tax consolidaton update - s3. · pdf fileof rtfi) (iv) deemed goodwill for assets not...
TRANSCRIPT
TAX CONSOLIDATON
UPDATE
lsquoSTILL GRAPPLINGrsquo
Wayne Plummer ATI
PwC
Agenda
1 Introduction
2 Changes to the changes - worth the wait
bull 201617 Federal Budget
bull Deductible liabilities
bull The other proposals
bull The new lsquosharersquo v lsquoassetrsquo acquisition comparison
bull Some examples
3 Still to do (broad review)
bull Issues previously identified by the BoT
bull Issues with the 2012 tax consolidation changes
bull Other areas warranting consideration
Changes to the changes (timeline)
Date Event
14 May 2013 Board of Tax Report Post Implementation Review of Certain aspects of the Consolidation Tax
Cost Setting Process (dated April 2013) including recommendations on
bull Deductible liabilities - new assessable income
bull Removal of deferred tax liabilities
bull Securitised assets
bull CGT rollovers
14 May 2013 201314 Federal Budget announced the following changes
bull Deductible liabilities of joining entities ndash new assessable income
bull Anti-churning - entities transferred from non-residents under the same ownership
bull Intra-group assets excluded from TARP calculations
bull Assets subject to an intra-group liability
bull Reset intra-group TOFA liabilities on exit
Changes to the changes (timeline)
Date Event
13 May 2014 201415 Federal Budget
bull confirming the 201314 proposals will be implemented with effect from 14 May 2013
bull new change to remove unintended outcomes on entry and exit for securitised assets
bull confirmation that it would not be proceeding with changes to the MEC rules but that MEC
issues would be considered as part of the ldquobroader tax consolidations reviewrdquo in 2015
April 2015 Release of Exposure Draft Legislation ndash Tax and Superannuation Laws Amendment (2015
Measures No4) Bill 2015 Consolidation (the ldquoEDrdquo) covering
bull deductible liabilities
bull anti-churning for entities transferred from non-residents
bull assets impaired by an intra-group liability on exit
bull resetting of intra-group TOFA liabilities on exit
bull securitised assets
Changes to the changes (timeline)
Date Event
3 May 2016 201617 Federal Budget announcing
bull significant changes to the deductible liabilities measures
bull a broadening of the securitised assets measures
bull confirming the removal of deferred tax liabilities from entryexit calculations
PwC
Deductible Liabilities
The previous proposal
Applied from 14 May 2013
Head company to include an amount in assessable income equal to the
amount of any deductible liabilities of the joining entity
bull over 12 months for current liabilities and
bull over 48 months for non-current liabilities
Deductible liabilities fully included in step 2 of ACA calculations
(resulting in higher reset asset cost bases)
New test to determine whether a liability is lsquodeductiblersquo
Exceptions (eg insurance company liabilities retirement village operators)
Carve-outs for lsquoowned liabilitiesrsquo and where entry and exit in the same year
PwC
Deductible Liabilities
The new proposal
Applies from 1 July 2016
Does not create assessable income
Simply removes deductible liabilities from step 2 of the ACA calculation
(and therefore reduces the reset cost of assets of the joining entity)
Reduced
bull Tax depreciation
bull Cost of trading stock
bull Cost base of other tangible assets
bull Cost base of intangible assets (incl goodwill)
In proportion to
market values
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Agenda
1 Introduction
2 Changes to the changes - worth the wait
bull 201617 Federal Budget
bull Deductible liabilities
bull The other proposals
bull The new lsquosharersquo v lsquoassetrsquo acquisition comparison
bull Some examples
3 Still to do (broad review)
bull Issues previously identified by the BoT
bull Issues with the 2012 tax consolidation changes
bull Other areas warranting consideration
Changes to the changes (timeline)
Date Event
14 May 2013 Board of Tax Report Post Implementation Review of Certain aspects of the Consolidation Tax
Cost Setting Process (dated April 2013) including recommendations on
bull Deductible liabilities - new assessable income
bull Removal of deferred tax liabilities
bull Securitised assets
bull CGT rollovers
14 May 2013 201314 Federal Budget announced the following changes
bull Deductible liabilities of joining entities ndash new assessable income
bull Anti-churning - entities transferred from non-residents under the same ownership
bull Intra-group assets excluded from TARP calculations
bull Assets subject to an intra-group liability
bull Reset intra-group TOFA liabilities on exit
Changes to the changes (timeline)
Date Event
13 May 2014 201415 Federal Budget
bull confirming the 201314 proposals will be implemented with effect from 14 May 2013
bull new change to remove unintended outcomes on entry and exit for securitised assets
bull confirmation that it would not be proceeding with changes to the MEC rules but that MEC
issues would be considered as part of the ldquobroader tax consolidations reviewrdquo in 2015
April 2015 Release of Exposure Draft Legislation ndash Tax and Superannuation Laws Amendment (2015
Measures No4) Bill 2015 Consolidation (the ldquoEDrdquo) covering
bull deductible liabilities
bull anti-churning for entities transferred from non-residents
bull assets impaired by an intra-group liability on exit
bull resetting of intra-group TOFA liabilities on exit
bull securitised assets
Changes to the changes (timeline)
Date Event
3 May 2016 201617 Federal Budget announcing
bull significant changes to the deductible liabilities measures
bull a broadening of the securitised assets measures
bull confirming the removal of deferred tax liabilities from entryexit calculations
PwC
Deductible Liabilities
The previous proposal
Applied from 14 May 2013
Head company to include an amount in assessable income equal to the
amount of any deductible liabilities of the joining entity
bull over 12 months for current liabilities and
bull over 48 months for non-current liabilities
Deductible liabilities fully included in step 2 of ACA calculations
(resulting in higher reset asset cost bases)
New test to determine whether a liability is lsquodeductiblersquo
Exceptions (eg insurance company liabilities retirement village operators)
Carve-outs for lsquoowned liabilitiesrsquo and where entry and exit in the same year
PwC
Deductible Liabilities
The new proposal
Applies from 1 July 2016
Does not create assessable income
Simply removes deductible liabilities from step 2 of the ACA calculation
(and therefore reduces the reset cost of assets of the joining entity)
Reduced
bull Tax depreciation
bull Cost of trading stock
bull Cost base of other tangible assets
bull Cost base of intangible assets (incl goodwill)
In proportion to
market values
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Changes to the changes (timeline)
Date Event
14 May 2013 Board of Tax Report Post Implementation Review of Certain aspects of the Consolidation Tax
Cost Setting Process (dated April 2013) including recommendations on
bull Deductible liabilities - new assessable income
bull Removal of deferred tax liabilities
bull Securitised assets
bull CGT rollovers
14 May 2013 201314 Federal Budget announced the following changes
bull Deductible liabilities of joining entities ndash new assessable income
bull Anti-churning - entities transferred from non-residents under the same ownership
bull Intra-group assets excluded from TARP calculations
bull Assets subject to an intra-group liability
bull Reset intra-group TOFA liabilities on exit
Changes to the changes (timeline)
Date Event
13 May 2014 201415 Federal Budget
bull confirming the 201314 proposals will be implemented with effect from 14 May 2013
bull new change to remove unintended outcomes on entry and exit for securitised assets
bull confirmation that it would not be proceeding with changes to the MEC rules but that MEC
issues would be considered as part of the ldquobroader tax consolidations reviewrdquo in 2015
April 2015 Release of Exposure Draft Legislation ndash Tax and Superannuation Laws Amendment (2015
Measures No4) Bill 2015 Consolidation (the ldquoEDrdquo) covering
bull deductible liabilities
bull anti-churning for entities transferred from non-residents
bull assets impaired by an intra-group liability on exit
bull resetting of intra-group TOFA liabilities on exit
bull securitised assets
Changes to the changes (timeline)
Date Event
3 May 2016 201617 Federal Budget announcing
bull significant changes to the deductible liabilities measures
bull a broadening of the securitised assets measures
bull confirming the removal of deferred tax liabilities from entryexit calculations
PwC
Deductible Liabilities
The previous proposal
Applied from 14 May 2013
Head company to include an amount in assessable income equal to the
amount of any deductible liabilities of the joining entity
bull over 12 months for current liabilities and
bull over 48 months for non-current liabilities
Deductible liabilities fully included in step 2 of ACA calculations
(resulting in higher reset asset cost bases)
New test to determine whether a liability is lsquodeductiblersquo
Exceptions (eg insurance company liabilities retirement village operators)
Carve-outs for lsquoowned liabilitiesrsquo and where entry and exit in the same year
PwC
Deductible Liabilities
The new proposal
Applies from 1 July 2016
Does not create assessable income
Simply removes deductible liabilities from step 2 of the ACA calculation
(and therefore reduces the reset cost of assets of the joining entity)
Reduced
bull Tax depreciation
bull Cost of trading stock
bull Cost base of other tangible assets
bull Cost base of intangible assets (incl goodwill)
In proportion to
market values
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Changes to the changes (timeline)
Date Event
13 May 2014 201415 Federal Budget
bull confirming the 201314 proposals will be implemented with effect from 14 May 2013
bull new change to remove unintended outcomes on entry and exit for securitised assets
bull confirmation that it would not be proceeding with changes to the MEC rules but that MEC
issues would be considered as part of the ldquobroader tax consolidations reviewrdquo in 2015
April 2015 Release of Exposure Draft Legislation ndash Tax and Superannuation Laws Amendment (2015
Measures No4) Bill 2015 Consolidation (the ldquoEDrdquo) covering
bull deductible liabilities
bull anti-churning for entities transferred from non-residents
bull assets impaired by an intra-group liability on exit
bull resetting of intra-group TOFA liabilities on exit
bull securitised assets
Changes to the changes (timeline)
Date Event
3 May 2016 201617 Federal Budget announcing
bull significant changes to the deductible liabilities measures
bull a broadening of the securitised assets measures
bull confirming the removal of deferred tax liabilities from entryexit calculations
PwC
Deductible Liabilities
The previous proposal
Applied from 14 May 2013
Head company to include an amount in assessable income equal to the
amount of any deductible liabilities of the joining entity
bull over 12 months for current liabilities and
bull over 48 months for non-current liabilities
Deductible liabilities fully included in step 2 of ACA calculations
(resulting in higher reset asset cost bases)
New test to determine whether a liability is lsquodeductiblersquo
Exceptions (eg insurance company liabilities retirement village operators)
Carve-outs for lsquoowned liabilitiesrsquo and where entry and exit in the same year
PwC
Deductible Liabilities
The new proposal
Applies from 1 July 2016
Does not create assessable income
Simply removes deductible liabilities from step 2 of the ACA calculation
(and therefore reduces the reset cost of assets of the joining entity)
Reduced
bull Tax depreciation
bull Cost of trading stock
bull Cost base of other tangible assets
bull Cost base of intangible assets (incl goodwill)
In proportion to
market values
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Changes to the changes (timeline)
Date Event
3 May 2016 201617 Federal Budget announcing
bull significant changes to the deductible liabilities measures
bull a broadening of the securitised assets measures
bull confirming the removal of deferred tax liabilities from entryexit calculations
PwC
Deductible Liabilities
The previous proposal
Applied from 14 May 2013
Head company to include an amount in assessable income equal to the
amount of any deductible liabilities of the joining entity
bull over 12 months for current liabilities and
bull over 48 months for non-current liabilities
Deductible liabilities fully included in step 2 of ACA calculations
(resulting in higher reset asset cost bases)
New test to determine whether a liability is lsquodeductiblersquo
Exceptions (eg insurance company liabilities retirement village operators)
Carve-outs for lsquoowned liabilitiesrsquo and where entry and exit in the same year
PwC
Deductible Liabilities
The new proposal
Applies from 1 July 2016
Does not create assessable income
Simply removes deductible liabilities from step 2 of the ACA calculation
(and therefore reduces the reset cost of assets of the joining entity)
Reduced
bull Tax depreciation
bull Cost of trading stock
bull Cost base of other tangible assets
bull Cost base of intangible assets (incl goodwill)
In proportion to
market values
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Deductible Liabilities
The previous proposal
Applied from 14 May 2013
Head company to include an amount in assessable income equal to the
amount of any deductible liabilities of the joining entity
bull over 12 months for current liabilities and
bull over 48 months for non-current liabilities
Deductible liabilities fully included in step 2 of ACA calculations
(resulting in higher reset asset cost bases)
New test to determine whether a liability is lsquodeductiblersquo
Exceptions (eg insurance company liabilities retirement village operators)
Carve-outs for lsquoowned liabilitiesrsquo and where entry and exit in the same year
PwC
Deductible Liabilities
The new proposal
Applies from 1 July 2016
Does not create assessable income
Simply removes deductible liabilities from step 2 of the ACA calculation
(and therefore reduces the reset cost of assets of the joining entity)
Reduced
bull Tax depreciation
bull Cost of trading stock
bull Cost base of other tangible assets
bull Cost base of intangible assets (incl goodwill)
In proportion to
market values
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Deductible Liabilities
The new proposal
Applies from 1 July 2016
Does not create assessable income
Simply removes deductible liabilities from step 2 of the ACA calculation
(and therefore reduces the reset cost of assets of the joining entity)
Reduced
bull Tax depreciation
bull Cost of trading stock
bull Cost base of other tangible assets
bull Cost base of intangible assets (incl goodwill)
In proportion to
market values
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Deductible Liabilities
What might the change look like
705-75(1) If some or all of an accounting liability will result in a
deduction to the head company the amount to be added for the accounting
liability under subsection 705-70(1) is reduced by the following amount
[Deduction times Corporate tax rate] - Double-counting adjustment
where
double-counting adjustmentmeans the amount of any reduction that has already occurred in the accounting liability under subsection 705-70(1) to take account of the future availability of the deduction
ldquoLess complexrdquo (per Government)
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Deductible Liabilities
Exclusions
Where there is no ACA calculation
o Division 615 rollover new head company above a consolidated group
o Parent company on group formation
o Subdivision 124-M rollover (scrip for scrip) where a ldquoRestructurerdquo
o Where the new anti-churning rules apply (entity transferred from a non resident)
o For the parent entity on group formation
Where the liabilities are already excluded from an ACA calculation
o Where a liability must move with an asset (section 705-70(2))
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Deductible Liabilities
Exclusions
Others (based on exposure draft)
o Insurance company liabilities
o Retirement village operator liabilities
o TOFA liabilities
o Where an entity joins and leaves within the same year
o lsquoOwned liabilitiesrsquo
Likely
radic
radic
X
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Deductible Liabilities
What will the test look like
Current s701-75(1) 2015 Exposure draft
If some or all of an accounting liability
will result in a deduction to the head
company
hellip because the joining entity became a
member of the group at that time an
amount hellip that is all or part of the joining
liability would result in a deduction to the
head company of the group if just after
the joining time the head company of
the group had made a payment to
discharge the joining liability
Annual leave provision
Onerous contract provision
Warranty claim provision
radic radicradic
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Deductible Liabilities
Start date
201617 Federal Budget announcement rdquodeferred to 1 July 2016rdquo
Likely ndash arrangements commencing on or after 1 July 2016
Arrangement type Time of commencement of the arrangement
On-market takeover bid The day on which the bid is announced
Off-market takeover bid The day on which the bidderrsquos statement is lodged with the ASIC
Scheme of arrangement The day on which a company applies to the court for the scheme meeting
Other arrangement The day on which a decision to enter into the arrangement was made
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Other changes
Proposed anti-churning rule
Tax cost of assets will be retained on transfer of membership interests in
an entity by a non-resident to a consolidated group where
a) The transfer is not taxable per Division 855 (non-TAP)
b) There is no change in underlying majority beneficial ownership and
c) Membership interests were acquired by the foreign group in excess of 12
months prior to the transfer
Applies to arrangements that ldquocommencerdquo after 14 May 2013
[No comment in the 201617 Federal Budget Announcements]
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Timing of post acquisition restructuring following a global acquisition will be important (ie for cost base resetting to be available transfer must occur within 12 months of group acquisition)
Foreign parent
Australian Head Co
Australian sub 1
Consolidated group
Foreign acquired co
Australian sub 2
Other changes
Proposed anti-churning rule
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Other changes
Value shifting through internal encumbrance of assets
bull Removal of potential ldquodouble benefitrdquo arising where an encumbered asset (whose
market value has been reduced due to intra-group creation of rights) is sold by a
consolidated group
bull Applies to arrangements that ldquocommencerdquo on or after 14 May 2013
bull [No comment in the 201617 Federal Budget Announcements]
Exit of intra-group TOFA assets amp liabilities
bull On exit only net gains and losses will be recognised for certain intra-group TOFA
assets and liabilities
bull Applies from the commencement of the TOFA regime
bull [No comment in the 201617 Federal Budget Announcements]
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Other changes
Securitised assetsbull Accounting for securitised assets will typically see the creation of an asset and
offsetting liability On exit and entry the ldquocreatedrdquo liability may be recognised while
the ldquocreatedrdquo asset may have no cost base The proposed rules will remove this
unintended outcome
bull Applies to arrangements that commence on or after 13 May 2014 (with transitional
measures for arrangements prior to this time)
bull 201617 Federal Budget announced an extension of the proposal to non-financial
institutions (with effect for arrangements commencing after 3 May 2016)
Deferred tax liabilitiesbull 201617 Federal Budget confirmed the removal of DTLs from entry and exit ACA
calculations
bull Applies to arrangements commencing after the introduction of the amending
legislation into Parliament
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(i) Consumables deduction
(ii) WIP deduction
(iii) Retained cost base for all other RTFI (broader definition
of RTFI)
(iv) Deemed goodwill for assets not recognised under tax
laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
excluded from ACA calculations (resulting in reduced
asset cost bases)
(viii) Tax liabilities (apart from income tax liabilities where a
clear exit is obtained) will remain with the company
(i) Consumables deduction
(ii) WIP deduction
(iii) CGT cost base for all other RTFI contracts
(iv) Potential blackhole deduction for assets not recognised
under tax laws
(v) ldquoBusiness Acquisitionrdquo approach - no deduction for
revenue assets (although question re a lsquonet incomersquo
approach)
(vi) Reset TOFA liabilities
(vii) Deductible liabilities and deferred tax liabilities ndash
assumption is part of the cost paid to acquire the
business assets (future deduction although note Ausnet
decision (2015))
(viii) No tax liabilities are inherited by the purchaser
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
PwC
Share v asset acquisition
Share acquisition Direct business acquisition
(vi) Tax attributes (such as losses and franking credits) only
remain with the entity if it was a stand-alone company
or a head company of a consolidated group
(vii) Tax depreciation ndash must use the same method as used
prior to joining and must reset the effective life except
for an asset using PC which has not been reset
upwards 200 DV accelerated rate is available based
on the joining date
(viii) Potential adverse impact of CGT Event L5 on exit
(where liabilities exceed the tax cost base of assets) or
L3 on re-consolidation (where the available ACA is less
than the retained cost base assets)
(ix) Transaction costs incurred post-acquisition may be
deductible under s40-880 (ie over 5 years)
(v) No tax attributes (losses or franking credits) ae inherited
by the purchaser
(vi) Tax depreciation ndash can use a different depreciation
method The rate on remaining useful life of assets or
Commissionerrsquos rates 200 DV accelerated rate is
available based on acquisition date
(vii) Equivalent CGT Event L5 may manifest as a CGT Event
L1 gain (or balancing charge on plant) The equivalent
CGT Event L3 gain is likely deferred under a direct asset
acquisition
(viii) Transaction costs incurred pre or post-acquisition are
likely to form part of the tax cost of the assets
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Example 1 ndash service industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (60)
ACA 140
Balance
sheet
Market
value
Reset tax
cost
Receivables 60 60 60
Plant 10 10 6
Goodwill 0 60 46
WIPstock 50 50 28
DTADTL 20 20
ALLSL (60) (60)
Payables (40) (40)
Net assets 40 100
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Example 2 ndash capital intensive industry
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (50)
ACA 150
Balance
sheet
Market
value
Reset tax
cost
Receivables 20 20 20
Plant 120 120 87
Goodwill 0 20 14
WIPstock 40 40 29
DTADTL (20) (20) 0
ALLSL (30) (30)
Payables (50) (50)
Net assets 80 100
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Example 3 ndash high cashreceivables
Vendor group Purchaser group
Target company
Price = $100
ACA entry calculation
Step 1 100Step 2 100
Less deductibleliabilitiesDTL (80)
ACA 120
Balance
sheet
Market
value
Reset tax
cost
Receivables 130 130 120
Plant 10 10 0
Goodwill 0 60 0
WIPstock 10 10 0
DTADTL (10) (10)
ALLSL (70) (70)
Payables (20) (20)
Net assets 40 100
$10 lsquoL3 gainrsquo
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Still to do
Board of Tax Recommendations
A more systematic approach to addressing and resolving tax consolidation issues
Clarification of membership rules for trusts and trustees
Rules to deal with the application of the single entity rule and the ldquoemergencerdquo of
intra-group assets and liabilities
Consistent rules to ensure the continuance of a tax consolidated group on the
interposition of a new holding company
Straddle contracts involving intra-group assets
Measures to encourage SMEs to adopt tax consolidation
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Still to do
lsquoProspective rulesrsquo ndash to be clarified
1 Clarification of the scope of the term lsquowork in progressrsquo
2 Clarification of the (broad) definition of lsquoright to future incomersquo and in particular
whether it extends to
bull In the money (non-TOFA) derivatives
bull Contracts for the supply of trading stock
bull Valuable lease rental or license agreements
bull Contracts to generate an interest return
bull In the money foreign currency receivables
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Still to do
lsquoProspective rulesrsquo ndash to be clarified
3 Guidance on the allocation of value (and therefore ACA) that is otherwise
attributable to non-CGT assets or various customer intangibles (ie spread across
other assets or specifically attributed to the value of goodwill)
4 Guidance on the allocation of goodwill cost base in disposal or exit calculations
(where that goodwill cost base has been increased as a result of assets excluded
from ACA entry calculations such as RTFI assets non-CGT assets etc)
5 Guidance in relation to the application of the lsquobusiness acquisition approachrsquo to
the characterisation of the reset cost of non-RTFI contractual assets
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Still to do
Other areas warranting consideration
1 Do away with tax sharing agreements ndash ie the default should be tax
sharingclear exit unless otherwise agreed
2 Liabilities ndash clearer rules to determine when to take up gross v net liabilities in
entry and exit ACA calculations (including broaden s705-70(2) and s711-45(2))
3 Liabilities ndash rules to better define liabilities to exclude ldquoaccounting creationsrdquo
4 Service receivables ndash dealing with the difficulty establishing cost base for Div
711 exit calculations (or perhaps clarification via s118-20)
5 Broaden the circumstances in which Subdiv 705-C applies ndash including
acquisition of a group by a single entity offshore acquisitions via buy-
backcancellations
6 Introduce a ldquosafe harbourrdquo to align ACA outcomes with ldquopurchase price
accountingrdquo outcomes (where applicable)
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Still to do
Other areas warranting attention
7 MEC ndash review the appropriateness of the deemed COT failure rules
8 MEC ndash address the impact on group losses of the establishment of a new ET1
9 MEC ndash amend the rules dealing with the ldquotransfer-uprdquo of a subsidiary to
become an ET1 (that per the ATO interpretation gives rise to a CGT Event A1
without any cost base)
10MEC ndash clearer rules for thin capitalisation ldquosafe harbourrdquo calculations
11Reconsider the retained cost base treatment of RTFI assets on the basis this
measure was an over-reaction and is inconsistent with an underlying policy to
broadly replicate the outcomes of a business acquisition
12Consider the provision of a broad ldquostick electionrdquo for all transactions where the
step 1 ACA amount is based on historic costs ndash eg various roll-over
transactions re-consolidation of a group following IPOdemerger etc
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
Still to do
Broad review of the tax consolidation regime
2015
2016
2017
X
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests
copy Wayne Plummer PwC
Disclaimer The material and opinions in this paper are those of the author and not those of The Tax Institute The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests