Legislation was introduced into Federal Parliament on 15 February 2018 to give effect to the long-awaited tax consolidation integrity measures. Following consultation on these measures over the last few years, tax consolidated groups now have certainty in relation to the manner in which these integrity measures affect the tax cost setting rules in respect of entities that either join or leave their group.
The measures broadly apply in the same manner as they were previously reflected in the exposure draft law that was released for comment in September 2017, but there has been some welcome changes.
The Bill, Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018, includes all of the previously announced integrity measures that impact the tax cost setting rules when an entity joins and/or leaves a tax consolidated or multiple entry consolidated (MEC) group. These integrity measures are summarised in the table below.
It is important to note that these measures broadly apply based on the time that an arrangement under which an entity has joined or left a group has commenced. This is not necessarily the same time that the entity has actually become or ceased to be a subsidiary member of the group.
Further background in relation to the effect of each of these measures is summarised in our TaxTalk Alert released on 14 September 2017.
Some welcome changes which have been made to the last exposure draft law are noted below.
Clarifying the deductible liabilities measure
The deductible liabilities measure operates in the broad manner in which it was announced in the 2016-17 Federal Budget (i.e. disregarded from step two of the entry allocable cost amount (ACA) calculation). The Bill lists those accounting liabilities of insurance companies that will continue to be recognised in the entry tax cost setting process.
The Explanatory Memorandum (EM) to the Bill includes some welcome clarifications. Firstly, it clarifies that an amount of an unearned income liability that may be reflected in financial statements is `not typically' a deductible liability. In addition, in relation to the adjustment made to step three of the entry ACA calculation to ensure that any excluded deductible liability is also not taken into account when working out the accrued undistributed taxed profits of the joining entity, the EM includes an example which confirms that the tax-effected amount of the deductible liability is applicable.
Disregarding all DTLs on exit
The Bill ensures that DTLs are disregarded under the exit tax cost setting rules for all arrangements under which an entity ceases to be a subsidiary member that commence on or after 15 February 2018. There is no longer the qualification that the leaving entity had its DTLs excluded on entry under the amending law.
This is a welcome change as it means that existing groups will not have to monitor the time at which a subsidiary member joins the group when seeking to exclude DTLs from the exit calculation.
Limited deferral of anti-churn measure
The anti-churn measure continues to apply with retrospective effect to 14 May 2013. However, in recognition of the fact that the scope of the measure was expanded in the September 2017 exposure draft law, the Bill provides a transitional rule that ensures that participation interests of associates are only to be taken into account when determining the control entity in the joining subsidiary in respect of arrangements that commence on or after 15 February 2018. This ensures that taxpayers who have undertaken transactions in the past are not unfairly disadvantaged by what was an unforeseen extension of this provision.
The Bill also ensures that there is no double counting of participation interests in working out the requisite level of control in the joining entity.
The anti-churn measure is perhaps the most complex of the new integrity measures. The law in this respect is drafted very broadly. It can clearly apply when the joining entity was not initially part of a wholly-owned global group, and it can potentially apply to transactions that are not merely internal reorganisations involving a foreign parent.
All of the measures included in this Bill are critical to understand for any future M&A deals. As the majority of the measures included in this Bill have retrospective effect, it is also imperative that all tax consolidated groups that have had an entity join or leave their group in the past few years consider the effect of the rules, and whether there is a need to revisit past tax cost setting calculations and if so, whether any prior year income tax assessments are affected. There may be financial reporting implications as a result of the new measures, in particular deferred tax balances, which will need to be taken into account when preparing financial reports once the measures are substantively enacted.