In brief

Treasury has this week released the long awaited exposure draft legislation in relation to a number of outstanding tax consolidation amendments that were first announced in the 2013-14 and 2014-15 Federal Budgets. The proposed new rules are stated as being aimed at “restoring integrity to the consolidation regime” by proposing a number of key amendments (outlined below), but most significantly, by removing what are perceived to be “double benefits” or “double detriments” that could arise on when an entity joins a tax consolidated group.

Whilst still in exposure draft form (and therefore subject to change), should the amendments be passed in their current form, they will operate as a significant detriment to commercial M&A transactions involving the acquisition of companies and the application of the tax consolidation regime. Taxpayers will need to carefully consider the impact of the proposed changes on future acquisitions, as well as revisit acquisitions that have occurred since 14 May 2013 to determine whether any amendments are required to the tax positions for prior and future income years.

In detail

To recap, the five outstanding consolidation amendments that are dealt with in the exposure draft legislation released this week are set out in the table below.

Click here to view table

The acquired liabilities measure is the most highly anticipated of the above five amendments. It is disappointing that the Government has maintained the original application date for this measure, which   is now almost two years ago. During the intervening time, taxpayers who entered into affected  transactions have had to deal with the significant uncertainty associated with an announcement that lacked detail; together with restrictions on the ability to recognise the proposed amendments for financial reporting purposes as they were not substantively enacted. It is hoped that the Government will consider changes to the start date based on submissions that will be received during the public consultation period.

The measures, as currently drafted, will go far beyond the stated aim of removing “double benefits” or “double detriments”. The perceived “double benefit” of (i) future deductions when a liability is paid and (ii) future deductions from the increased tax cost of assets under tax consolidation - are rarely fully realised. The proposed additional assessable income amounts will therefore represent an often significant disincentive for the acquisition of shares and the application of the tax consolidation regime.

It is clear that Treasury has attempted to address concerns regarding the application of the acquired liabilities measure to “owned deductions”, which can be a significant issue for formation cases and demergers where there is no double benefit as a result of deductible liabilities held by joining members. However, the manner of dealing with this issue in the draft legislation seems quite arbitrary and raises concerns regarding the application of this rule to recently established entities, as the ownership testing times for current and non-current liabilities are one and four years, respectively, from the date of joining the consolidated group. As currently drafted, where the joining member or the joined consolidated group have been established within those timeframes, none of the liabilities of the joining member may be treated as “owned” liabilities as the head company would not have held any membership interests in the joining member at the relevant test time.

On a related matter, it is noted that the Board of Taxation in its Post-Implementation Review into Certain Aspects of the Consolidation Tax Cost Setting Process recommended that the Government amend the law to exclude deferred tax liabilities from the consolidation tax cost setting process. The Government has not addressed this issue in the exposure draft legislation released this week.

The next steps

Consultation on the exposure draft legislation will close on 19 May 2015. Whilst there is likely to be a short period of time to allow for refinement of the legislation following stakeholder consultation, it is hoped that the final legislation will be brought before Parliament sometime in the Winter 2015 sittings which commence on 12 May 2015 and end on 25 June 2015.

There are a large number of recommendations from the Board of Taxation’s Post-Implementation Review into Certain Aspects of the Consolidation Regime and Post-Implementation Review into Certain Aspects of the Consolidation Tax Cost Setting Process that have yet to be addressed by the Government. We  expect Treasury will undertake a broader review of the consolidation regime later this year which will hopefully address these outstanding recommendations.

The takeaway

These proposed amendments should be taken into consideration for any upcoming transactions. Consideration should be given to prospective acquisitions and the impact of the proposed new rules on any purchase price negotiations and forecasts of future tax cash flows. In particular, the acquired liabilities measure may represent an impediment to transactions involving companies that carry material deductible liabilities.

Whilst there is still some hope that the Government may reconsider the retrospective application dates for some of these amendments, affected taxpayers should be reviewing historic positions to conclude whether an amendment is required to prior tax returns to include an amount in assessable income.