Acquiring a subsidiary? Pay attention to 'deductible liabilities'

Acquiring a subsidiary? Remember deductible liabilities

Jenny Wong explains the Government's proposed new ‘deductible liability’ measures for tax consolidated groups.

Director, Tax

KPMG Australia

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I was asked the other day if I could simply explain the ‘deductible liability’ measures and where the ‘double benefit’ lies. Of course, we are talking about tax consolidation which applies where all the shares in a company are acquired by another company. 

It all started in 2013, where the Board of Tax conducted a review of Australia’s tax consolidation regime. If a subsidiary is acquired by a tax consolidated group, its accounting liabilities are reflected in its assets’ tax costs at the time of joining. Some of these liabilities will be deductible in the future, for example, annual leave liability when it is paid. So you have a situation where the liability is reflected in the tax cost of assets (a benefit, albeit at 70 percent because it is tax effected, which may be recouped if it’s in the tax depreciable assets) and that same liability is deductible later on (another benefit). This is one of the perceived ‘double benefits’ people refer to when they talk about the ‘deductible liability’ measures. 

Now, the concern with this perceived problem is that the tax cost (of which reflects a portion of the ‘deductible liability’) that is allocated to the subsidiary’s assets at the joining time are mostly allocated to goodwill. The benefit of any cost base uplift can only be realised at the time of a future disposal of the company or a disposal of the entire business of the company. The original proposals to fix this ‘problem’ announced in the 2013-14 Budget would bring an assessable amount over a short period of time to counteract a duplication which may never arise in practice – a very harsh outcome. 

What the Government now proposes to do is to exclude the ‘deductible liability’ amount from the tax cost allocation that occurs when a subsidiary joins a tax consolidated group. They’ll still get the deduction for the liability when it is incurred, but the liability will no longer be reflected in the tax cost base of assets of a subsidiary member when it joins a tax consolidated group. This proposal applies from 1 July 2016 (i.e. prospectively) and I suspect that means the new proposals applies to transactions occurring after that date. 

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