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Consolidation measures regarding Churning and DTLs

Consolidation measures regarding Churning and DTLs

Anthony Patrk and Pavlina Zdraveski discuss two of the proposed consolidation measures, churning and deferred tax liability measures (DTL).

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Last month we saw the release of the updated exposure draft legislation that is an amalgamation of tax integrity announcements across a number of years. Two of the measures the exposure draft discusses are the churning and deferred tax liability measures (DTL).

The old – Churning measures

The churning measures were first introduced in the 2013-2014 Federal Budget. The churning measures in the exposure draft refresh the original 2015 draft measures introduced to modify the tax cost setting rules to address the ‘churn’ of assets in consolidated groups by foreign residents.

Very broadly, the tax cost resetting process is switched off in certain circumstances where:

  • a consolidated group acquired an entity from a foreign entity
  • the capital gain or loss on disposal of the shares by the foreign entity is disregarded
  • the assets of the joining entity would ordinarily be reset under the tax cost setting process and
  • during the 12-month period ending immediately after the joining time, the same foreign entity had a total participation interest of 50 percent or more in the joining entity (refer to Jenny Wong’s article on 20 September 2017 for further detail).

The new exposure draft adds to the original and goes on to clarify that the measures also apply to both cases where a consolidated group acquires another consolidated group and circumstances where linked entities join a tax consolidated group. This measure applies retrospectively from 14 May 2013.

The new – Deferred tax liabilities

The new measures propose to simplify the entry and exit cost setting process by excluding the DTLs, a (relatively) new tax consolidation measure introduced in the 2016-2017 Federal Budget. In comparison to the churning measure which was introduced to address a double-benefit, the introduction of the DTL measure is motivated by simplifying the tax consolidation process.

Currently, on entry into a tax consolidated group, the step 2 amount is adjusted where an accounting liability of the joining entity would be different when it became a member of the joined group. This adjustment can sometimes involve complex and lengthy iterations to determine the adjustment to the DTL. The DTL measure aims to eliminate this complexity by entirely excluding the DTL from the step 2 amount.

The DTL measure applies consistently to both entry and exit calculations to avoid a mismatch in the treatment. Where a DTL has been excluded on entry, it should also be excluded in step 4 of the calculation on exit.

The DTL measures are expected to apply prospectively from the date the amending Bill is introduced to Parliament.

If you have any submissions in relation to these or the other proposed measures, these should be submitted by 6 October 2017.

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