Mergers & Acquisitions
5. Basics of Consolidation
Last updated: 06 Jul 2015
- The choice to consolidate is made by the head company. Not all consolidatable groups are consolidated.
- Once the choice is made to consolidate all wholly owned subsidiaries of the head company will become part of the consolidated group. This is the case whether the subsidiary existed at the time of the choice to consolidate or was formed afterwards.
- If you do not wish for a particular entity to join the group then selling a part of the interest of the head company may be an option. Such a strategy is subject to various anti-avoidance provisions.
- The head company must be resident in Australia and have its income taxed at the company tax rate. It cannot be a subsidiary in another consolidatable or consolidated group. Corporate unit trusts and public trading trusts can be the head of a consolidated group provided they are taxed as companies.
- Trusts and partnerships can also be subsidiaries provided the head company wholly owns them.
- A trust can be a member of a consolidatable group if the head company wholly owns it or the beneficiaries are all members of the consolidatable group.
- Partnerships can join a consolidatable group if all the partners are members of the consolidatable group.
- A company, trust or partnership will be ‘wholly owned’ by the head company if all of the membership interests are beneficially owned by the head company or by one or more other wholly owned subsidiaries of the head company.
- Shares in employee share schemes that are entitled to deferred taxation are disregarded if the total does not exceed 1% of the ordinary shares.
- The fact that the same individuals wholly own several companies will not make the companies consolidatable. The head company must wholly own each of the companies for them to form a consolidatable group.
- Therefore it is very important that the proper company be chosen as the head company for the group. Only a company can be the head of a consolidated group.
- It may be that you may have to restructure existing entities so that they qualify as wholly owned subsidiaries of the head company.
- The consolidated group will continue to exist as long as there is the head company.
- A trust can be a member of a consolidatable group only if the head company wholly owns all the interests in the trust. Therefore if the trust is a discretionary trust it may not become a member except in limited circumstances.
- See our Equity and Trusts topic for more information.
- After consolidation has occurred no subsidiary of the head company can remain outside the group. There is no revocation of the election and therefore careful consideration must be given before taking that step.
- Any entity purchased that is wholly owned by the head company will join the group and any member of the group that ceases to be wholly owned by the head company will leave the group. Notification of these events must be made to the tax office.
- There are some important matters that must be considered before the election is made. You should consider:
- whether you want to use the grouping provisions other than in consolidation. Former provisions relating to loss transfers, inter-corporate dividend rebates, transfers of excess foreign tax credits and Capital Gains Tax (CGT) roll-over have been removed;
- whether there are any benefits to be obtained by resetting asset values; and
- what resources are required for consolidation.
- The notification to the tax office may be made any time before the date of lodgement of the first consolidated tax return. The head company is required to notify the tax office whenever any of the following occurs:
- a new entity joins the group;
- an existing member leaves the group; or
- the group ceases to exist.
- Consolidation applies only to income tax and CGT on transfer of assets within the group. It will not affect stamp duty, GST, Fringe Benefits Tax (FBT) and Pay As You Go (PAYG) withholding.
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