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Acquiring a subsidiary? Tax consolidation changes are now law

Tax consolidation changes are now law

Jenny Wong discusses legislation amendments affecting a subsidiary member’s assets joining a tax consolidated group.

Jenny Wong

Director, Australian Tax Centre

KPMG Australia


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Building blocks

The Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018, containing the long awaited amendments affecting the tax cost setting amount of a subsidiary member’s assets joining a tax consolidated group, received Royal Assent on 28 March 2018. A key amendment in the legislation is known as the ‘deductible liabilities’ measures.

Before the changes you would include a joining subsidiary’s accounting liabilities in Step 2 of the allocable cost amount (ACA) at the joining time. Under the new law, you now no longer include liabilities that give rise to a future tax deduction in the Step 2 amount.

Typical ‘deductible liabilities’ that are excluded from Step 2 may include accrued leave liabilities, out of the money derivative liabilities (that do not fall under the taxation of financial arrangements (TOFA) provisions); a foreign currency liability that is in a net forex loss position. When a subsidiary joins, you need to make an assessment of whether a deduction would arise in relation to all or part of the accounting liability at the joining time.

To illustrate simply, consider the following example:

Liabilities under consolidation integrity measures – diagram

Where an accounting liability is not included in Step 2 of the entry ACA, no adjustments are required to the accounting liability under s705-75 and 705-80. There are certain exceptions and some deductible liabilities are still included in Step 2 (e.g. certain insurance liabilities, TOFA liabilities and those relating to retirement village contracts). The amendments apply in relation to an entity that becomes a subsidiary member of a consolidated or multiple entry consolidated (MEC) group under an arrangement that commences on or after 1 July 2016.

The other amendment that affects the treatment of liabilities on an entry ACA i.e. the exclusion of deferred tax liabilities from entry and exit tax cost setting rules on consolidation has a different start date being 15 February 2018 (this is the date the Bill containing these amendments was introduced into the House of Representatives).

As a result of these amendments, entry ACAs and post-consolidation asset tax costs will be lower than they would be in the absence of the amendments. If undertaking merger and acquisition changes it is critical you review the impact of these changes and also understand the tax accounting impacts. As the amendments also have retrospective effect, you should also review past transactions to consider the impact the changes had on historical deals.

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