What do you get when you mix lawyers, accountants and an assistant tax commissioner together? A lively debate on whether tax consolidation is the business tax system we need, or the system we deserve.
Brought together last week at the launch of LexisNexis Tax, the organisation’s next generation range of tax information products, the panel of experts was tasked with exploring whether the tax consolidation regime had given corporate Australia the tax system it needed or the tax system it deserved.
The Commonwealth Government introduced consolidation to reduce compliance costs for business, remove impediments to the most efficient business structures and improve the integrity of the tax system. It allows wholly owned corporate groups to operate as a single entity for income tax purposes from 1 July 2002.
For its part, the Australian Taxation Office (ATO) has asserted that after nearly four years, we are all in a better position to understand its impacts from various lenses including commercial, legislative and administrative perspectives. Consolidation involved transitional costs but the pot of gold at the end of this journey would be in the form of reduced complexity and increased flexibility in commercial operations.
At the time of publishing some 5,806 corporate groups had registered for consolidation, comprising approximately 49,000 company members.
Ian Kellock, partner, Baker & Mackenzie and a contributor to the recently launched LexisNexis Lawyers Tax Manual, said that we were at a juncture where it would soon become evident just how expensive the ongoing cost of compliance would be. His take was that consolidation had delivered “a lot of complexity without achieving compliance”.
Peter McCullough, partner, Deloitte Touche Tohmatsu and a key contributor to LexisNexis Corporate Tax — Finance, Transactions, Distribution, said he would be surprised “if there was any material reduction in cost of compliance”. He added that consolidated groups now find it difficult to transfer genuine losses incurred by companies within the group and that this is yet another impact of consolidation.
Kellock pointed to the burgeoning levels of complexity being generated through multiple entry consolidated (Mec) groups — a group that may arise where there is a foreign entity which has at least two wholly owned Australian subsidiaries, which also have Australian resident subsidiaries — as a case in point.
Another area causing concern, according to Kellock, surrounded foreign investment into Australian companies, which could potentially see the foreign investors becoming liable for an Australian company’s entire tax history. “US purchasers would be shocked by this and would want assurances that they’d be able to sue someone,” he said.
Jokingly, Kellock added that the amount of work being generated for lawyers around this liability issue was set against a backdrop of “career-ending complexity”. Little reassurance was forthcoming from the Australian Tax Office’s representative on the night, Peter Coakley, assistant commissioner, compliance assurance practice. He said that the ATO “could only give its view” on issues and they obviously “needed to be tested”.
Kellock pointed to this fact when he said that “purchasers have nothing to hang their hat on in regards to liability for purchasers”.
The legislative, information and administrative building blocks are now in place to enable most groups to confidently decide whether or not to enter into the regime. Nevertheless, more work is required to bed down what is a significant and fundamental change to the business tax system.
After 45 minutes of debate, the panel members were asked for their verdicts on the question of whether we had the system we needed or deserved. Kellock provided perhaps the best quip — “it depends on your client” — before concluding that if you start from the position of anti-avoidance, “then Treasury would say that it’s what you deserve”.