Playing with Fire: Resetting Cost Bases of Assets in Consolidated Groups
Australian Tax Forum, Volume 28(3), 2013
22 Pages Posted: 9 Oct 2013 Last revised: 19 Mar 2014
Date Written: October 8, 2013
Australia’s consolidation regime has been in operation for over ten years. Fine-tunings of the notoriously complex regime have been a regular exercise since its introduction in 2002. However, no one seems to be able to foresee the dramatic and significant impact of the “fine-tuning” in 2010 with respect to the treatment of the rights to future income and the residual tax cost setting (“TCS”) rules. In less than ten months after the 2010 amendments became effective, consolidated groups promptly lined up to claim tax refunds amounting to $10 billion arising out of those provisions. The outcome was more surprisingly as the 2010 amendments were the product of several years of consultations. The government urgently asked the Board of Taxation to review the provisions and eventually decided to amend retrospectively the 2010 amendments back to 2002. Many taxpayers and their tax advisors are understandably disquiet about the retrospective changes, as they will be denied a substantial portion of the $10 billion tax refund claims. The retrospective amendments to the 2010 amendments were finally enacted in July 2012.
The saga raises many questions. What went wrong in the process? Why did the supposedly minor “fine-tuning” of a ten-year old regime have such unforeseen significant revenue impact? Are there lessons to learn from the experience? This paper attempts to answer these questions, with the aim to identify tax design policies to minimise the risk of enacting similar problematic provisions in the future.
The paper first outlines the background and the consultation process leading to the 2010 amendments. This is followed by a review of the originally “unknown” revenue impact and the government’s responses. The paper then proceeds to analyse critically why the government – equipped with nearly ten years of experience of implementation – still got burnt by the consolidation regime. It argues that, besides the complexity of the regime that makes it extremely difficult for anyone to have a full understanding of the detailed operation of the regime, there is a more fundamental reason: the policy to reset cost bases of assets in a consolidated subsidiary. The tax cost setting rules of the consolidation regime replace the original cost bases of assets of subsidiaries with artificially created “reset cost bases” that rely heavily on market valuations of the assets. The swap of historical costs with the reset cost bases is hazardous and creates loopholes for taxpayers to manipulate. The paper concludes by suggesting some steps the government may take to avoid creating similar undesirable outcome in the future.
Keywords: tax consolidation
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