Jenny Wong explains the proposed Consolidation Integrity Measures affecting the treatment of liabilities when an entity joins a tax consolidated group.
Well, we now have Exposure Draft (ED) legislation on the outstanding consolidation measures which includes what is known as the ‘deductibility liability’ measures which was released on 11 September 2017. I remember we agonised why these changes were proposed and I found an old article which refreshed my memory on the ‘why’ aspect of these measures.
Now there are other tax consolidation changes proposed in this draft legislation which I’ll talk about in future articles but I’ll focus on the proposed changes affecting the treatment of liabilities when an entity joins a tax consolidated group.
There are two proposed changes in the ED. 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 this ED, 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:
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 proposed 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.
Interestingly, the other change 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 and is prospective.
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 M&A changes you should review the impact of these changes and also as the legislation is in draft, consider any issues that should be raised with your tax advisor by the submission due date, 6 October 2017.
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