Review of the

Consolidation Rights to Future Income and Residual Tax Cost Setting Rules

Terms of Reference — [HTML ]

Additional Guidance Material — [PDF 259KB] [RTF 746KB]

Report to Minister— [PDF 656KB] [RTF 891KB]

Submissions — [HTML]

On 25 November 2011, the Assistant Treasurer announced the release of the Board of Taxation's report on its review of the consolidation rights to future income and residual tax cost setting rules and the Government's response to the Board's report.

The Government's announcement of its response, which was developed through extensive consultation with a working group of tax experts and key industry bodies, was welcomed by the Chairman of the Board of Taxation, Mr Chris Jordan AO.

The Board's key findings were that the revenue impact of the rights to future income and residual tax cost setting rules have been significantly larger than expected and the scope of the rules, as enacted, is broader than what was intended when they were announced in 2005. The Board was of the view that, as a general principle, consolidated groups should not be able to claim types of deductions that are not available to taxpayers outside of consolidation.

In light of these findings, the Board made the following recommendations for changes to the future operation of the consolidation rules:

  • The consolidation tax cost setting rules should apply only to assets already recognised for taxation purposes.
  • The residual tax cost setting rule should be modified so that, for the purpose of applying the rule to an asset, the consolidated group is taken to acquire the asset as part of a business acquisition.
  • The rights to future income rules should be limited to rights to unbilled income (or work in progress amounts) so that they align with deduction provisions in the general tax law.
  • The tax cost setting rules should treat majority owned revenue assets as retained cost base assets, to prevent the double claiming of deductions by a single economic group in relation to the same revenue asset.

The Board also recommended that the Government could further investigate the treatment of liabilities in the tax consolidation regime and whether the tax cost setting amount allocated to assets in the tax consolidation regime could be capped at the greater of their market value or terminating value.

In accordance with the terms of reference, the Board outlined a number of options the Government could consider in deciding whether to address, retrospectively, the unanticipated cost to the revenue of the rights to future income and residual tax cost setting rules.

In framing its recommendations and options the Board consulted with industry and tax practitioners.

The Board believes that its recommendations will improve the integrity of the tax consolidation rules so that they do not advantage consolidated groups over taxpayers outside consolidation. The recommendations should also provide increased clarity in the operation of the rights to future income and residual tax cost setting rules.

Background

On 30 March 2011, the Assistant Treasurer announced  that he had commissioned the Board of Taxation to undertake a review of the consolidation rights to future income and residual tax cost setting rules. The terms of reference for this review were released together with the announcement.

Under the terms of reference, the Board was requested to examine the operation of the rights to future income and residual tax cost setting rules with a view to defining and limiting their scope.

The Board is requested to:

  • examine the operation of the rights to future income and residual tax cost setting rules (the rules) with a view to clarifying their scope; and
  • propose changes to limit the scope of the rules, if necessary, and advise on the date of effect of those proposed changes (including whether they should apply retrospectively).

In undertaking the review, the Board should also consider:

  • the taxation outcomes that arise when assets of the type that are covered by the rules are acquired directly by a company as part of a business acquisition outside of the consolidation regime;
  • whether there are any circumstances in which these tax outcomes should be different if these assets are held by a company that joins a consolidated group;
  • if a difference in tax outcomes is warranted, the appropriate basis for recognising the tax costs of any assets that should be treated differently on entry into a consolidated group; and
  • the revenue impact of any changes to the rules it proposes.

In conducting the review, the Board was asked to seek public submissions and consult widely. After considering the views of all stakeholders the Board is to provide a final report to the Government by 31 May 2011.

The Board requested written submissions on the review of the consolidation rights to future income and residual tax cost setting rules by 20 April 2011. On 6 April 2011, the Board released additional guidance material [PDF 73KB] which stakeholders were to take into account in preparing submissions.

All submissions received were acknowledged. Copies of public submissions made to the Board are available from the Rights to Future Income submissions page.

The Board completed its review of the consolidation rights to future income and residual tax cost setting rules and provided its report to the Assistant Treasurer on 31 May 2011. In preparing its report the Board took into account the various submissions to the review and discussions with stakeholders and its expert panel.

Further information on this review can be obtained from the Board of Taxation Secretariat on 02 6263 4366.