Tax Efficiency: Role of Tax Advisors in Corporate Group Restructuring and Tax Consolidation
With any corporate group, there is always a need to continually review whether the structure still suits your needs, or whether there is a need to make changes to take into account a change in circumstances. In the process of this assessment, the expertise of a tax advisor is valuable, especially when it comes to the tax consolidation decision. If you have a group of companies that are commonly owned by a parent company, and the group has not been Tax Consolidated, you should review whether you would be better off becoming consolidated.
Making a decision about tax consolidation can be very complex, depending on the group’s circumstances, especially the level and type of assets owned within the group and the possible effect on the cost bases of those assets if Tax Consolidation was to be undertaken.
Evaluating Tax Consolidation: Weighing the Pros and Cons for Effective Group Tax Management
To provide you with a comprehensive understanding of tax consolidation and the factors to consider when making a decision, it is important to examine both the generic advantages and disadvantages associated with this approach. By considering these parameters, you can gain a better appreciation of the potential benefits and drawbacks that may arise from implementing tax consolidation within a group.
Advantages of Tax Consolidation
- Allows the group only to have to lodge one tax return for the group (although accounts for each need to be prepared and consolidated to allow the consolidated figures to be incorporated into the tax return)
- Intra-group transactions between the head company and any of the subsidiaries are disregarded for tax purposes – no need for management fees or intra-group movement of profit
- Losses (either revenue or capital) can be offset against profits in other entities in the group
- R & D concessions can be offset against profits made in other entities in the group
- Franking credits and foreign tax credits (if there are any) can be pooled and used across the group. Only one franking account is required to be kept
- Assets can be moved between group members without giving rise to a capital gain or loss and without any need for any formal rollover relief
Disadvantages of Tax Consolidation
- There is a highly complex calculation when existing companies enter a group to determine the assets they bring and the tax cost base. Depending on the circumstances, there can be some unintended adverse tax ramifications on the cost-setting calculation of the new tax consolidated group. This can be mitigated by starting the group before the new subsidiaries have assets or liabilities.
- The choice to become a tax-consolidated group is irrevocable, and there can be tax issues if one of the group members tries to leave the group
- Tax liabilities can be jointly and severally between the entities. A Tax Sharing Agreement, prepared by a lawyer, is needed to ensure each entity is only liable for its own share of the taxes
The above is a start. If you have a company group and want to review whether Tax Consolidation would benefit you, please contact us to discuss your circumstances.
Kreston Stanley Williamson
*Correct as of November 2020
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek specific advice relating to your particular circumstances. Liability is limited by a scheme approved under professional standards legislation.
