Assessment of Company Groups

16.122. A number of submissions have drawn attention to the absence of any provisions whereby a loss suffered by one company of a group of companies may be offset against the net income of another company in the same group.

16.123. It is argued in these submissions that the fact that two companies are legally distinct entities should not prevent their being treated as one entity for income tax purposes when the same persons are beneficially interested in the equity of both companies. Parent and subsidiary companies it is said should be regarded as one taxable entity, and the subsidiary companies as branches or divisions of the parent. This would be in line with the requirements of the Australian Companies Act in relation to the preparation of consolidated accounts for groups of companies in which the results of the operations of the group, as a whole, are reported.

16.124. The point has also been raised that where the companies involved are private companies there are special difficulties. A profitable parent company, engaged in trading, may be required to pay a dividend to avoid undistributed profits tax even though its profits are offset by a loss incurred by its subsidiary company.

16.125. The treatment of company groups in other countries. Overseas the practices adopted are varied. In the United States a group of companies having a certain common ownership is permitted to make a consolidated return of income. The principle thus expressed is that the true income of a single enterprise should be taxed even though the enterprise is carried on through more than one company. The regulations provide extensive and detailed rules covering the preparation of consolidated returns, the basis for computing taxable income of the group and the liability for the tax assessed. The privilege of lodging consolidated returns is denied foreign companies,

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life insurance companies, exempt companies and a number of others specifically defined. Some conception of the complexity of the rules thought necesary to prevent the provisions being abused may be gained from the fact that the rules and associated comments in one of the standard tax services relating to consolidated returns in the United States cover nearly 400 pages.

16.126. In New Zealand there are provisions requiring the income of related companies to be aggregated, but here the requirement is largely a consequence of the fact that the income of a company is taxed at graduated rates ranging from 20 per cent up to the general rate of company tax of 45 per cent. Requiring aggregation precludes any tax advantages which might otherwise be gained by multiple incorporation. There is provision for the transfer of losses without restriction between companies in a group where they are wholly owned by the same interests. Where minority interests are involved there is provision whereby one company in the group may make up the current loss of another through a payment to it, referred to as a subvention payment. The payment is deductible by the company making it and is income of the receiving company.

16.127. There is no provision in the Canadian law for the lodging of consolidated income tax returns by company groups. However, there are some provisions in regard to multiple incorporation, which are mainly aimed at ensuring that undue advantage is not taken of the lower rates of tax available on some company income.

16.128. The United Kingdom has no provisions for consolidated returns but the law contains what are termed ‘group relief’ provisions which, like the New Zealand loss transfer provisions, have the effect, in certain respects, of treating a company group as a single taxpayer. Under the United Kingdom provisions a company may, under certain conditions, surrender to any company in the same group which is profitable its own entitlement to relief for trade losses and for certain other amounts eligible for relief from corporation tax—for example, capital allowances and management expenses. The effect is to cancel one company's losses and reduce the profits of others in the group. It is not necessary that there be an actual payment for the surrender but if a payment is made it will not give rise to tax consequences for either party.

16.129. The choice of method of relief. There is little doubt that consolidated return procedures involve some major compliance and administrative difficulties. Moreover, procedures which would have the effect of permitting the extensive offsetting of losses within all company groups could have significant revenue implications.

16.130. Some of the major difficulties which arise in regard to returns concern defining companies which are part of a group, the question of the time at which any relevant ownership tests decided upon should be applied, the treatment of companies with common ownership but differing balance dates, the extent to which overseas income of foreign members should be aggregated with Australian income, assessing difficulties resulting from the necessity for all member companies to lodge their income tax returns at the same tax office, inordinate delays in assessing because one company's return is late in lodgment and the possible need to amend assessments of all group member companies where an adjustment or error arises in respect of one of them. In addition, there would be special problems arising in relation to sufficient distributions and undistributed profits tax in the case of private companies.

16.131. While the Committee accepts in principle that a company and, at least, its wholly-owned subsidiaries should be treated as one entity for income tax assessment

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purposes, it does not favour the adoption of group assessment procedures. It recommends that group relief procedures modelled on those currently in force in the United Kingdom should be available in Australia, though subject to conditions which would be more restrictive than under the United Kingdom law.

16.132. Holding and subsidiary companies. Relief should only be available when:

  • (a) the companies concerned are resident in Australia;
  • (b) one company is a wholly-owned subsidiary of the other or both are wholly-owned subsidiaries of a third company for the whole of the year of income;
  • (c) both companies have the same year of income;
  • (d) the loss surrendered by one company was incurred in the same year of income as that in which it is claimed by the other company;
  • (e) the surrender of the loss is evidenced by a written agreement, nominating the amount surrendered, made and notified to the Commissioner within three months of the end of the year of income in which it was incurred.

The adoption of this restriction basis would avoid a number of difficulties and possible abuses and should minimise the effect on revenue.

16.133. The Committee does not think it necessary for the tax law to require that the surrendering company should be paid any amount by the claimant company for the loss transferred. It is apparent, however, that there will be circumstances where commercial reasons, and perhaps company law reasons, require that a payment be made. Under the Committee's proposals there will not be any minority interests in a company which could be prejudiced by the surrender of the loss, but a creditor of the surrendering company might be prejudiced if no payment is received by that company for the loss surrendered. There should be provisions whereby a payment which is in fact made will not be treated as income of the surrendering company or as a deductible outgoing by the claimant company.

16.134. Trading and consortium companies. The United Kingdom extends its group relief provisions so that they are available where the surrendering company carries on business and is owned by a consortium of companies and is not a 75 per cent subsidiary of any company, and the claimant company is a member of that consortium; or where the surrendering company is a 90 per cent subsidiary of a holding company which is in turn owned by a consortium of companies and the claimant company is a member of that consortium; or where the surrendering company is the holding company owned by the consortium of companies and the claimant company is a member of that consortium. A company is owned by a consortium of companies if it is owned by five or fewer companies. These latter companies are the members of the consortium. Relief is only available in favour of the member of the consortium in respect of the loss of the company carrying on the business, or of the holding company. A member of the consortium cannot surrender a loss to another member of the consortium nor can a member surrender a loss to the holding company or to the company carrying on the business.

16.135. A company owned by a consortium, in the language of the United Kingdom provisions, is sometimes described in Australia as a ‘joint venture company’. In the Committee's view there should be provisions allowing the surrender of losses by a joint venture company to its owners modelled on the United Kingdom provisions. Where there is a surrender of part of a loss in favour of one member of the consortium

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but no surrendering in favour of another—the latter may have no net income to absorb it—a payment by the member of the consortium receiving the surrender will be commercially appropriate. A payment in these circumstances, like the payments referred to in paragraph 16.133 should not attract any tax consequences.