Forming a Tax Consolidated Group
A post implementation review of the Tax Consolidation regime released by the Board of Taxation has noted relatively few Small and Medium Enterprise (“SME”) Groups have taken advantage of the provisions. The Board advises less than 15% of SME Groups that have a turnover under $2m per annum and could consolidate have done so.
While the rules can be complex, many of the most complex aspects of the rules do not apply in SME Group structures. In addition, fears of capital gains tax consequences can be overcome as roll-over relief may be utilised to minimise (often remove entirely) the tax costs of the restructuring.
Advantageous of Forming a Tax Consolidated Group
There are many instances encountered by SMEs where splitting from a single entity to form a Group of entities will be advantageous including –
- Separation of assets – An existing business may outgrow its single company structure and have accumulated significant business assets, such as real properties, plant & equipment, intellectual property, or other intangible assets that should be separately owned.
- Separation of a unit, branch or line of the business – An existing business may spread into new areas of operation (both in terms of product lines and geographically) and it may make sense to operate as separate entities.
As an example – a mining services business may accumulate significant plant & equipment, such as the heavy equipment, trucks, etc. The current structure is a single private company. For asset protection purposes, the shareholders decide to undertake the separation of the business assets from the actual business by creating a second company and transferring the assets to it. The business would then lease the plant & equipment from the new company. Should the business ever experience financial difficulties, a barrier has been created between the potential creditors of the business and the assets accumulated over many years.)
Under such circumstances the business has two choices, they can either treat each company as a separate taxpayer, with separate income tax returns and tax laws applying to each individually and tax applying to each transaction between them. Or, they can elect to treat the two companies (actually in this case a third will be created as a Head Company) as a Tax Consolidated Group which means for income tax purposes there is only one income tax return covering all the companies and most transactions between them are ignored for income tax purposes. There can be significant benefits to the second option, both administratively and from a tax planning and tax minimisation point of view.
How to Form a Tax Consolidated Group
Where it is decided to form a Tax Consolidated Group the first step is to interpose a new company (Head Co) between the shareholders and the original company (OrgCo). Assuming all the requirements are satisfied, the original shareholders may elect to use the roll-over relief under Subdivision 124-G. The Group then elects to form a Tax Consolidated Group for income tax purposes.
The next step is then to establish a subsidiary company (Newco) wholly owned by Head Co (so now both Newco and Orgco stand side by side each 100% owned by Head Co). OrgCo then transfers the plant & equipment to Newco.
Where the transfer is done between members of the Tax Consolidated Group, no income tax liabilities arise. (If the group also forms a GST Group, a separate but related Grouping matter under tax legislation, there should be no Goods & Services Tax (“GST”) on the transfer either).
Newco would then lease the plant & equipment to OrgCo at market value. The transactions between members has no effective income tax consequence (nor GST), yet the goal of separating the plant & equipment assets from the risk of the business have been achieved with no tax cost.
Other CGT Rollover Relief Where a Non-Company Structure Exists
The case above assumes that the original business is already in a corporate structure (a Tax Consolidated Group only applies to a group of companies). However, there are also other CGT roll-over concessions available to move business assets from sole traders, partnership or trusts into a company to then allow the creation of a Tax Consolidated Group.
You can obtain further information regarding Tax Consolidated Groups on the ATO website here.
If you feel your business could benefit from a separation of business assets, units or the like, contact us to discuss the options available both to achieve the split and in terms of the ongoing management and administration of the various entities.