Tax consolidation: 7 benefits and downsides for Perth SME’s

The tax consolidation rules in Part 3-90 of the Income Tax Assessment Act 1997 offer Perth SME’s and their business accountants a range of benefits. This is especially so for private groups, family businesses, and small to medium enterprises (SMEs).

The article will address the following topics:

1. Advantages and Disadvantages of Forming a Consolidated Group
2. Eligibility to Form a Consolidated Group
3. Setting Asset Costs Upon Entry
4. Carry Forward Losses
5. Tax Sharing and Funding Agreements
6. Operating a Consolidated Group
7. Exiting a Consolidated Group
8. Division 7A and Consolidated Groups
9. Trusts and Consolidated Groups
10. Small business capital gains tax concessions in tax consolidation

A. Pro’s and Con’s of Forming a Consolidated Group

Tax consolidation was introduced on 1 July 2002. Initially, the rules in Part 3-90 were predominantly utilized by large corporations due to the complexity and costs associated with transitioning to the new regime. For private groups and SMEs, these challenges, combined with the prevalent use of discretionary trusts, made the transition to a consolidated group less appealing.

However, in the past 20 years, increased Australian Taxation Office compliance activities related to trusts and Division 7A, along with greater acceptance of the consolidation regime, have prompted some private groups and SMEs to reconsider consolidation as a viable option.

As with any significant decision, there are both advantages and disadvantages to consider. While this series will explore these aspects in detail, below is a brief summary of the key points:

Advantages

1. Utilization of a ‘holding company’ structure with distinct business, asset-owning, or financing entities beneath the holding (head) company.
2. Ability to transfer assets or restructure within the consolidated group without triggering tax liabilities.
3. Submission of a single consolidated tax return for the entire group.
4. Utilization of tax losses within the group without complex inter-company transactions.
5. Potential efficiencies in mergers and acquisitions (M&A) transactions.
6. Simplified compliance with Division 6 and Division 7A of the Income Tax Assessment Act 1936.
7. Reduced franking credit wastage due to a single franking account for the head entity.

Disadvantages

1. A ‘holding company’ structure may complicate the eligibility for small business CGT concessions.
2. Complex cost-setting rules upon entry and exit, potentially leading to capital gains or cost-base losses.
3. Losses of low-value entities entering the group may be of limited utility due to a small available fraction.
4. The ‘one in, all in’ approach mandates that all 100% owned entities are automatically included in the group.
5. Group members have joint and several liabilities for the group’s tax liabilities unless a valid tax-sharing agreement exists.
6. Uncertainty regarding the inclusion of discretionary trusts within the consolidated group.
7. The single entity rule applies only for certain purposes.

Many disadvantages arise during forming a consolidated group, where the complexity and associated costs are most prominent. However, once established, the day-to-day management of a consolidated group can be more straightforward than the alternatives.

While the disadvantages may deter some from pursuing consolidation, the increasing knowledge and acceptance of the regime among advisors and the complexities of managing large, unconsolidated groups means that consolidation is no longer an option solely for large corporations.

B. Am I Eligible for Tax Consolidation?

To qualify for tax consolidation, the following conditions must be satisfied:

1. Group Structure and Head Company

The group must comprise an Australian-resident head company and its wholly owned Australian-resident subsidiaries. The head company is required to hold 100% ownership of the shares in each subsidiary, either directly or indirectly.

2. Compliance with Tax Laws

All entities within the group must be fully compliant with Australian tax laws. This includes having all tax returns filed up to date and no outstanding tax liabilities unless appropriate arrangements have been made with the Australian Taxation Office (ATO).

3. Notification to the ATO

The head company must formally notify the ATO of its decision to establish a consolidated group. This is typically achieved by submitting a Consolidation Election Notice.

Multiple entry consolidated (MEC) groups offer Australian tax residents the flexibility to form groups, provided they meet specific eligibility requirements. These requirements include adherence to ongoing, complex rules concerning tax losses and the disposal of interests in eligible tier-1 companies.

The cost-setting process on entry into a tax-consolidated group is a critical aspect of the tax consolidation regime in Australia. It involves determining the tax cost of each asset an entity holds when it joins a consolidated group. This process ensures that the tax values of the assets reflect their economic values, which is important for future tax calculations, including depreciation, capital gains, and losses.

C. Key Steps in the Tax Cost Setting Process

1. Step 1: Determining the Allocable Cost Amount (ACA)

The first step in the cost-setting process for a tax consolidation is to calculate the Allocable Cost Amount (ACA). The ACA represents the total cost that the head company is considered to have paid for the subsidiary’s membership interests (such as shares) when it joins the consolidated group. The ACA is calculated based on several factors, including:

• The market value of the membership interests in the joining entity.
• The value of any liabilities of the joining entity that the consolidated group takes on.
• The value of the joining entity’s retained earnings or losses.

2. Step 2: Allocating the ACA to the Joining Entity’s Assets

Once the ACA is determined, it is allocated across the joining entity’s assets to establish their tax cost bases. The allocation follows a specific order of priority:

1. Retained Cost Base Assets: These include assets whose tax costs do not change upon entry, such as cash, certain receivables, and trading stock.
2. Reset Cost Base Assets: The tax cost base is reset for other assets, such as depreciable assets, capital gains tax (CGT) assets, and intellectual property. This means that the ACA is allocated to these assets based on their market values at entry.

3. Step 3: Adjustments and Special Rules

Certain adjustments and special rules may apply to the allocation process:

• Market Value Cap: An asset’s tax cost cannot exceed its market value at the time of entry.
• Residual ACA: If there is any residual ACA after allocating costs to all assets, it is typically assigned to goodwill or other intangible assets.

4. Step 4: Effect on Taxation

Once the ACA is allocated, the new tax cost bases of the assets are used for future tax purposes within the consolidated group. This impacts how the group calculates depreciation, amortisation, and capital gains or losses when assets are sold or disposed of.

Practical Implications:

• Depreciation and Capital Gains: The new cost bases established through this process will affect the amount of depreciation that can be claimed, and the capital gains or losses recognised on the sale of assets.
• Compliance and Complexity: The cost-setting process requires careful consideration to ensure the tax cost bases are correctly established. Errors in this process can lead to significant tax consequences.

D.   Tax loss and tax consolidation

When a company with carry-forward tax losses joins a tax-consolidated group, the treatment of those losses is governed by specific rules that can significantly impact the group’s tax position. These rules ensure that the tax losses are utilised appropriately and prevent misuse. Below is an overview of how carry-forward tax losses are impacted when a company enters a tax-consolidated group.

1. Transfer of Losses to the Head Company

When a subsidiary with carry-forward tax losses joins a consolidated group, those losses do not remain with the subsidiary. Instead, they are transferred to the group’s head company. The head company then becomes responsible for managing and utilising these losses within the consolidated group.

2. Available Fraction Rule

The “available fraction” rule limits the ability of the consolidated group to use the transferred losses. This rule is designed to ensure that the tax losses are utilized proportionately to the value of the entity that brought them into the group relative to the value of the entire group.

• Calculating the Available Fraction: The available fraction is calculated as the value of the joining entity (with the losses) divided by the total value of the consolidated group immediately after the entity joins.
• Impact on Loss Utilization: The available fraction determines the proportion of the transferred losses that can be used to offset the group’s taxable income in each year. If the available fraction is small, the group will be limited in how much of the losses it can use each year.

3. Loss Integrity Measures

The tax law includes several integrity measures to prevent the inappropriate use of tax losses within a consolidated group:

• Same Business Test: The losses can only be used if the joining entity continues to carry on the same business it was conducting at the time the losses were incurred. This test is applied to ensure that losses are not being used to offset income from entirely different business activities within the group.
• Continuity of Ownership Test: If there has been a significant change in the ownership or control of the entity with the losses before it joins the group, those losses may be denied or limited.

4. Losses of Low-Value Entities

If the joining entity is of relatively low value compared to the rest of the group, its losses may have a very low available fraction, which means they might be of limited utility. This is because the proportion of the group’s income that can be offset by the losses will be small.

5. Impact on the Group’s Tax Position

The introduction of carry forward losses into a consolidated group can have both positive and negative impacts:

• Positive Impact: If the available fraction is favorable, the group can reduce its taxable income by utilizing these losses, which can result in tax savings.
• Negative Impact: However, if the available fraction is small or if the integrity measures disallow the use of the losses, the anticipated tax benefits might not materialize.

6. Potential for Loss Duplication and Adjustment

The tax consolidation rules are also designed to prevent duplication of losses or inappropriate benefits. For example, losses already deducted before the entity joins the group are excluded from being transferred. Furthermore, the cost bases of certain assets might need to be adjusted to reflect the tax losses, ensuring that the group’s overall tax position remains accurate and fair.

E.  Tax Funding and Tax Sharing Agreements in a Tax Consolidated Group

In a tax-consolidated group, the head company manages the group’s tax obligations, including lodging the consolidated tax return and paying any tax liabilities. Tax funding and tax-sharing agreements are often put in place to ensure that the economic burden of these tax liabilities is fairly shared among the group members. These agreements outline how tax payments are allocated among the entities within the group and how potential liabilities are shared.

1. Tax Funding Agreement

A tax funding agreement is an internal arrangement within the tax consolidated group that sets out how each group member will contribute to the overall tax liabilities that the head company pays on behalf of the group.

Key Features of a Tax Funding Agreement:

• Calculation of Contributions: The agreement specifies how each entity’s share of the group’s tax liability is calculated. This could be based on the tax each entity would have paid if it were not part of the consolidated group, adjusted for any intra-group transactions and other relevant factors.
• Payment Mechanism: The agreement outlines the payment mechanism. Typically, each subsidiary pays the head company an amount equivalent to its share of the group’s overall tax liability.
• Adjustments for Tax Attributes: The agreement may include provisions for adjusting payments based on tax losses, tax offsets, or other tax attributes that an individual entity brings to the group.
• Reconciliation: After the head company has paid the group’s tax liability, a reconciliation process is often conducted to ensure that each entity’s contribution reflects its actual economic burden within the group.

The primary purpose of a tax funding agreement is to ensure that the financial impact of the group’s tax obligations is equitably distributed among the group members. This helps in maintaining transparency and fairness within the group.

2. Tax Sharing Agreement

A tax sharing agreement, while similar to a tax funding agreement, has a different focus. It is a formal agreement that specifies how the tax liabilities are apportioned among the entities within the group, particularly if the group is unable to meet its tax obligations.

Key Features of a Tax Sharing Agreement:

• Apportionment of Liability: The agreement specifies how tax liabilities will be shared among the group members. This could be based on factors like each entity’s contribution to the group’s income or other agreed-upon metrics.
• Joint and Several Liability: Without a tax sharing agreement, all group members are jointly and severally liable for the group’s tax liabilities. This means that if the group cannot pay its tax debts, the Australian Taxation Office (ATO) could seek payment from any group member.
• Limiting Liability: A tax-sharing agreement can limit the exposure of individual group members by defining each member’s maximum liability. This is crucial for protecting individual entities from bearing an unfair share of the group’s tax burden.
• ATO Requirements: For a tax-sharing agreement to be effective in limiting liability, it must meet specific requirements set out by the ATO. This includes being in place before the liability arises and having clear, fair, and reasonable terms.

3. Interplay Between the Agreements

While a tax funding agreement deals with the practical aspects of how tax liabilities are funded and paid within the group, a tax-sharing agreement focuses on the legal and financial protections for group members in the event of non-payment. Together, these agreements provide a comprehensive framework for managing tax within a consolidated group, ensuring that tax liabilities are handled equitably and legally soundly.

4. Benefits of Implementing These Agreements

• Transparency: Both agreements promote transparency in how tax liabilities are handled within the group.
• Risk Management: A tax sharing agreement reduces the risk that one member could be unfairly burdened with the group’s tax liability, protecting the financial health of individual entities.
• Compliance and Governance: These agreements help ensure that the group remains compliant with tax laws and provides a clear governance structure for tax matters.

F. Operating a tax-consolidated group

Once the group is established, the head of the company assumes responsibility for managing the tax affairs of the entire group. This centralised management includes:

• Single Tax Return: The head company is responsible for lodging a single consolidated tax return on behalf of the group. This return covers all income, expenses, and tax liabilities of the group members.
• Tax Payments: The head company makes all tax payments on behalf of the group, including income tax, GST, and other applicable taxes. The group members contribute to these payments according to the terms of the tax funding agreement.

1. Intra-Group Transactions

One of the key benefits of tax consolidation is that transactions between group members are ignored for tax purposes. This simplifies the tax treatment of intra-group transactions, such as:

• Asset Transfers: Assets can be transferred between group members without triggering capital gains tax (CGT) or other tax liabilities.
• Internal Loans and Payments: Interest and other payments between group members are generally not taxable, reducing the complexity of intercompany dealings.

2. Utilizing Tax Attributes

The head company manages the group’s tax attributes, such as tax losses and franking credits:

• Tax Losses: The head company can use tax losses brought into the group by individual members to offset the group’s overall taxable income, subject to the available fraction rule.
• Franking Credits: The head company manages the group’s franking account, ensuring that dividends paid to shareholders are appropriately franked.

3. Compliance and Reporting

Maintaining compliance with tax laws is crucial for the successful operation of a tax-consolidated group:

• Ongoing Compliance: Ensure that all group members remain compliant with tax obligations, including keeping up-to-date records, meeting filing deadlines, and addressing outstanding tax issues.
• Regular Reporting: The head company must maintain accurate and regular reporting of the group’s tax position, including tracking the use of tax losses, the allocation of tax liabilities, and the management of franking credits.

G. Exiting a tax-consolidated group

Exiting a tax-consolidated group involves a process where a subsidiary (or multiple subsidiaries) leaves the consolidated group. For a Perth-based small to medium-sized enterprise (SME), this can be a complex process that requires careful planning to manage the tax implications and ensure compliance with tax laws. Below is an outline of the steps and considerations involved in exiting a tax-consolidated group.

1. Pre-Exit Planning

Before initiating the exit, detailed planning is crucial to assess the potential tax consequences and ensure that the exit aligns with the business’s strategic goals.

• Assessment of Tax Implications: Evaluate the tax consequences of the exit, including potential capital gains tax (CGT) events, the impact on the cost base of assets, and the treatment of any existing tax losses.
• Review of Legal Agreements: Review any tax sharing and tax funding agreements to understand the obligations and rights of the exiting entity and the remaining group.
• Consultation with Advisors: Engage with tax advisors and legal professionals to ensure that the exit is structured in a tax-efficient manner and complies with all relevant regulations.

2. Determine the Exit Method

There are several ways an entity can exit a tax consolidated group, and the method chosen will depend on the specific circumstances of the SME.

• Sale of Shares: The most common method is the sale of the shares in the subsidiary to an external buyer. The purchaser will acquire the entity as a separate legal entity outside the consolidated group.
• De-merger: In some cases, a de-merger might be undertaken, where the subsidiary is spun off into a separate entity, often to existing shareholders.
• Liquidation: Another option could be the liquidation of the subsidiary, although this is less common due to the potentially adverse tax and commercial consequences.

3. Calculate the Exit ACA (Allocable Cost Amount)

When an entity exits a consolidated group, the Allocable Cost Amount (ACA) must be recalculated to determine the tax cost bases of the assets that the exiting entity will take with it.

• Recalculate ACA: The ACA is recalculated based on the value of the subsidiary’s assets at the time of exit, adjusted for any retained earnings, liabilities, and other relevant factors.
• Allocate ACA to Assets: The recalculated ACA is then allocated to the exiting entity’s assets to establish their new tax cost bases.

4. CGT and Cost Base Adjustments

Exiting a consolidated group can trigger a number of CGT events, and the tax cost base of the exiting entity’s assets may need to be adjusted.

• CGT Event L5: If the ACA exceeds the market value of the membership interests in the exiting entity, CGT Event L5 may apply, resulting in a capital gain for the head company.
• Cost Base Reset: The tax cost bases of the exiting entity’s assets are reset based on the recalculated ACA, which will affect future tax calculations such as depreciation and CGT.

5. Treatment of Tax Losses

The treatment of tax losses is a critical consideration during an exit:

• Forfeiture of Tax Losses: In many cases, the exiting entity will forfeit any tax losses it brought into the group unless specific conditions are met, such as the same business test or continuity of ownership test.
• Transfer of Losses: If allowed, the exiting entity may be able to retain or transfer some of its tax losses, but this requires careful analysis to ensure compliance with tax laws.

6. Legal and Administrative Requirements

Once the tax implications are understood and the exit plan is in place, the legal and administrative steps must be completed:

• Amend Corporate Documents: Update the exiting entity’s corporate documents, including any changes to its constitution, share registers, and ASIC records.
• Notify the ATO: The head company must notify the Australian Taxation Office (ATO) of the exit, usually by lodging the necessary forms and updates with the ATO as part of the annual tax return process.
• Finalization of Agreements: Finalize the termination or adjustment of any tax sharing and tax funding agreements to reflect the entity’s exit from the group.

7. Post-Exit Considerations

After the exit is complete, there are several ongoing considerations for both the exiting entity and the remaining group:

• Separate Tax Reporting: The exiting entity will need to start filing its own tax returns, separate from the consolidated group, and manage its own tax affairs going forward.
• Ongoing Compliance: The remaining group must continue to meet its tax obligations, including any adjusted liabilities that result from the exit.
• Review and Adjust: Both the exiting entity and the remaining group should periodically review their tax positions post-exit to ensure that all tax implications have been correctly managed.

8. Strategic Reassessment

Finally, it is important for both the exiting entity and the remaining group to reassess their strategic positions post-exit:

• Re-evaluate Group Structure: The remaining group should re-evaluate its structure to ensure that it remains tax-efficient and aligned with its business goals.
• Future Tax Planning: The exiting entity should develop a new tax strategy that reflects its independent status, considering its new tax bases and any ongoing obligations to the ATO.

H. Division 7A and Tax Consolidated Groups

Division 7A rules are applied differently within a tax-consolidated group than standalone entities. Here are the key considerations:

1. Single Entity Rule (SER)

The Single Entity Rule (SER) is a fundamental concept in tax consolidation. Under this rule, the group is treated as a single entity for income tax purposes. This means:

• Intra-Group Transactions: Transactions between entities within the consolidated group are generally ignored for tax purposes. For Division 7A purposes, loans, payments, or debt forgiveness between group members are not subject to Division 7A because they are disregarded under the SER.
• External Transactions: Division 7A will still apply to transactions between entities within the group and external parties, including shareholders or associates who are not part of the consolidated group.

2. Loans and Payments to Shareholders or Associates

For Perth SMEs and family businesses, it’s common to have loans or payments made to shareholders or their associates. In a tax consolidated group, the key considerations include:

• Treatment of Pre-Consolidation Loans: Loans made before the formation of the tax consolidated group might still be subject to Division 7A. It’s crucial to ensure that any pre-existing loans comply with Division 7A requirements, such as being on commercial terms (i.e., having a written loan agreement, a fixed repayment schedule, and charging an interest rate at or above the benchmark rate).
• New Loans: After consolidation, any loans or payments made by the head company or subsidiaries to shareholders or their associates outside the group need to be assessed for Division 7A implications. These transactions could be deemed dividends if they do not meet Division 7A’s compliance requirements.

3. Debt Forgiveness

If a private company within the consolidated group forgives a debt owed by a shareholder or an associate outside the group, Division 7A can treat this forgiveness as an unfranked dividend to the extent of the company’s distributable surplus.

• Monitoring Debt Forgiveness: Perth tax accountants should monitor any potential debt forgiveness transactions to ensure they do not inadvertently trigger Division 7A consequences.

4. Distributable Surplus Calculation

The concept of a distributable surplus is central to Division 7A, as it determines the extent to which a payment, loan, or forgiven debt is treated as a dividend. In a consolidated group:

• Group-Wide Surplus: The distributable surplus calculation must consider the entire consolidated group’s financial position. This is important for determining the amount that could be deemed as a dividend under Division 7A.
• Individual Entity Consideration: While the group is treated as a single entity for tax purposes, the financial statements of individual entities may still need to be analyzed to ensure accurate surplus calculations.

Key Considerations for Perth Tax Accountants

1. Compliance with Division 7A

• Loan Agreements: Ensure all loans between entities within the group and shareholders or their associates are properly documented with compliant loan agreements that meet Division 7A requirements.
• Annual Review: Conduct an annual review of loans, payments, and debt forgiveness to identify any potential Division 7A issues early and take corrective actions where necessary.
• Benchmark Interest Rates: Apply the appropriate benchmark interest rates to loans to avoid unintended Division 7A implications.

2. Strategic Planning for Division 7A

• Debt Structuring: Advise clients on structuring loans and repayments in a way that minimises Division 7A risks. For instance, converting loans into compliant Division 7A loans with fixed repayment schedules can help avoid deemed dividends.
• Dividend Planning: To avoid Division 7A, plan the distribution of profits through franked dividends rather than loans. This is particularly relevant for family businesses that often mix business and personal finances.

3. Monitoring and Managing External Transactions

• External Parties: Ensure that transactions between the group and external parties, particularly shareholders and their associates, are scrutinised for Division 7A risks. This includes loans, payments, or the provision of assets for private use.
• Documentation and Record-Keeping: Maintain meticulous records of all transactions subject to Division 7A to ensure that any deemed dividend can be properly assessed and reported.

4. Family Business Considerations

Family businesses, common among Perth SMEs, often have complex ownership structures and related-party transactions. Special attention is needed to ensure:

• Related-Party Loans: Loans between the business and family members are structured correctly to avoid triggering Division 7A.
• Use of Family Trusts: If the business involves family trusts, ensure that any distributions, loans, or payments from the trust are compliant with Division 7A. Trusts are often intertwined with business operations and can inadvertently lead to Division 7A issues if not managed carefully.

5. ATO Compliance and Updates

• Stay Updated: Keep up to date with any changes in Division 7A regulations and ATO guidance, as this area of tax law is subject to periodic updates and changes.
• ATO Communication: If potential Division 7A issues are identified, consider proactive communication with the ATO or voluntary disclosures to mitigate penalties.

When considering the interaction between trusts and a tax consolidated group, particularly in the context of Perth SMEs and family businesses, it’s important to understand the implications and limitations of including trusts within such a structure. Trusts, especially discretionary trusts and unit trusts, are common in ownership structures, but the rules governing their role in tax consolidation are complex. Below, we explore whether discretionary trusts or unit trusts can be part of a tax consolidated group, with a specific focus on situations where the only beneficiaries are members of the tax consolidated group. We also outline the key considerations for a Perth tax accountant.

I.  Can Trusts Be Part of a Tax Consolidated Group?

In general, trusts cannot directly be part of a tax consolidated group. This includes both discretionary trusts and unit trusts, even when the only beneficiaries are members of the tax consolidated group. The tax consolidation regime in Australia is primarily designed for companies, and only certain types of entities can be members of a tax consolidated group. Here’s a detailed discussion of each type of trust:

1. Discretionary Trusts

• Exclusion from Group Membership: Discretionary trusts, generally, cannot be directly included as members of a tax consolidated group, regardless of whether the beneficiaries are members of the group. This is because the beneficiaries of a discretionary trust do not have a fixed entitlement to the trust’s income or capital, which conflicts with the ownership requirements for tax consolidation.

While it is technically possible for a discretionary trust to become a member, we have never seen it happen practically.

• Indirect Participation: Even if all beneficiaries are members of the tax-consolidated group, the trust itself, generally, cannot be part of the group. However, the trust can own shares in a company that is part of the tax-consolidated group. The income generated by the company can flow to the discretionary trust and subsequently to its beneficiaries, but the trust will remain outside the consolidated group for tax purposes.

2. Unit Trusts

• Exclusion from Group Membership: Unit trusts generally cannot be members of a tax-consolidated group, even if the unitholders are members of the group. The nature of most unit trust deeds, which gives flexibility, does not satisfy the requirements for inclusion in the consolidated group.
• Public Trading Trusts Exception: If a unit trust qualifies as a public trading trust and is treated as a company for tax purposes, it might be eligible to join a tax consolidated group. However, this scenario is uncommon and requires specific conditions to be met.
• Ownership of Shares: A unit trust can hold shares in companies that are part of the tax consolidated group, even if the unitholders are also members of the group. The trust itself, however, remains a separate entity for tax purposes.

3. Implications for Perth SMEs and Family Businesses

For Perth SMEs and family businesses that use trusts in their ownership structures, the exclusion of trusts from tax consolidated groups presents several implications and considerations, even when the trust beneficiaries are members of the consolidated group:

1. Structuring Ownership

• Indirect Participation: The trust cannot join the tax consolidated group, but it can hold shares in a company that is a group member. This allows the trust to participate in the group’s profits indirectly, but it requires careful planning to ensure tax efficiency.
• Complex Structures: When the trust beneficiaries are consolidated group members, the overall structure may become more complex. The trust remains outside the group, which requires careful management of the interactions between the trust and the group members.

2. Distributions from the Trust

• Tax Treatment of Distributions: Distributions from a trust to its beneficiaries (who are members of the consolidated group) are not directly affected by the group’s tax consolidation status. However, the timing and nature of these distributions must be managed to optimize tax outcomes for both the trust and the group members.
• Dividend Flow-Through: If a company within the tax-consolidated group pays dividends to the trust, which then distributes these to beneficiaries within the group, the tax implications for the beneficiaries need to be carefully considered, particularly concerning franking credits.

3. Compliance with Division 7A

• Related-Party Loans: In family businesses where trusts interact with companies within the consolidated group, Division 7A can apply to loans made to beneficiaries who are members of the group. These transactions need to be structured to avoid triggering Division 7A consequences.
• Trust Loan Accounts: Regular reviews of loan accounts between the trust and companies within the consolidated group are necessary to ensure compliance with Division 7A, as these transactions are not disregarded under the Single Entity Rule.

4. Succession Planning and Trusts

• Family Trusts: Trusts are often used for succession planning in family businesses. The trust’s exclusion from the tax-consolidated group means that the tax implications of transferring control or assets between generations must be managed carefully, especially when beneficiaries are also group members.
• Preservation of Control: Maintaining control over the trust and its assets while maximising the tax benefits of the consolidated group requires careful planning, particularly in multi-generational family businesses.

Conclusion

Tax consolidation offers Perth SMEs and family businesses several potential benefits, such as simplified tax reporting, efficient use of tax losses, and streamlined intra-group transactions. However, it also introduces complexities, particularly when considering the Small Business CGT concessions, Division 7A, and the role of trusts in ownership structures. While tax consolidation can provide significant advantages, it requires careful planning and consideration of each business’s specific circumstances.

For family businesses, the interplay between trusts and tax consolidation must be managed with particular attention to compliance, tax efficiency, and succession planning. The exclusion of trusts from the consolidated group and the impact on eligibility for Small Business CGT concessions are critical factors that must be addressed with strategic foresight.

Ultimately, the decision to form a tax-consolidated group should be made in consultation with experienced tax advisors who understand the unique dynamics of Perth SMEs and family businesses. By carefully weighing the benefits and downsides, businesses can ensure that their tax strategies align with their long-term goals, providing a solid foundation for growth and continuity.