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Part 1: tax consolidation for SMEs series: pros and cons of forming a consolidated group?

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This is the first article in a series that aims to demystify the application of the tax consolidation rules in Part 3-90 of the Income Tax Assessment Act 1997 for private groups and small and medium enterprises (SMEs).

The articles in the series will cover the following:

  • Part 1: pros and cons of forming a consolidated group;

  • Part 2: eligibility to form a consolidated group;

  • Part 3: setting the cost of assets on entry;

  • Part 4: carry forward losses; 

  • Part 5: tax sharing and funding agreements;

  • Part 6: operating a consolidated group; 

  • Part 7: exiting a consolidated group

  • Part 8: restructuring to form a consolidated group;

  • Part 9: Division 7A and consolidated groups; and

  • Part 10: trusts and consolidated groups.

Advantages and disadvantages of forming a consolidated group?

Tax consolidation began on 1 July 2002. At that time, and for many years afterwards, the rules in Part 3-90 were the providence of the ‘big end of town’. This was due, at least in part, to the size and complexity of the changes not justifying, using a cost benefit analysis, private groups and SMEs moving to the new regime. The prevalence of discretionary trusts in private and SME groups increased the difficulties in moving to a consolidated group.

However, over the last 20 years, Australian Taxation Office compliance activity around trusts and Division 7A, coupled with greater acceptance of the consolidation regime, has led some private and SME groups to reconsider consolidation as a possibility.

Like any choice, there are advantages and disadvantages. We look at these in more detail over the series, but below is a short summary of advantages and disadvantages of consolidation.  

Advantages

  1. use of a ‘holding company’ structure with separate business and / or asset owning or financing entities below the holding (head) company;

  2. being able to move assets, or restructure within, the consolidated group without crystalising tax liabilities;

  3. lodgment of a single consolidated tax return for the consolidated group;

  4. use of tax losses within the group without complicated inter-group transactions;

  5. can provide efficiencies in M&A transactions; 

  6. easier compliance with Division 6 and Division 7A of the Income Tax Assessment Act 1936; and

  7. reduced franking credit wastage due to the single franking account for the head entity.

Disadvantages

  1. a ‘holding company’ structure can make satisfying the basic conditions for the small business CGT concessions more difficult;

  2. complicated cost setting rules on entry and exit and the possibility of capital gains or cost base losses;

  3. losses of low value entities receiving a small available fraction on entry into the group mean that the loss but not be of use;

  4. one in, all in approach – all 100% owned entities are automatically included;

  5. group members have joint and several liability for tax liabilities of the group unless there is a valid tax sharing agreement covering the liability;

  6. whether discretionary trusts can be part of the consolidated group; and

  7. remembering that the single entity rule only applies for certain purposes.

Many of the disadvantages arise on the formation of a consolidated group and that is where most of the complexity and expense arises. Once formed, the day-to-day operation of a consolidated group can be simpler than what it replaced.

While the disadvantages may mean that consolidation is not for everyone, increased knowledge and acceptance of the consolidation regime within the advisor community, coupled with complexities in managing large unconsolidated groups, means that consolidation is an option that no longer can be discounted as being for the ‘big end of town’ only.

This series looks to demystify the consolidation regime as it applies to private groups and SMEs. The next article is on eligibility to form consolidated groups.

For more information please contact:

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 |  T +61 3 9611 0105
E: dsmedley@sladen.com.au

Kaitilin Lowdon
Special Counsel
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au

Neil Brydges