There is a common misunderstanding that the tax consolidation regime is for the “big end of town”.
Whilst tax consolidation does feature in the tax structuring of larger corporates, the tax consolidation regime is not only for the big end of town, but can be effectively used by Small to Medium Enterprise Groups (“SME”), the minimum requirement to form a tax consolidated group being a resident company with at least one wholly owned subsidiary company (or unit trust).
The tax consolidation regime treats the members of a consolidated group as a single entity for income tax purposes. This means that intra-group transactions are ignored for income tax purposes and the group lodges only one income tax return for each income year. Therefore, whilst tax consolidation is a choice, for many SME corporate groups it will be a practical necessity.
Some of the benefits that result from tax consolidating include the following:
- There may be an ability to increase the tax cost setting amounts of the assets of a subsidiary member. This may provide a benefit by reducing a CGT liability if the asset is sold or by increasing depreciation deductions.
- The ability to use subsidiary group losses across the entire group’s income;
- The ability to utilise built up franking credits within subsidiaries for the benefit of the parent company’s shareholders;
- The ability to move assets between group members without incurring a tax cost; and
- The ability to ignore other intra-group transactions, such as loans, debts, fees and services.
Importantly, the tax consolidation regime can greatly assist SME’s in increasing their asset protection which is a very important commercial driver in deciding whether or not tax consolidate.
Take the following scenario which is not uncommon to an SME where tax consolidation can become very useful in assisting with asset protection:
- Mum and Dad set up Company A Pty Ltd that runs Business A;
- Over time, valuable Equipment and Buildings are acquired by Company A Pty Ltd;
- Mum and Dad become worried about the lack of asset protection as more and more value is generated by Business A; and
- Mum and Dad consider divesting by setting up subsidiaries and moving assets into subsidiaries but are concerned about CGT/balancing charges of moving assets into separate subsidiaries.
Depending upon Mum and Dad’s other commercial requirements a possible solution could be the following in order to increase their asset protection:
- Incorporate Company B and Company C as wholly owned subsidiaries of Company A.
- Form a tax consolidated group with Company A as the head of the tax consolidated group.
- Move Business A to Company B and move Equipment/buildings to Company C.
- Leave Company A as a holding company that only owns shares in Company B and Company C.
The above will allow the moving of assets without any adverse tax impact as transactions within the tax consolidated group are ignored for income tax purposes (GST and duty will still need to be appropriately addressed as separate considerations).
The above should also achieve Mum and Dad’s goal of increasing their asset protection by splitting the Business from the PPE/Buildings.