If your business is a company that owns 100% of another company, trust or partnership, tax consolidation is an option you should consider.
A consolidated group generally consists of a head company and subsidiary members. Throughout consolidation, subsidiary members lose their individual tax identities. They are regarded as part of the head company and their assets, liabilities and transactions are treated as that of the head company (the single entity rule).
Where a wholly owned group decided not to consolidate, the income tax system treats each company in the group as a separate entity. Taxing member entities separately means that each member must separately account for all intra group transactions and debt and equity interests.
Things to Note
- If wholly owned corporate groups want all of their entities in their group to be taxed together, consolidation is an option
- Consolidation is optional but irrevocable.
- For income tax purposes, the consolidated group operates as a single entity, lodging a single income tax return and then paying a single set of pay as you go (PAYG) instalments.
- One in, all in. If a group consolidates, all of the head company’s eligible wholly owned subsidiaries are members.
- Most small businesses involve sole traders and are not affected by the consolidation rule.
To be eligible, the head company must:
- be an Australian resident company
- not be a subsidiary member of a consolidated group or a group that is eligible to consolidate
- have at least some of its taxable income (if any) taxed at the general company tax rate.
Note that a corporate unit trust or public trading trust that selects to be taxed like a company may be a head company.
To be eligible, a subsidiary member must:
- be a company, trust or partnership
- be wholly owned (either directly or indirectly) by the head company
- be an Australian resident
- have at least some of its taxable income (if any) taxed at the general company tax rate (if a company).
Steps for consolidation
There are key steps in choosing, forming, and operating as a consolidated group.
Consolidation is optional so a group needs to determine if it’s eligible, analyse the costs and benefits of consolidating, and choose whether and when to consolidate. Bear in mind that consolidation is irrevocable once it has been made.
2. Forming a consolidated group
Consolidating a group involves planning and implementing new systems and calculating a consolidated income tax position for the group.
Also the head company needs to determine asset values for joining subsidiaries, transfer losses and calculate a utilisation rate, transfer franking credits and foreign tax credits, and deal with the other tax attributes of the joining subsidiaries.
Operating as a consolidated group
When operating as a consolidated group, the head company needs to:
- make a choice to form a consolidated group with effect from a certain date
- notify the ATO of its choice to consolidate in the approved form within the prescribed time
- calculate, report and pay the group’s PAYG instalments
- determine, report and make any balancing adjustments to meet the group’s annual income tax liabilities
- manage any ongoing income tax liabilities and supply income tax information to the ATO when required, and manage the entry and exit of subsidiary members, including notifying the ATO.
What are the costs and benefits of consolidation?
The consolidation process may be costly at the start. Some features of consolidation may involve up front compliance costs. For example, determining the asset values of joining subsidiaries involves complex calculations and may involve market valuing assets. Similarly, the use of transferred losses by the head company may involve complex calculations and valuations.
The benefits of consolidation are the following:
- Intra group transactions are ignored for income tax purposes
- Losses, franking credits and foreign tax credits are combined
- Existing complex integrity provisions (such as those relating to cost base adjustments, loss deferral and debt forgiveness) do not apply to intra group transactions
- Tax related impediments to group restructuring are reduced
- Ongoing compliance costs are reduced, as the group has a single income tax accounting period, self assesses a single income tax liability, makes consolidated PAYG instalments and maintains only one franking account.
The head company of a consolidated group lodges a single income tax return on behalf of the group. Where a group consolidates part way through an income year, the head company lodges a single return covering both its own activities up to the date of consolidation and the group’s activities from the date of consolidation.
Other things to remember:
- Indicate head company status at label Z1 Consolidated head company (item 3 in Company tax return). This applies even if the company ceases to be a head company during the year of income. Note that the head company must separately notify us of its decision to consolidate by the time it lodges the group’s first consolidated tax return.
- Complete one set of schedules. The amounts on each Schedule are made up of two components one covering the head company’s own activities up to the date of consolidation and the other covering the group’s activities from the date of consolidation.
An entity that is a subsidiary member of a consolidated group for the entire income year is not required to lodge an income tax return. But an entity that is a subsidiary member of a consolidated group for only part of an income year must lodge an income tax return accounting for the period (or periods) in which it was not part of a group. In these circumstances, the entity lodges a single return for the entire income year at the normal lodgment time but includes only income and deductions attributable to the non membership period (or periods).
Other things to note in completing a return for one or more non membership periods:
- Indicate part year membership of a consolidated group at label Z2 Consolidated subsidiary member (item 3 in Company tax return), even if the entity is no longer a member of a consolidated group at 30 June.
- Do not indicate this is part year return at the top of page 1 of the return form. (Even though the return includes income and deductions attributable to the non membership periods, the return is for the entire income year and is lodged at the usual time.)
- Do not indicate this is a final return in the Final tax return field on page 1 of the Company tax return, as this will prevent setting of a PAYG instalment rate for the subsidiary, pending the head company being issued with a group instalment rate.
- Subsidiaries lodging a return for the transitional income years 2002 03 and 2003 04 do not need to complete schedules for capital allowances, CGT, losses, thin capitalisation, Schedule 25A or R&D but must keep adequate records to substantiate any claims in the return.
- However, subsidiaries lodging a return do need to complete schedules for dividends and interest, PAYG and personal services income, if they are applicable.
You won’t be penalised if you make a genuine attempt to meet your obligations. Some groups have been seeking deferrals for lodging their first consolidated return on the grounds that the rules are changing. However, the ATO generally requires groups to lodge by their due dates. This allows the ATO to set a new group PAYG instalment rate, enabling the group to get the benefits of the consolidated PAYG instalment system as soon as possible.
If a consolidated return later needs to be amended due to changes in the law, or new ATO rulings or determinations, the ATO will then take a fair and reasonable approach in relation to penalties and interest on any tax shortfall. Noting that with a major policy initiative such as consolidation it takes time for the rules to be finalised, the ATO has stated that taxpayers who have made a genuine attempt to meet their obligations under the consolidation provisions will have any shortfall penalties remitted in full, unless there is clear evidence to the contrary.
Nominating Consolidation Date
Consolidated groups often aim to form from the beginning of an income year to avoid the need for part year returns. If this is the intention, ensure that the date notified as the date of consolidation is the first day of the income year (1 July for June balancers).
If, for example, a group forms on 30 June, the head company will need to include its own income and expenses up to and including 29 June, together with the joining subsidiaries’ income and expenses for the one day of 30 June. The subsidiaries will need to include in their return’s income and expenses up to and including 29 June.
In the balance sheet labels at item 8 the head company will need to record amounts that show the financial position of the group at 30 June while the joining subsidiaries will need to record amounts that show their financial position at 29 June.
Subsidiaries - franking account return (FAR)
Subsidiary member for entire income year
A company that is a subsidiary member of a consolidated group for the entire income year is not required to lodge a FAR if the ATO has been notified of the group’s formation by the time the FAR is due. For a consolidated group the obligation to lodge the FAR and pay any franking deficit tax (FDT) liabilities lies with the head company.
The FAR and payment of any FDT is due on the last day of the month following the company’s normal income year. For example, a 30 June balancing company will have to lodge and pay by 31 July. So, if the head company does not notify the ATO of the group’s formation until the due date of the first consolidated income tax return, subsidiary companies will have an obligation to lodge FARs and pay any FDT in the meantime.
However, if a company believes it will be a subsidiary member for the entire income year it may apply for deferral of time to lodge the FAR. If it subsequently transpires that the company was not a subsidiary member for the entire income year it will have to lodge a FAR and pay any FDT owing. GIC may be applied back to the due date.
If a company lodges a FAR and pays its FDT liability on the due date and subsequently notifies us that the company was a subsidiary member of a group for the entire income year, the company will need to contact the ATO to amend the FAR to zero and request a refund of any FDT paid for the year.
Subsidiary member for part of the income year
If on the date of consolidation, the subsidiary member’s franking account is in deficit, it is required to lodge a FAR and pay any FDT owing by the last day of the month following its normal income year. For example, if a June balancing company joins a consolidated group on 1 December and has an FDT liability, the lodgment and payment due date will be 31 July. After the part year income tax return has been assessed any remaining FDT credit amounts will be available to the head company to be offset against current or future income tax liabilities of the head company.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.