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Interpreting the new ‘churning’ measures for foreign owned groups

New ‘churning’ measures for foreign owned groups

Jenny Wong discusses the new ‘churning’ measures for foreign owned groups.

Jenny Wong

Director, Australian Tax Centre

KPMG Australia


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The new ‘churning rules’ contained in Treasury Laws Amendment (income Tax Consolidation Integrity) Act 2018, now law and affecting certain restructures of foreign owned Australian groups, might only be two and a bit pages long but you need to carefully consider the new provisions if you are contemplating a restructure. It also has retrospective effect, generally affecting cases where a subsidiary member joins a tax consolidated or multiple entry consolidated (MEC) group on or after 14 May 2013.

It’s important to understand what these provisions are intended to do.

The Board of Taxation originally raised the concern that consolidated groups that are wholly owned by a foreign entity and MEC groups can uplift the cost base of Australian assets where there has been no change in their underlying beneficial ownership without recognising a capital gain (see Post-Implementation Review Into Certain Aspects of the Consolidation Regime (PDF 712 KB) June 2012). i.e., where an entity joins another consolidated group or MEC group, the cost base of the joining entity’s assets can be uplifted even though the vendor is not taxable on the capital gain made on the disposal of the membership interests.

Hence, we have the new Section 716-440 so that if there has been no change in the underlying majority beneficial ownership of the membership interests in the entity for a period of at least 12 months before the joining time, you cannot reset the tax cost base of the assets at the joining time. This is consistent with the Board of Taxation’s recommendation.

Example scenario

So consider this scenario below noting the steps of the restructure. Conceptually, Aus Co2 will be ‘recently acquired’ by the foreign group in the last 12 months. However, will the law will get you to this conclusion?

The relevant provision is paragraph 716-440(1)(f) and whether it is reasonable to conclude that throughout the 12-month period the sum of the total participation interest held by the control entity (Foreign Parent 1 in this case) and its associates in the joining entity was 50 percent or more. Read literally you could say that both Foreign Parent 1 and Foreign Parent 2 (an associate) owned Aus Co 2 throughout the 12-month period but this seems to be contrary to ensuring ‘recent acquisition’ cases can still reset their asset’s tax costs.

The provision probably needs to be interpreted as testing the control entity and its associates that were there from the start of the 12-month period to see if there was an underlying majority change in the joining entity or not throughout this period. This would seem to be the better view but would benefit from Australian Taxation Office (ATO) clarification on this interpretation.

Foreign owned group

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