Is Tax Consolidation for YOU?

Tax consolidation.  It has historically been viewed as a tax structuring mechanism really only applying to bigger businesses, but this view may be changing with the reduction in income tax rates for companies with a turnover of $50 million or less.

 

What is tax consolidation?  Broadly, it involves grouping 100% owned companies together for income tax purposes with a view to streamlining the Australian Tax Office (‘ATO’) income tax compliance requirements of the group.  The end goal of entering into tax consolidation is to have only one tax return lodged with the ATO each year.  Over time, entities can be added to the group and where entities are sold, they can be removed from the group.

 

The head entity of the tax consolidated group is the only entity which interacts with the ATO for income tax purposes.  Intra-group transactions such as rent payments, payment of management fees, asset transfers and so on, become invisible to the ATO.  In addition, assets values are reset on entry into the consolidated group leading to possible further depreciation opportunities.

 

Why consolidate?  Well in addition to the streamlining of compliance requirements with the ATO, there may also be opportunities in relation to depreciation of assets, step-ups in the cost base of capital gains assets, ability to transact within the group without attracting income tax consequences and accessing a reduced corporate income tax rate.

 

It’s this latter point which may prove to be a strong incentive for a small business where cash and the access to cash to further growth and development, is key.  The current corporate income tax rates are outlined in the table below:

 

Income Year Aggregated Turnover Threshold Tax Rate for entities under the threshold Tax Rate for all other entities
2017 – 2018 $25 million 27.5% 30%
2018 – 2019 and

2019 – 2020

$50 million 27.5% 30%
2020 – 2021 $50 million 26% 30%
2021 – 2022 $50 million 25% 30%

 

If we were to assume a structure similar to the one below, the head entity of a tax consolidated group may be be eligible for a tax rate of 27.5% on the basis predominantly all of it’s income comprises dividends from Trading Co and P&E Co.  Whereas on a standalone basis, P&E Co may well have a tax rate of 30% whilst Head Co and Trading Co a rate of 27.5%.  Consolidating for tax purposes would mean all income derived in the group would be tax in the head entity (i.e. Head Co) at 27.5%.

Img Vba Tax Consol Ab14 7 2020

Tax Consolidation is not for everyone, and entering into a tax consolidated group can cost a significant amount and take some considerable time to complete.  In addition, anticipated cost savings may be eroded by the need to prepare consolidated accounts for the group.  Finally, let us not forget the decision is irrevocable.  However, the ongoing benefits and opportunities especially in relation to the step-up in cost base of capital gains assets and lowered tax rates together with the streamlining of communication with the ATO may be persuasive.

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