax credit for the dividend from A to HC to US parent is only 120 (240 x 50%). Hence, US parent pays additional 60 (180-120) US tax.

In summary, the tax consequences are as follows:


Australian Tax

US Tax Credit

Additional Tax Cost

Current Regime




Consolidation Regime      
  1. elect not to consolidate




  • elect to consolidate




The above example shows that the consolidation regime results in additional tax (either US or Australian) where one company in the group makes a loss. This is even worse where there is no Australian holding company, since consolidation cannot be used and tax loss transfers are not permitted. This is totally inequitable, and contrary to the objectives of the Ralph review.

Moreover, we note that in comparison with the tax consolidation rules in New Zealand, no such problem as described above exists. The reason for this is that the New Zealand tax law permits loss grouping as an alternative to consolidation. The obvious implication of this is that New Zealand will have a further competitive advantage over Australia in relation to business investment. (This is in addition to the advantage it already has through a lower corporate tax rate). This is again completely contrary to the Ralph Committee’s objectives which aims to foster international competitiveness.

Appendix 2

Synopsis of Problems with the Current System, According to A Platform for Consultation Paper

The Platform states that the current grouping provisions and intercorporate dividend rebate has resulted in the following problems in relation to the taxation of wholly owned groups:

  • tax impediments to business organisation — for example, compliance costs and possible tax costs of liquidating a redundant company in a wholly owned company group;
  • high compliance costs — for example, the costs of dealing with the tax implications of intra-group dividends (such as the franking rules);
  • tax avoidance through intra-group dealings — for example, manipulating dealings between group companies to reduce or defer tax;
  • loss cascading — where group companies — as well as companies that are less than 100 per cent owned — can use a chain of companies to create multiple tax losses based on one initial economic loss;
  • loss duplication — where losses realised in carrying on a business or on disposal of assets are realised again on the disposal of equity;
  • double taxation — where gains realised in ordinary commercial transactions are taxed again on the disposal of equity; and
  • value shifting — by group companies — as well as related companies that are less than 100 per cent wholly owned — transferring assets at under- or over-value between themselves to create artificial tax losses where no economic loss exists.

It is suggested in the Platform that the anti-avoidance provisions which have been introduced continually over the years in an attempt to address these problems are not sufficient to address these problems. It is further suggested that the provisions are lengthy and complex – but, in part because of the lack of a clear framework and the ad hoc approach to policy development and legislation, have not been able to keep up with the growing use of tax minimisation strategies. The integrity and ease of use of the business tax system, it is said, suffers as a result.

In short, the combined effect of the intercorporate dividend rebate and the grouping concessions that apply to the transfer of losses (both capital and revenue) and the transfer of assets and availability of rollover relief within corporate groups have created a situation where there is a lack of integrity in the tax system. This has also created a significant amount of complexity leading to increased administration and compliance costs because of the over-reliance on anti-avoidance rules which both embed the lack of integrity in certain circumstances and in other circumstances fail to meet the stated objectives.

As noted in the Platform, these problems are enhanced by the fact that there are two levels of taxation relevant to company groups, being at the shareholder level and at the entity level. This creates opportunities to minimise tax and equally creates situations where double taxation arises due to value shifts. Furthermore, the way in which the intercorporate dividend rebate provision operates leads to inefficiencies in flowing cash through entity chains.

Appendix 3

23 April 1999

The Secretary
Review of Business Taxation
Department of Treasury
Parkes Place


Dear Sir


A Platform for Consultation Paper

Submission - Thin Capitalisation Rules for Foreign-Owned Groups with Separate Entry Structures into Australia

Arthur Andersen’s clientele includes many foreign investors with major investments in Australia. As such, since the introduction of the thin capitalisation rules in 1987, we have had substantial experience with the practical issues arising out of the application of these rules.

The purpose of this submission is to bring to your attention one of the more significant defects in the thin capitalisation rules for your consideration during the Government’s current tax reform process. The removal of this defect will increase the efficiency of the tax system without deleteriously affecting the tax base by providing scope for tax avoidance. The submission also provides comment in relation to proposed changes to the current thin capitalisation rules.



The thin capitalisation rules were introduced with the objective of addressing the incentive which foreign controllers would have, on the basis of the different treatment of dividend and interest payments, to utilise excessive levels of debt funding in preference to equity funding in respect of "controlled" Australian companies. The rules operate to protect the Australian revenue base by denying the deductibility of interest incurred on foreign debt in excess of the specified ratio. Currently, the ratio of maximum foreign debt to foreign equity allowed is 2:1.

The above rules calculate foreign debt based on total foreign debt within each corporate sub-group, and foreign equity by reference to the Australian holding company (ie the top company in the chain) of the relevant sub-group. Foreign corporate groups with more than one sub-group in Australia are required to perform the thin capitalisation calculation for each sub-group.

It is currently not possible to amalgamate total foreign debt and total foreign equity that the foreign controller has in various Australian sub-groups to perform a single overall calculation to determine compliance with the rules. This is illustrated by the following example:

click to see larger version


Under the current rules, HoldCo A Pty Ltd has foreign equity of $10 million. The sub-group to which HoldCo A Pty Ltd belongs (comprising HoldCo A Pty Ltd, B Pty Ltd and C Pty Ltd) has total foreign debt of $20 million. Accordingly, none of these companies may borrow further amounts from UK Parent Co without breaching the thin capitalisation rules. In contrast, the sub-group comprising HoldCo X Pty Ltd and Y Pty Ltd may borrow up to a further $12 million from UK Parent Co without breaching the thin capitalisation rules. This is because HoldCo X Pty Ltd has foreign equity of $10 million whereas total existing foreign debt within this sub-group is only $8 million.

However, should the thin capitalisation rules allow for the consolidation of all foreign equity and foreign debt for the purpose of determining compliance with the rules, total foreign equity would be $20 million. Accordingly, the maximum foreign debt allowed would be $40 million, such that any of the Australian subsidiaries may borrow a further amount up to an additional $12 million on a group basis without breaching the thin capitalisation rules.



1.Non-Resident Parent for Australian Group Companies

While the above operation of the provisions may not present a practical impediment to many newly organised company groups which could take into account the requirements of the thin capitalisation rules, these requirements can produce a severe impediment for groups, which for historical reasons (for example, manufacturing of entirely differentiated products within separate operational sub-groups after takeover situations) have resulted in separate holding company structures. There will of course be other groups that wish to invest in Australia but also prefer to be organised other than by way of common holding company.

We note in this regard that the requirement to measure foreign debt and foreign equity separately for each sub-group is incongruous when contrasted with various provisions of the tax legislation. For instance, the loss grouping provisions for wholly owned company groups would apply to the above example such that losses incurred by any of the companies in the HoldCo A Pty Ltd sub-group may be transferred to any of the companies in the HoldCo X Pty Ltd sub-group to the extent there are profits in a particular company in the latter sub-group, and vice versa.

Similarly, taxation under the capital gains tax ("CGT") rules may be deferred where assets are transferred via roll-over between any of the Australian resident companies in the above example. In addition, in a broad range of anti-avoidance provisions, all entities in a wholly owned company group are treated as belonging to the same group, regardless of sub-group organisation (for example, under the CGT provisions where assets are transferred at less than their market value).

In the above areas of the tax legislation, the fact that there are separate sub-groups is not considered to be relevant. Equally, we do not see the relevance of having different sub-groups for the purposes of applying the thin capitalisation rules.

Whilst we recognise the concerns of the Ralph committee as set out in our main submission on consolidation, we indicated therein we believe that these concerns can and should be addressed without introducing inequities in the system which will offset investment decisions.

We understand that under the Foreign Investment Review Board ("FIRB") rules which preceded the introduction of the thin capitalisation rules, the debt to equity ratio for FIRB purposes may have been independently calculated using separate sub-groups. This may have led to the thin capitalisation rules being drafted to apply to different sub-groups as well. Even if this is historically correct, in our view, it is merely a historical anachronism with no continuing policy basis.

The effect of the current operation of the thin capitalisation rules to sub-groups is merely to introduce non-neutrality in the commercial structuring of investment which, we would assume you would agree, to be undesirable unless there is an overriding reason which exists for such tax-based non-neutrality.

We therefore submit that this non-neutrality be removed by amendment of the thin capitalisation provisions. We accept that, consistent with the other instances of "grouping" as discussed above in relation to losses, CGT asset roll-overs and anti-avoidance provisions, the sub-groups should only be treated as one group for thin capitalisation purposes when they are 100% wholly owned group entities.

This amendment is required, in our view, whether or not the proposals for consolidation of tax returns are implemented. It is equally appropriate to calculate the thin capitalisation ratio on a single group basis whether a company group prepares individual or consolidated tax returns.

In our view, legislative amendments to effect this would not be complicated, would involve no complex legislative drafting, and could be readily implemented without imposing an increased administrative burden on either taxpayers or the Australian Taxation Office. We would be pleased to prepare draft legislative amendments to illustrate how our proposed changes could be implemented.

2.Proposed Changes

In their present form, the thin capitalisation provisions only apply to related party debt. The proposed changes contained in the Platform for Consultation Paper of the Review of Business Taxation recommend taking into account all debt, from both related and unrelated companies (using either a worldwide group formula or a fixed ratio). Insufficient detail of the method of calculation has been provided. In any event, we are concerned about the likely consequences of implementing and applying a new regime to currently-existing group financing arrangements. This could, in effect, constitute retrospective taxation.

In this regard, we submit that the recommendations, in their present form, require considerably more clarification and explanation. Until this is provided, we are unable to comment meaningfully on the proposals.

* * * * *

We would be happy to discuss our submission in further detail with either you or your officials. To that end, please do not hesitate to contact Michael Wachtel on (03) 9286 8620.

Yours faithfully