Tax consolidation and deferred tax liabilities

Tax consolidation and deferred tax liabilities

Anthony Patrk discusses the proposed change to the consolidation regime's treatment of deferred tax liabilities.

Director, Tax

KPMG Australia


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In addition to two other technical tax consolidation announcements in the recent Federal Budget (the broadening of the securitised assets measure and the removal of double benefits from deductible liabilities), the Government also announced that it will amend the consolidation regime's treatment of deferred tax liabilities (DTLs) by removing adjustments relating to deferred tax liabilities from the consolidation entry and exit tax cost-setting rules.

This change will apply to joining and leaving events under transactions that commence after the date amending legislation is introduced in Parliament.

Currently, there is a commercial/tax mismatch under the consolidation entry and exit tax cost-setting processes for deferred tax liabilities. This was initially raised back in September 2012 in the Board of Taxation’s discussion paper that noted “deferred tax liabilities give rise to over taxation for the vendor consolidated group when an entity is sold. Where the deductible liability ceases within the purchaser consolidated group, deferred tax liabilities give rise to under taxation”.

Under the current law, and taking the entry of an entity into a tax consolidated group, subsection 705-70(1A) of the Income Tax Assessment Act 1997 requires the joining entity's DTL when it becomes a DTL of the group to be used at step 2 of the allocable cost amount (ACA) calculation, rather than the DTL included in the joining entity's financial statements immediately before the joining time.

This potentially requires several iterations of the ACA calculation to determine the most accurate value of what will become the DTL of the group (although administrative short cuts are available in light of the compliance costs).

Although there is limited additional guidance on the measures in the Federal Budget papers, it will likely be the case that DTLs are excluded altogether from the ACA calculation (it is worth noting that this is the case in respect of deferred tax assets for both an entry and exit situation).

Given that the iteration process is as confusing as it is cumbersome, any changes to these provisions would be welcomed by taxpayers.

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