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Review into the Consolidation Rights to Future Income and Residual Tax Cost Setting Rules

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 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:

In undertaking the review, the Board should also consider:

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.