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

The Chairman of the Board of Taxation, Mr Chris Jordan AO, today welcomed the Assistant Treasurer’s announcement  of the Government’s response to the Board of Taxation’s report on its review of the consolidation rights to future income and residual tax cost setting rules.

The Chairman acknowledged that the Government’s response to the Board’s report was developed through extensive consultation with a working group of tax experts and key industry bodies, which included the Corporate Tax Association, The Tax Institute, the Institute of Chartered Accountants and CPA Australia.

The key findings from the Board’s review were:

  • The revenue impact of the rights to future income and residual tax cost setting rules have been significantly larger than expected.
  • The scope of the rights to future income and residual tax cost setting rules, as enacted, is broader than what was intended at the time of their original announcement in 2005.
  • 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 also 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 should 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.

The Chairman expressed his thanks to those who contributed to the review, including the individuals and organisations that participated in the Board’s consultation forums and made submissions, members of the Board’s working group chaired by Mr Keith James, members of the Board’s expert panel, officers of the Treasury and the Australian Taxation Office and the staff of the Board’s Secretariat.

The report is available from the Board’s website.

The Chairman also noted that the Board is continuing with its post-implementation review into certain aspects of the consolidation regime. The Board expects to finalise this review by March 2012.