Release of exposure draft legislation to limit 2010 consolidation changes

On 18 April 2012 the government released exposure draft legislation and explanatory material to implement changes to the tax consolidation rules announced on 25 November 2011. In broad terms, the exposure draft amends the Income Tax Assessment Act 1997 (ITAA 1997) to:

  • Schedule 1 - modify the tax cost setting and rights to future income (RTFI) rules and 
  • Schedule 2  - ensure that, for consolidated groups applying Division 230 to their financial arrangements, the head company is deemed to have received an amount for assuming an accounting liability that is, or is part, of a financial arrangement as part of a joining/consolidation event equal to its accounting value.

    Schedule 2 also amends the transitional provisions in the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 to ensure that, among other things, the TOFA consolidation interaction provisions apply to a joining/consolidation event that occurred prior to the consolidated group starting to apply the TOFA provisions in relation to its financial arrangements and the head company makes a transitional election to apply the TOFA provisions to its existing financial arrangements.

Determining how the Schedule 1 changes affect a corporate acquisition made after 1 July 2002 are complex and depend on when a transaction took place or when a ruling or an assessment issued. However, claims based on the 2010 amendments which are covered by a private ruling or written advice under an advance compliance agreement issued before 31 March 2011 are protected.

In broad terms, different changes are proposed for acquisitions made in the following periods:

  • 1 July 2002 to 11 May 2010 (the ‘pre-rules’) – these rules are intended to restore the rules that operated prior to the 2010 amendments (the original cost setting rules) , with modifications to:
    - limit deductions for RTFI to work in progress (WIP) assets
    - ensure that a deduction is allowed for the reset tax cost of consumable stores and
    - treat certain assets as goodwill.
  • 12 May 2010 to 30 March 2011 (the ‘interim rules’) – these rules are intended to restore the current 2010 residual tax cost setting and RTFI rules with modifications to:
    - treat certain assets as goodwill
    - ensure that no value is attributed to certain contractual RTFI
    - ensure that a deduction is allowed for the reset tax cost of consumable stores.
  • After 30 March 2011 (the ‘prospective rules’) - these rules are intended to:
    - restrict the operation of the tax cost setting rules to CGT assets
    - apply a business acquisition approach to the residual tax cost setting rule
    - ensure that the reset tax costs for RTFI that are WIP amounts and consumable stores are deductible and
    - treat RTFI other than WIP amounts as retained cost base assets.

The Schedule 2 changes apply retrospectively from the TOFA start time.

The period for consultation on the exposure draft legislation and accompanying explanatory material is limited to two weeks with comments due by 2 May 2012. Accordingly, if you have any comments which you would like considered for inclusion in any submission which the Institute makes, please email them to Tax Group as soon as possible.

Article last updated 4 April 2014