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NEWS - TAX LAW
Reforms in consolidation offer benefits
6/21/2002
Almost anyone with two or more companies that have different tax positions can benefit from the new consolidation rules.
"Mum and Dad operators often set up different companies for each business activity that they have," said a tax partner with William Buck Chartered Accountants, Greg Travers.
"What you find is that some of these businesses are making profits and some are making losses. Or there might be an old business that is now dormant, but has some losses, a couple of assets or maybe some franking credits."
When the businesses consolidate, the losses sitting in the dormant company can offset profits in another company. The franking credits, which may be stuck in the dormant company, can be utilised by the group.
A review of William Buck's client base found 50per cent of clients with two or more companies would benefit significantly from consolidation. Benefits include continuing, or in some cases improving, the use of losses in one company against profits in another, and enabling all profits and franking credits to be aggregated and more tax effectively flowed out to the shareholders.
Other benefits entail moving assets from trading entities to non-trading entities to improve asset protection; and reducing the number of income tax returns and activity statements that need to be prepared.
Those who would not benefit include having a third party that invests in one of the businesses, or running profitable businesses which are independent from each other.
Eligible businesses can adopt the new rules from July 1.
Others who need to restructure before they are eligible can apply the extended transitional concessions to use the next 12 months to get them ready to consolidate from July 1, 2003.
At the very least, consolidations preserve the existing grouping rules and enable businesses to lodge one tax return covering all their companies - which should help reduce compliance costs.
"Whether to consolidate this year or next requires a cost-benefit analysis by each SME to determine whether there will be tax savings by waiting to consolidate, or doing it now," said Danny Fischer, a senior associate with law firm Deacons.
Small-to-medium-sized businesses will have the potential benefit of resetting asset cost bases and tax values on a subsidiary-by-subsidiary basis.
"This represents a huge opportunity for SME businesses to revalue assets upward without paying any CGT," said Mr Fischer.
For example, he says, "Company D" owns a building it bought 10 years ago for $500,000. It's now worth $1.5 million.
If Company D forms part of a consolidated group, it could choose to revalue the building at $1.5million.
If the building is sold 12 months later for $2 million, the company will make only $500,000 in capital gain.
The capital gain is a third of what the company would have made if the building had not been revalued under consolidation.
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