An income tax consolidated group is a group of wholly owned corporate entities which are treated as a single taxpayer for income tax purposes.
Ordinarily, each company in a corporate structure is deemed a separate taxpayer and required to lodge a separate tax return. Where a single holding company owns multiple companies, forming a tax consolidated group allows the corporate group to operate as a single entity for income tax purposes. As a result, you lodge a single income tax return and pay a single set of PAYG instalments. Overall, being consolidated for income tax purposes can ease the administrative burden of preparing multiple tax returns each financial year. We explain what a tax consolidated group is, whether you are eligible to form one, and the process.
Eligibility
To be eligible for consolidation, you must satisfy the following:
- the corporate structure must have a holding company that wholly owns the subsidiary member, which can be a company, a partnership or a trust. If the corporate structure is not headed by a holding company, a corporate unit trust or public trading trust that elects to be taxed like a company may meet this requirement and be considered a “head company” for consolidation purposes;
- the holding company and the subsidiary member must have at least some of its taxable income taxed at the general company tax rate;
- the holding company and the subsidiary member must be an Australian resident; and
- the holding company must not be a subsidiary of a consolidated group or any group that is eligible for consolidation.
Costs
The consolidation process may initially be costly and may involve some up-front compliance costs. In addition, consolidation can require complex calculations and professional asset valuations. As a result, there may be costs associated with engaging professionals to assist, such as accounting or legal fees. To help minimise these compliance costs, the ATO provides short cut options in determining asset values.
Continue reading this article below the formBenefits
The primary benefit of consolidation for tax purposes is administrative ease. Lodging a single income tax return for the entire corporate group and paying a single set of PAYG instalments can help streamline the reporting process for companies come the end of the financial year. Ongoing compliance costs are also reduced.
Other benefits to tax consolidation as set out by the ATO include:
- intra-group transactions are disregarded for income tax purposes;
- individual entity losses, franking credits and foreign tax credits are pooled;
- less tax liability for the group when restructuring. For example, assets can be moved between group entities with less onerous rollover requirements. Likewise, shares can be bought back into a group company without triggering capital gains tax.
How to Form a Tax Consolidated Group
To form a tax consolidated group, you must first determine the entry allocable cost amount (ACA) of all the assets in the joining subsidiaries and deal with all losses and other tax attributes of the joining subsidiaries. This is a key step in working out if there are any tax liabilities on forming a consolidated group and resetting the costs of the assets coming into the group. Your accountant would normally complete the ACA calculation.
Once complete, the head company must choose to form a consolidated group with effect from a certain date. It is important to speak to your advisors about the effective date. This is because it could trigger an unintended tax event. The choice is made by the public officer or registered tax agent of the business notifying the ATO by lodging a Notification of Formation of an Income Tax Consolidated Group Form. This Notification will specify the date of consolidation.
If a new subsidiary is incorporated in a consolidated group, the head company must notify the ATO within 28 days after the subsidiary is incorporated with the Notification of members joining or leaving an income tax consolidated group. This same form is used when a member is leaving the group.
Documentation
Once consolidated, the group may wish to enter into the following agreements:
- Tax Sharing Agreement – this agreement is entered into between the members of a consolidated group and operates when the head company defaults in paying income tax liability to the ATO. It ‘reasonably’ allocates the group’s income tax liability to certain group members.
- Tax Funding Agreement – this agreement is entered into between members of a consolidated group. The agreement provides a mechanism by which entities in a tax consolidated group can share responsibility for the amount of tax payable on an ongoing basis.
The group can also enter into an Indirect Tax Sharing Agreement and an Indirect Tax Funding Agreement if the group has been grouped for GST purposes. They are the same as above but in respect of GST liability.
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Key Takeaways
Wholly-owned corporate groups may have the option of consolidating for income tax if they want all of their entities in their group to be taxed together. A tax consolidated group will operate as a single entity for income tax purposes. You can then lodge a single income tax return and pay a single set of PAYG instalments. Consolidation is optional but irrevocable once you apply for it. Carefully consider the implications of consolidation before you notify the ATO of your decision.
It is important that you complete an ACA before alerting the ATO. This is because forming a consolidated group could trigger a taxing event for the joining entities. Additionally, the “one in, all in” rule applies to consolidation. This means that if the group consolidates, all of the head company’s eligible wholly-owned subsidiaries will be included.
For more information about forming a tax consolidation group, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
An income tax consolidated group is a group of wholly owned corporate entities which are treated as a single taxpayer for income tax purposes.
Most small businesses involve single entities and are not affected by the consolidation regime. Consolidation is not relevant to the business activities of individuals, such as sole traders.
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