A tax consolidated group (TCG) is a group of entities owned by a single company that are treated as a single taxpayer for the purpose of income tax.
A holding company typically heads a TCG. The holding company has 100% control of one or more subsidiary or operating companies (or a partnership or trust). Each subsidiary company would constitute an individual tax entity if there was no TCG. This would mean lodging seperate and individual tax returns. However, a TCG can prevent the expenditure of excess tax. In a TCG, only the holding company is liable to pay income tax and PAYG instalment for all other companies. This is based on the Single Entity Rule – the holding company is the singular taxable entity. In a TCG, the subsidiary companies are the assets of the holding company. Notably, the purchase or lease of assets within a consolidated group (intra-group transaction) does not incur income tax or GST consequences.
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Forming a Tax Consolidated Group
Dual Structure
There must be a head company and subsidiary companies to form a TCG. The head company must completely own the subsidiary company to consolidate it within a TCG.
There are many reasons why you might consider separating your business in this form. Importantly, if a creditor sues the operating company, the dual structure prevents the creditor from accessing the assets of the head company. Thus, the business can protect its valuable assets through the dual structure. This includes real property and intellectual property like trade marks and patents. Furthermore, it may make sense to create seperate companies if the business ventures into different market areas or different consumer lines. For more comprehensive information, visit our guides “What is a Holding Company” and “What is a Subsidiary Company”.
Not all businesses can become a TCG even with a head and subsidiary company structure. For example, entities which receive a special tax status cannot form a consolidated group. This includes credit union and pooled development funds. Notably, a not-for-profit may be a head company of a TCG but not a subsidiary member. Similarly, a TCG may not include some special trusts as subsidiary members.
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Seek Advice on Consolidation
There are many possible benefits to a TCG. Firstly, a subsidiary company’s losses can be used to offset the tax for all other companies in the TCG. Secondly, GST and income tax do not apply to transactions between TCG companies. This presents a valuable opportunity for corporate restructuring and asset transferring.
It is important that you seek advice before choosing to consolidate as this decision has significant tax implications. One implication is that each subsidiary company is liable for any tax that is unpaid by the head company. It is possible to portion the liability through a Tax Sharing Agreement. Further, it is not possible to de-consolidate a TCG. The decision to consolidate is irrevocable.
Tax legislation and the consolidation regime are complex. In Australia, legislation responsible for controlling or regulating TCG’s is the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 (which deals with PAYG instalments). Further, special rules apply where there is a TCG involving a foreign holding company with Australian subsidiary companies in Australia (known as a multiple entry consolidated group).
You can get a free quote from one of Lawpath’s expert tax lawyers to assist you in navigating through the requirements.
Notify ATO
You must notify ATO of a decision to consolidate. This requires filing ATO’s “Notification of formation of an income tax consolidated group”. Importantly, a TCG is solely used for income tax. There may exist a different consolidated group for the purpose of GST.
