Tax Consolidation: Opportunities for SMEs

The Tax Institute held its National Consolidation Symposium in Melbourne on Tuesday, 10 September 2013. Outlined below is a summary of some of the issues discussed at this year’s Symposium:

  1. the general consensus of the presenters and attendees was that there is far less uncertainty in the consolidation realm in relation to technical issues than there is in the trusts and superannuation realms. Businesses are focusing on external economies rather than internal technicalities;

  2. the potential impact of extending the scope of the Consolidation regime - statistics presented at the Symposium indicate that of the 16,330 micro-enterprise groups (groups with less than $2m turnover), only 20% have elected to form consolidated groups, and that of the 9,044 SME enterprise groups (groups with a turnover of $2m - $50m), only 42% have elected to form consolidated groups. These figures contrast with the 3,016 medium to large enterprise groups (with turnover exceeding $50m) of which 83% have elected to consolidate.
    The Board of Taxation has received submissions on the need to include entities which are not wholly-owned by a single company, but commonly owned by a group of individuals, in the legislation. If such legislative changes were made, it would mean that 56,352 micro enterprises that are wholly-owned ‘economic groups’ and 18,883 wholly-owned ‘economic groups’ with a turnover of $2m to $50m, could elect to consolidate. This provides considerable scope for SME clients to review their operations and further consider the benefits of forming a tax consolidated group – including reduction in operating costs as a consequence of preparing a single income tax return for the group, and the income-tax exemptions for transactions between entities that form part of the consolidated group;

  3. the importance of carefully drafted Tax Sharing Agreements in allocating the tax liabilities of the members of the group and in obtaining a “clear exit” when a subsidiary leaves a consolidated group;

  4. the Courts are adopting a purposive/principled approach to the interpretation of the Consolidation legislation, creating greater certainty and consistency;

  5. the ATO’s focus areas for compliance:

    a. the ATO indicated that in future it intends to disband the National Tax Liaison Group Consolidation Sub-Committee and proceed on an ad hoc basis when resolving technical issues, with a focused consultation on identified issues over a specific timeframe, with the aim of reaching a definite outcome. It intends to proceed on the basis of:
        I.   Why is the issue important?
        II.  What can we get out of it?
        III. Who are the best consultants in relation to this issue?

    b. ensuring compliance with the 2012 legislative amendments to the rights to future income (RTFI) rules, which introduced 3 primary rules depending on the time of the joining/arrangement, is a primary risk focus for the ATO. The ATO mailed letters and questionnaires to identified taxpayers. Key issues that the ATO is focusing on are:
        I.   Where the joining time is before 12 May 2010 - inclusion of certain assets in goodwill and deductions being appropriately claimed for unbilled income assets;
        II.  Where the joining time is (generally) after 12 May 2010 - including value attributed for renewal or non-cancellation of RTFI assets in goodwill; and
        III. Where the joining time/arrangement commenced after 31 March 2011 – valuation of WIP.

  6. there continues to be residual cost setting issues in relation to WIP, derivative and tax losses and valuations, but these have not precluded the progress of M & A deals;

  7. exposure draft legislation in relation to demergers – to provide CGT event L5 relief and retention of existing tax values for a consolidated group that demerges a chain of subsidiaries which elect to form a new consolidated group - is pending;

  8. there is uncertainty as to how the recent amendments to the anti-avoidance legislation in Part IV of the Income Tax Assessment Act 1936 may operate notwithstanding the decision in FC of T v Macquarie Bank Ltd and Anor [2013 FCAFC 13], for which the High Court refused the Commissioner’s request for leave to appeal on 16 August 2013.

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For more information on tax consolidation and Tax Sharing and Tax Funding Agreements, please contact:

Renuka Somers
Senior Associate 
03 9611 0110
rsomers@sladen.com.au 

or

Daniel Smedley
Principal
03 9611 0105
dsmedley@sladen.com.au

Daniel Smedley