Australia: Tax Consolidation: Treasury says no to your "rights to future income" deductions

Last Updated: 3 December 2011
Article by Stephen O'Flynn, Angela Sagoe-Crentsil and Simon Tucker

On 25 November 2011 the Assistant Treasurer announced changes to the rules relating to tax consolidated groups and residual tax cost setting and rights to future income ('RFI').  The changes follow a review of the rules undertaken by the Board of Taxation. The Board concluded that the scope of the rules were broader than intended, allowing for preferential tax treatment towards consolidated groups.

The Government has moved to retrospectively amend tax law in an obvious effort to return of Federal Budget to surplus by 2013 by plugging the otherwise significant revenue leak posed by the existing law.

Interestingly, consolidated groups that acted quickly to have their amended tax returns processed or have received a favourable private binding ruling or advance compliance agreement (in relation to the retrospective application of the existing law) will not be adversely impacted by the retrospective change.  One might question just how equitable this is in the overall policy framework of the law change –especially since most of these taxpayers are likely to represent the larger end of town


Broadly, when an entity joins a tax consolidated group, the tax cost setting rules apply to allocate a tax cost to the assets of the joining entity.  This tax cost is then used by the head company in working out the tax consequences in dealings with the asset (e.g. depreciation).  The nature of the asset determines the tax cost. Where there is no specific tax provision to allocate the cost, the residual tax cost setting rules will apply to determine the tax cost.

The current rules relating to residual tax cost setting and RFI were introduced in June 2010, though their application was backdated to 1 July 2002; the start of the consolidations regime. They apply to allocate a tax cost setting amount for a tax consolidated group in relation to a joining entity's interest in assets that qualify as RFI.

The law as it currently stands suggests that an RFI asset will include rights to payment under:

  • long term construction contracts; 
  • perpetual or annual service contracts; 
  • unbilled income.

Where a consolidated group acquires an entity that holds an RFI asset the current rules allow a consolidated group to claim a deduction (over a maximum period of 10 years) equal to the tax cost amount of the asset. In this way the deduction that is claimed by the consolidated group should offset the income that is expected to arise under the future income right.

Proposed Changes

In essence, the proposed changes will undo the amendments that were introduced in June 2010.

The changes include a number of alternatives that apply depending on the timing of the acquisition or arrangement giving rise to the joining a tax consolidated group.

Prospective Period

For entities joining a consolidated group under an arrangement made on or after 31 March 2011, the following changes are proposed:

The tax cost setting rules will apply only to assets already recognised for tax purposes
Where an entity joins a consolidated group, only assets that are recognised for tax will have their costs set. This will predominately be capital gains tax assets.  It follows that assets such as non-contractual customer relationships will be excluded.

  • Residual tax cost setting rules modified to apply a business acquisition approach A head company will be treated as having acquired the assets of a joining entity as if they were  acquired as part of a business acquisition. The characterisation of an asset as  revenue or capital will  be determined as if the assets were acquired as part of a business acquisition.
  • The reset tax costs for assets that qualify as work in progress or are consumable stores will be deductible The general tax provisions will be amended to ensure that a deduction is available for work in  progress amounts or consumable stores held by a joining entity.
  • Entitlements to future income under contracts to be treated as retained cost base assets Contracts giving rise to a right to future income assets (i.e. these are assets that are currently treated as RFI) will be treated as retained cost base  assets. This will prevent the tax cost of such assets being reset upon consolidation.
  • Rights to future income deduction to be repealed Significantly, the existing provisions that allow a deduction for rights to future income of  joining entities will be repealed.

Transitional Arrangements

For arrangements entered into between 12 May 2010 and 30 March 2011, transitional arrangements will apply.

For the transitional period, the current provisions will be retained with some amendments:

  • Certain assets will be included as goodwill;
  • Exclusion of mine site improvements from the residual tax cost setting rules; and
  • Amendments to ensure that no value is attributed to certain contractual RFI.

Importantly consolidated groups that did acquire an entity that held rights during this transitional period (embedded in a contract) for work to be performed or goods to be provided (excluding rights contingent on contract renewal) may have an entitlement to reset the tax cost of such rights and claim a deduction equal to the tax cost.

Arrangements prior to 12 May 2010

Where an entity joined a consolidated group prior to 12 May 2010 or where an arrangement was entered into prior to 10 February 2010, the tax cost setting rules prior to the 2010 amendments will apply with some significant amendments, including:

  • Rights to future income deductions will be limited to unbilled work in progress amounts and consumables.
  • The amendment period for claiming a deduction for RFI will be limited to the ordinary amendment period – for most affected groups this will be four years from the date of the lodgement of their tax return.

We note that whilst limited deductions may be available to some consolidated groups – the proposed amendments represents an unreasonable reduction in the deductions that are currently available.

Next Steps

The retrospective application of the proposed changes means that there will be considerable impact on consolidated groups that have not had their amendment request processed or do not have a private binding ruling or Advance Compliance Agreement in place.

The Government will undertake a public consultation on draft legislation. Moore Stephens will be involved in this process, and will provide updates as the process evolves.

If you wish to discuss the proposed changes further please contact one of the authors or your Moore Stephens Relationship Partner.

Follow Stephen O'Flynn
Follow Simon Tucker

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.