To serve as a head company of the consolidated group, the company must be resident in Australia and be subject to income tax at the corporate tax rate on some or all of its income. Furthermore, it must not be a wholly-owned subsidiary of another entity that fulfils the preceding requirements; even if it is, it will not be prevented from being a head company as long as it is not a subsidiary member of a group already consolidated or that may be consolidated.
To qualify as a subsidiary member of a consolidated group, the company must be wholly owned, whether directly or indirectly, by the head company. This means that all of its membership interests must be beneficially owned directly or indirectly by the head company, the determination of which is governed by various specific rules. Furthermore, it must be a resident of Australia and be subject to tax at the corporate income tax rate on all or some of its taxable income.
Though a non-resident entity may not be a member of a consolidated group, Australian residents that are the wholly-owned subsidiaries of a common foreign holding company have the option to consolidate – referred to as a multiple entry consolidated (MEC) group.
Companies that are excluded from being members of a consolidated group include prescribed dual resident companies, companies fully exempt from income tax, together with certain credit unions, licensed investment companies and superannuation funds.
As long as the head company remains the head company of the consolidated group, new members may automatically join the group and existing members may also leave the group if the qualifying criteria apply. Thus, companies newly acquired by the head company automatically become members of the group, while subsidiary members that cease to comply with the qualifying criteria automatically leave the group. In either case, a number of notification requirements regarding new memberships must be complied with by the head company.
When an entity joins or leaves a consolidated group, the allocable cost amount (ACA) is reset by applying the cost setting rules. These rules were amended on 22 March 2018 when the Australian Parliament passed the Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018. The amendments mainly improve the cost setting rules when a member entity joins or leaves a consolidated group. The main measures are as follows:
- the deductible liabilities measure, which removes a double benefit by excluding certain deductible liabilities held by an entity that joins a consolidated group from the allocable cost amount (ACA), effective from 1 July 2016;
- the deferred tax liabilities measure, which ensures that deferred tax liabilities are disregarded from both entry and exit ACA, effective from 15 February 2018;
- the securitised assets measure, which prevents a double benefit by modifying the tax cost setting rules to disregard liabilities relating to the securitised assets, effective from 13 May 2014 for ADIs and financial entities, and 3 May 2016 for other entities;
- the churning measure, which prevents non-residents churning assets between different consolidated groups by switching off the entry tax cost setting rules for a joining entity, where a capital gain or capital loss made by a non-resident on disposal of membership interests is disregarded and there is no change in the majority beneficial ownership of the joining entity for a period of at least 12 months before the joining time, effective from 14 May 2013;
- the Taxation of Financial Arrangements (TOFA) measure, which clarifies the tax treatment of certain intra-group liabilities and assets between a continuing member of a consolidated group and an exiting member of the consolidated group, effective from 1 July 2010; and
- the value shifting measure, which prevents a consolidated group from shifting value across entities in the group by ensuring that the amount considered under the exit tax cost setting rules for an asset is aligned with the tax cost setting amount for the corresponding asset of the leaving entity, effective from 14 May 2013