Australia: Consolidation Exposure Draft (ED) provisions

Last Updated: 26 May 2012
Article by Ken Spence

Tax Brief

On 18 April 2012 the new Assistant Treasurer took his first foray into the world of tax consolidations by releasing Exposure Draft (ED) provisions dealing with the residual cost setting and right to future income rules and TOFA interaction rules. This ED material had been outstanding for some time, given that in the detailed media release issued on 25 November 2011 by Bill Shorten, the previous Assistant Treasurer, it was stated that the Government would fast-track these measures and undertake public consultation on the draft legislation as a matter of priority.

The proposed consolidation measures in the ED have broad application and significant revenue implications, and therefore it is disappointing that it has taken almost five months for this ED material to be released with taxpayers only then given two weeks to feed back comments.

In most respects the ED provisions reflect the policy objectives as foreshadowed in the initial 25 November 2011 media release, and this in itself highlights the following two key points.

  1. Many corporate groups continue to be extremely disappointed that the Government is persisting with its 25 November 2011 proposals, as a number of these proposals will have significant adverse and, importantly, retrospective application. Not only is this the case in relation to a number of the 'right to future income' proposed changes, but also in relation to the TOFA interaction measures – particularly as impacted taxpayers are not given the option of re-exercising the TOFA un-grandfathering election which many taxpayers made when they entered TOFA.
  2. In a limited number of areas the ED provisions are clearly not consistent with the 25 November 2011 media release. It is hoped that these inconsistencies are unintended and will be corrected, but this is yet to be confirmed. The most relevant divergences in this regard are as follows.
  3. – In respect of joining times before 12 May 2010 to which the 'prerules' will apply, it had been thought that for pre-12 May 2010 assessments deductible status would be confirmed for WIP amounts not only in respect of 'work' but also in respect of 'services' and 'goods'. This extension has not been reflected in the ED provisions.

    – Most relevant in relation to joining times occurring over the period 1 July 2002 through to 12 May 2010, the 25 November 2011 announcement had suggested that the normal four year section 170 amendment period would only be extended for the purposes of enabling taxpayer beneficial amendments to be sought (i.e. now seeking deductions in respect of consumable stores or WIP). However, the ED provisions appear to similarly extend this amendment period to ATO activated adjustments.

    – In relation to the prospective period (i.e. normally joining times after 30 March 2011), the ED seeks to limit consolidation cost resetting outcomes only to 'CGT assets', whereas the 25 November 2011 document suggested a somewhat broader approach would be used that could encompass other assets which are recognised for tax purposes but which are not CGT assets (with mining information being a case in point).

More broadly, the ED amendments are laced with 'the devil is in the detail' issues. As such, the proposed wording of numerous provisions may lead to uncertain or unintended outcomes which hopefully will be corrected during the course of this consultation process. The most significant long-term implication of these measures is the introduction of a 'business acquisition approach' in the context of the application of the residual tax cost setting provisions of section 701-55(6). This is dealt with in the ED material only by the insertion of some brief sections in proposed section 701-56, and there is no substantive discussion of issues and implications in the draft Explanatory Memorandum. However, importantly, it is evident that considerably more detailed consideration is required as to the method of implementing the proposed asset acquisition approach, including interactions with other components of the consolidation provisions.

Given the very fragmented scope and application of the proposed residual cost setting and right to future income rules, rather than seeking to outline the proposed changes descriptively, we have prepared a series of tables which illustrate key impacts and are cross-referenced to the ED clauses – refer Appendix A to this Tax Brief.

Appendix B to this Tax Brief describes the proposed TOFA/consolidation interaction changes and, most importantly, focuses on the very significant and adverse implications that the retrospective application of these measures can have. In summary, the two fundamental TOFA changes are to:

  • change the treatment of certain financial liabilities (i.e. liabilities that are TOFA financial arrangements) which a consolidated group is treated as assuming when it acquires another entity. The changes essentially reset the tax cost of the liability to the accounting value of the liability at the joining time. The effect of these changes is essentially to deny deductions equal to the accounting value of the liability at the joining time; and
  • to apply these changes retrospectively to certain pre-TOFA acquisitions (to acquisitions made by a taxpayer that has elected to un-grandfather its existing financial arrangements).

The initial and unanticipated announcement of these changes on 25 November 2011 provoked strong responses from industry and the professions. What particularly aggrieved taxpayers was the retrospective nature of the changes and their ability to potentially wipe out millions of dollars of tax deductions from the tax system. Unfortunately, despite strong lobbying, these concerns have not been acted on – rather, the exposure draft legislation reflects our 'worst fears' from the November media release.

Appendix C to this Tax Brief contains the Greenwoods & Freehills technical submissions to the Government in relation to these ED provisions, which outline the key technical issues and our concerns in relation to them.

Please do not hesitate to contact us regarding any particular aspect of the proposed changes that may be of relevance and/or concern.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Greenwoods & Freehills are the winners of the 2011 BRW Client Choice Awards.

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