The Government has finally introduced into the House of Representatives the Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018 to give effect to proposed measures announced in various Federal Budgets since 2013.
The bill and explanatory memorandum are generally consistent with the exposure draft material released in September 2017 which was discussed in our earlier Riposte. However, there have been some important changes to reflect our submission, particularly in relation to application of the deferred tax liability (DTL) exclusion in an exit context. The previously proposed transitional rule has been deleted, and exemptions have been proposed for certain DTLs for life insurance companies.
To refresh, the proposed changes to the law are as follows:
- Deductible liabilities: The most talked about (and for most taxpayers the most important) change is the removal of future deductible liabilities from entry allocable cost amount (ACA) calculations. The changes apply from 1 July 2016, with exceptions for certain life insurance, general insurance, health insurance and retirement village liabilities. Liabilities under Division 230 TOFA financial arrangements are also excluded, but do not give rise to future deductions in any event.
- Deferred tax liabilities: DTLs will be excluded from entry and exit ACA calculations, with effect from introduction of the bill on 15 February 2018.
- Securitised assets: Liabilities relating to securitised assets will be excluded from entry and exit ACA calculations from (generally) 13 May 2014 for financing entities and from 3 May 2016 for all other entities.
- Churning: The tax cost setting rules will not apply to reset the tax cost of assets held by a non-land rich entity that joins a consolidated group after being transferred from a non-resident associated entity (a 50% common ownership test applies) who is not taxed on the transfer. Exceptions apply where there has been a change in the underlying majority beneficial ownership of the entity, or where the non-resident entity and its associates started to hold their interests in the joining entity within 12 months before the joining time.
- Value shifting: From 14 May 2013, when resetting the tax costs of shares in an entity when it leaves a group, the value of any asset the leaving entity holds that corresponds to a liability owed by the group will be reduced from its market value to (in most circumstances) nil.
- TOFA interaction: From commencement of the Division 230 TOFA rules, the law will be modified to ensure it operates as intended when resetting the Division 230 value of intra group financial arrangement assets and liabilities of an entity when it leaves a group.
In addition to the DTL changes referred to above, the key differences between the bill and the exposure draft are:
- clarifying that the ‘churning rule’ can apply in the case of a transfer for no gain or loss; and
- clarifying that for arrangements commencing after introduction of the bill on 15 February 2018, the common ownership test for the churning rule will be associate-inclusive.
The bill does not cover amendments announced in the 2014-15 Federal Budget on 13 May 2014 regarding MEC groups.