AUSTRALIA

TAXATION –
ADVANCED
MODULE 5: CONSOLIDATIONS
TUTOR MATERIAL
AUSTRALIA TAXATION –
ADVANCED
MODULE 5: CONSOLIDATIONS

2
LEARNING OBJECTIVES

After completing this module, you should be able to:

• apply the eligibility criteria for a head company and a subsidiary
member to form a consolidatable group;
• evaluate the tax and administrative implications of the single
entity, entry history and exit history rules;
• calculate the allocable cost amount (ACA) for a joining member
and allocate that ACA over retained and reset cost base assets;
• determine whether each subsidiary’s unused tax losses can be
transferred to the group and how much of a transferred loss can
be used by the group; and
• calculate an ACA for an exiting member and allocate that ACA to
the membership interests.

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AUSTRALIA TAXATION – ADVANCED:
CONCEPT MAP

Source: CPA Australia 2020.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 5: CONSOLIDATIONS
PART A: ELIGIBILITY TO CONSOLIDATE

© COPYRIGHT CPA AUSTRALIA UNLESS OTHERWISE INDICATED

Advantages Disadvantages
Allows group to only have to lodge one tax There is a very complicated calculation to be
return for the group. done when existing companies enter a group to
work out the assets they bring into the group
and what the tax cost base is.

Intra group transactions between the head
company and any of the subsidiaries are
disregarded for tax purposes – no need for
management fees or intra group movement of
profit
Losses (either revenue or capital) can be offset
against profits in other entities in the group
The choice to become a tax consolidated group
is irrevocable and there can be tax issues if one
of the group members tries to leave the group
Tax liabilities can be jointly and severally
between the entities.

R & D concessions can be offset against profits

made in other entities in the group
Franking credits and foreign tax credits (if there
are any) can be pooled and used across the
group. Only one franking account required to
be kept
Assets can be moved between group members
without giving rise to a capital gain or loss and
without any need for any formal rollover relief

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CONSOLIDATABLE GROUP

• Group of entities must first determine if they are a consolidatable

group. Must comprise both:
• an Australian resident head company
• at least one or more eligible wholly owned Australian resident
subsidiary members.
• Separate rules apply for multiple entry consolidated (MEC) groups
• Consolidated group:
• head company must choose to consolidate—in writing,
specifying the date the consolidated group comes into existence
• choice is irrevocable and the date it takes effect cannot later
be varied
• must give the Commissioner of Taxation (Commissioner)
a notice in an approved form.

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HEAD COMPANY

Not an income tax

exempt entity, a pooled
development fund or a
credit union whose
taxable income is
concessionally taxed
Not a subsidiary
Not a prescribed
member of another
dual resident
consolidatable or
company
consolidated group

Requirements Have at least some

Australian resident taxable income (if any)
company to be a head taxed at the relevant
company corporate tax rate

Source: CPA Australia 2020.

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SUBSIDIARY MEMBER

Not an income tax

exempt entity, a pooled
development fund or a
credit union whose
taxable income is
concessionally taxed
Australian resident A wholly owned
company or an subsidiary of the
Australian resident head company
trust or a partnership

A trust cannot be a A company subsidiary

subsidiary member if it
Requirements member should have at
is a complying or non- to be a least some taxable
complying subsidiary income (if any) taxed at
superannuation entity or the relevant corporate
member
approved deposit fund. tax rate.

Source: CPA Australia 2020

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10
FACTORS AFFECTING DECISION
TO CONSOLIDATE
• Weigh up the relative benefits
and costs of consolidation
• Most head companies of large
corporate groups elect to
consolidate for reasons given in
Table 5.1.
• Interactions between group and
related non-group members:
• possible an entity in the
group may not be regarded
as a subsidiary member (e.g.
a partly owned company).
• Group consolidated part-way
through a tax year
Source: CPA Australia 2020.

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COMPARISON TO ACCOUNTING
CONSOLIDATION RULES
• Definition of a subsidiary for tax consolidation different to financial
reporting consolidation:
• definition for accounting consolidation purposes is much
broader as its applies ‘control’ test and not ‘wholly owned’ test.
• a subsidiary for financial reporting consolidation purposes will
include partly owned subsidiaries where the control test is fully
satisfied
• May complicate reconciliation between the group’s net profit for
accounting purposes and its taxable income or loss

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MULTIPLE ENTRY CONSOLIDATED GROUP

• Group of Australian resident subsidiaries of a common foreign

parent company may also potentially consolidate
• Necessary to determine who is the ‘top company’ being the
ultimate foreign resident parent company of the group
• MEC group will potentially exist if there are two or more eligible
tier-1 companies of the top company in the group
• Unlike the general consolidation rules, the ‘one-in all-in’ principle
does not apply
• Formed when:
• two or more eligible tier-1 companies jointly appoint one of
those companies to be the provisional head company and
irrevocably elect in writing to form a MEC group
• where a consolidated group ‘converts’ to a MEC group.

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14
AUSTRALIA TAXATION –
ADVANCED
MODULE 5: CONSOLIDATIONS
PART B: KEY CONSOLIDATION RULES

© COPYRIGHT CPA AUSTRALIA UNLESS OTHERWISE INDICATED

 SINGLE ENTITY RULE, ENTRY HISTORY
RULE AND EXIT HISTORY RULE
• Each subsidiary member is taken to be part of the head company for
the ‘core purpose’ of working out the income tax liability/loss of the
head company
Single • Applies income tax laws to a consolidated group as if it were a
single entity
entity rule • Only applied for the core purposes—subsidiary members are not
grouped for fringe benefits tax (FBT) or goods and services tax
(GST)

• For core purposes, the income tax history of a subsidiary member

is generally inherited by the head company when a:
Key Entry
− subsidiary member joins an existing consolidated group
− consolidated group is formed
consolidation history • Modifications:
− assets inherited by the head company
rules rule − tax losses of a subsidiary member
− elections that override those made by a subsidiary
− deductions for the write-off of bad debts

• The exiting subsidiary member will inherit the terminating values of

all assets held by the head company that the subsidiary takes with it
Exit on leaving the group including the:
− cost base (or reduced cost base) of capital gains tax
history (CGT) assets
− adjustable value of depreciating assets
rule − value of trading stock
• Broadly symmetrical with the application of the entry history rule
Source: CPA Australia 2020.

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CONSOLIDATED GROUP’S TAX COMPLIANCE

• The head company is responsible under the single entity rule

for lodging the group’s consolidated income tax return and will
become liable for any related income tax liabilities on behalf
of the group.
• Each subsidiary is jointly and severally liable for the group’s
income tax liabilities where the head company defaults.

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TAX SHARING AGREEMENTS

• Only effective way a group member can limit its joint and several liability
is to enter into a valid tax sharing agreement (TSA).
• Where a valid TSA is in place:
• head company remains primarily liable for the group’s income tax
liabilities
• where the head company does not pay all or part of such a liability by
the due date, each subsidiary member that is a party to the TSA will be
liable to the extent specified in the TSA
• the liability imposed on subsidiary members under the agreement
arises just after the time when the income tax liability became due and
payable by the head company
• the liability is not due and payable until 14 days after the
Commissioner has given the relevant subsidiary member a notice of its
liability under the TSA.

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PAYG INSTALMENT PAYMENTS AND
RECOGNISING FRANKING CREDITS
AND FOREIGN INCOME TAX OFFSETS
• A head company becomes liable for Pay-As-You-Go (PAYG) instalments
of income tax on behalf of the group after the head company has been assessed
on its first lodged consolidated income tax return.
• The Commissioner will issue the head company a group instalment rate following
that assessment.
• Head company maintains a single franking account on behalf of the consolidated
group:
• any franking account surplus of a subsidiary member is transferred
to the head company’s franking account on consolidation
• the subsidiary’s franking account is correspondingly debited to zero.
• Head company will derive foreign income on behalf of the group:
• only the head company is entitled to any related foreign income
tax offset.

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INTERACTION OF SINGLE ENTITY RULES
WITH OTHER INCOME TAX PROVISIONS
• Single entity rule overrides the general application of the income
tax laws
• Particularly important to recognise this principle operates when
applying certain specific tax provisions:
• research and development (R&D) tax incentive (Module 4)
• value shifting provisions (Module 7)
• thin capitalisation provisions (Module 7)
• general anti-avoidance provisions of Part IVA (Module 10).

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AUSTRALIA TAXATION –
ADVANCED
MODULE 5: CONSOLIDATIONS
PART C: JOINING A CONSOLIDATED GROUP
CALCULATING THE ALLOCABLE COST
AMOUNT OF THE JOINING MEMBER
Step
1 Start with the cost of all membership interests in the joining subsidiary at the joining time.

Step
2 + Add the joining entity’s liabilities at the joining time.

Step
3 + Add undistributed frankable pre-consolidation profits accruing to membership interests (Step 3A).

Step
4
– Subtract distributions of pre-acquisition profits by the joining subsidiary pre-consolidation, and profit distributions that
recoup a loss of the consolidated group.

Step
5
– Subtract any carried-forward losses (such as tax losses and capital losses) of the subsidiary member that accrued
to the consolidated group on continuously held membership interests prior to consolidation.

Step
6
– Subtract the tax-effected value of any carried-forward losses (such as tax losses and capital losses) that did not accrue to
the consolidated group that the joining entity transfers to the head company at the joining time.

Step
7 – Subtract certain deductions of the subsidiary that are inherited by the group at the joining time.

Step
8 = Aggregate preceding steps to calculate the allocable cost amount (ACA).

Source: CPA Australia 2020.

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IDENTIFYING ASSETS ELIGIBLE FOR
ALLOCATION OF ALLOCABLE COST AMOUNT
• Capital gains tax (CGT) asset
Regarded as • Revenue asset
• Depreciating asset
assets under
• Trading stock
s. 701-67 • A thing that is, or as part of a, financial arrangement under
of ITAA97 Division 230 of the Income Tax Assessment Act 1997
(Cwlth) (ITAA97)

Assets

Not • Customer-related intangibles (e.g. customer lists, order or

regarded as production backlogs and customer relationships)
• Marketing-related intangible assets (e.g. unregistered
assets under trademarks and trade names)
s. 701-67 • Technology-based intangible assets (e.g. information
of ITAA97 databases and trade secrets)

Source: CPA Australia 2020

.

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ALLOCATING THE ALLOCABLE COST
AMOUNT OVER JOINING MEMBER’S ASSETS
• The amount of the ACA allocated will depend on whether the relevant asset
is defined as a ‘retained cost base asset’ or a ‘reset cost base asset’.
• Retained cost base asset:
• Australian currency (other than trading stock or collectables)
• a right to receive a specified amount of Australian currency
• a unit in a cash management trust if the unit redemption value is fixed and
redeemable in Australian dollars
• a right to have something done under an arrangement where expenditure
has been incurred for the future doing of that thing (and it is required to be
done after the expenditure is incurred)
• certain rights to future income (other than work in progress amounts).
• The tax cost allocated to a retained cost base asset is generally the cost of
the asset to the joining entity.

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ALLOCATING THE ALLOCABLE COST
AMOUNT OVER JOINING MEMBER’S ASSETS
• Reset cost base asset is any asset of the subsidiary member at the joining
time that is not a retained cost base asset.
• Reset cost base assets therefore include revenue assets, trading stock,
WIP amount assets, goodwill, depreciating assets and CGT assets.
• The value attributed to reset cost base assets is the balance of the ACA after
deducting the value of the subsidiary’s retained cost base assets.
• This balance is then applied across all the subsidiary’s reset cost base
assets in proportion to their respective market values.
• Adjustments to the ACA allocated to revenue assets capping ACA allocated
to the greater of the terminating value or market value of such assets. Any
excess ACA is allocated to other reset cost base assets.
• Residual cost setting rule ensures that only eligible assets under s. 701-67
of the ITAA97 are treated as reset cost base assets in allocating ACA

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CAPITAL GAINS TAX EVENTS ON ENTRY

• Certain capital gains tax (CGT) events can arise on a subsidiary member joining
a consolidated group:
• L1—change in the majority underlying interests in a subsidiary member before
consolidation
• L2—where an adjustment under Step 3A of the ACA entry calculation results in
a negative ACA amount
• L3—where the tax cost setting amount of retained cost base assets exceeds the
ACA calculated for the joining entity
• L4—where the joining entity has no reset cost base assets, and the amount of
the ACA calculated exceeds the tax cost setting amount of any retained cost
base assets
• L6—when an error was made in calculating the ACA at the time a subsidiary
member joined, which is discovered at a later time
• L8—where the tax cost setting amount allocated to depreciating assets,
trading stock and other revenue assets has been capped to the greater of their
market value or terminating value under s. 705-40 of the Income Tax Assessment
Act 1997 (Cwlth) (ITAA97), and there is an excess amount of ACA which cannot
be re-allocated to other assets.

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CGT event Time of event Capital gain Capital loss
L1 - Reduction under section 705- Just after No capital Amount
57 in tax cost setting amount of
assets of entity becoming entity gain of
subsidiary member of becomes reduction
consolidated group or multiple subsidiary
entry consolidated (MEC) group member

L2 - Amount remaining Just after Amount No

after step 3A (of the table entity remaining capital
in section 705-60) of becomes loss
joining ‘allocable cost subsidiary
amount’ is negative member

L3 - Tax cost setting Just after Amount of No

amounts for retained cost entity excess capital
base assets exceed joining becomes loss
‘allocable cost amount’ subsidiary
member

L4 - No reset cost base Just after No capital Amount

assets against which to entity gain of excess
apply excess of net becomes
‘allocable cost amount’ on subsidiary
joining
27 member
CGT event Time of event Capital gain Capital loss
L5 - Amount remaining When entity Amount No capital
after step 4 (of the ceases to be remaining loss
table in section 711-20) subsidiary
of leaving ‘allocable member
cost amount’ is
negative

L6 - Error in calculation Start of the The net The net

of tax cost setting income year overstated understated
amount for joining when the amount amount
entity’s assets Commissioner resulting resulting
becomes from the from the
aware of the errors, or a errors, or a
errors portion of portion of
that that amount
amount

L8 - Reduction in tax Just after No capital Amount of

cost setting amount for entity gain reduction
reset cost base assets becomes a that cannot
on joining cannot be subsidiary be allocated
allocated member
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MODIFICATION OF THE ALLOCABLE COST
AMOUNT TAX COST SETTING RULES
• Tax cost setting rules that apply in calculating the ACA of a
single subsidiary member joining a consolidated group under
Subdivision 705-A of ITAA97 will be modified:
• on the formation of a consolidated group
• on an existing consolidated group joining another
consolidated group
• upon the formation of a MEC group.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 5: CONSOLIDATIONS
PART D: TRANSFER AND UTILISATION OF LOSSES
DETERMINING LOSSES TO BE
TRANSFERRED
• Unused losses—tested at joining time to determine if they can
be transferred to the head company on consolidation.
• A loss can be transferred to the extent the loss could have been
used by the joining entity in the ‘trial year’ - which generally starts
12 months before the joining time and ends just after the joining
time.
• A company joining member will be required to satisfy modified
versions of the continuity of ownership test (COT) and the
business continuity test (BCT).
• The modified BCT involves two alternate loss recoupment tests,
being the same business test and the similar business test (but
the modified similar business test is only available for income
years commencing on or after 1 July 2015).

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DETERMINING LOSSES TO BE
TRANSFERRED
• The ‘modified’ COT requires a company joining the group to
establish that there has been continuity of majority ownership and
control from the start of the loss year to the end of the trial year.
• A group company that fails the modified COT may transfer its
losses to the head company if it satisfies the ‘modified’ BCT.
• Where the loss was incurred by a joining company in a tax year
starting after 30 June 1999, the BCT will be tested at the following
times:
• the just before the end of the tax year in which the loss was
made
• the tax year in which the joining entity first failed the continuity
of ownership or control tests
• the trial year

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UTILISING TRANSFERRED LOSSES

• Losses successfully transferred from joining companies (including the head

company) will be deemed to have been incurred by the head company.
• Losses transferred under:
• the ‘modified COT’ are deemed to have been incurred by the head
company in the tax year in which the losses were incurred by the
joining company
• the ‘modified BCT’ are deemed to have been incurred by the head
company at the joining time.
• Available fraction rules:
• use of losses is restricted to ensure that the rate of recoupment of
a subsidiary’s loss bundle by a consolidated group reflects the rate at
which such losses would have been used by the subsidiary had it
not consolidated.
• Calculated as follows:

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MODIFICATION OF LOSS TRANSFER AND
UTILISATION FOR A MULTIPLE ENTRY
CONSOLIDATED GROUP
• The key modifications are:
• the COT is applied to the foreign top company
• the COT is applied from the time that a loss is transferred from a group member or
the beginning of the year in which a loss was made by the group
• any ownership changes in the transferor company up to and including the joining
time are tested from the commencement of the transferor’s loss year
• the ability of a transferor company to satisfy the COT will be inherited by
the provisional head company of the MEC group
• where the test company fails the COT the provisional head company of the group
may potentially rely on the BCT applied in the context of the group’s business
history rather than that of that of the provisional head company as a single entity
• the available fraction concerning the utilisation of losses is adjusted where an
eligible tier-1 company joins a MEC group because the income earning capacity of
the group is expanded upon the addition of such an entity.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 5: CONSOLIDATIONS
PART E: EXITING A CONSOLIDATED GROUP
RESETTING COSTS OF MEMBERSHIP
INTERESTS IN A SUBSIDIARY
• The cost base of membership interests is reconstituted by
applying a separate ACA calculation:
• seeks to align the tax cost of the assets that the subsidiary
takes with it at ‘leaving time’.
• Reverses some of the ACA calculation steps applied to a
subsidiary member when it joins a consolidated group, but there
are key differences:
• the calculation of the ACA of membership interests is made on
a subsidiary leaving the group
• the allocation of the ACA to the various membership interests
held in the exiting subsidiary member at the leaving time.

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CALCULATING THE ALLOCABLE COST
AMOUNT OF THE LEAVING ENTITY

Step Add up the terminating values of all assets that a leaving entity will take with it when it ceases to be a subsidiary
1 member.

Step Add the tax-effected value of certain deductions that are inherited from the head company by the leaving entity
2
+ on its exit from the group and that are not reflected in the terminating values of assets taken on exit.

Step
3 + Add all liabilities owed by members of the group to the leaving entity at the leaving time.

Step
4 – Subtract all liabilities owed by the leaving entity just before the leaving time.

Step
5
= Aggregate preceding steps to calculate the allocable cost amount (ACA).

Source: CPA Australia 2020.

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ALLOCATING THE ALLOCABLE COST AMOUNT
TO MEMBERSHIP INTERESTS ON EXIT
• The ACA is allocated to membership interests in the leaving entity
by dividing the ACA by the total number of membership interests
on issue.
• CGT event on exit:
• CGT event L5 happens when the amount calculated of the ACA
on the exit of a subsidiary member from a group is negative.
• Modification of the ACA exit rules for a MEC group:
• modified in relation to the disposal of membership interests in
an eligible tier-1 company to the extent that those interests are
held outside the MEC group by other entities such as the top
company (i.e. non-resident holding company).

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REVIEW

• Part A introduced the circumstances in which the head company

of a consolidated group or MEC group may be able to elect to
form a consolidated group, and the costs and benefits of entering
into the consolidation regime.
• Part B outlined the single entity, entry history and exit history rules.
• Part C covered the calculation of an ACA on an entity joining a
consolidated group and the adjustments that need to be taken into
account.
• Part D discussed the complexity that applies with transfer of tax
or capital losses incurred by those members prior to the joining
time, and the use of losses applying the available fraction rules.
• Part E covered the calculation of an exit ACA upon an entity
leaving a consolidated group.

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 When a consolidated group is formed, no changes are made in relation to the assets
of the head company (except that intragroup membership interests and debts are
ignored after formation). The cost setting rules establish the tax cost setting amounts
for assets of subsidiaries.

40
 765 796

765 796

765 796

765 796

1,193 796

41 765 796 1,561

 1,561

900 5

900 5 905

905

2,466
42
 2,466

178

182

2,648

43
 2,648

44
 ACA 2,648

Retained cost base assets

Cash 481
Trading stock 350
1,817

Reset cost base Terminating Market Apportionment Tax cost setting

assets value value amount for
asset
Land 1 1,200 1,400 1,233 1,233
Plant 144 162 143 143
Shares in Gamma 200 193 170 170
Goodwill 0 304 267 267
Totals 1,544 2,059 1,813 1,813

45
 170

170

170

170

197

46 170 170
 170

3 3

173
47
 173

177

48
 177
10

0
10

174

49
 ACA 174
Retained cost base assets Cash 100
ACA remaining 74
Reset cost base assets Land 2 74

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