The tax consolidation legislation includes both mandatory requirements, which are applicable to all entities, and the tax consolidation system provisions, which entities can elect to adopt. The tax consolidation system allows groups comprising a parent entity and its wholly-owned subsidiaries (all being Australian residents for tax purposes) to elect to consolidate and be treated as a single entity for income tax purposes. It also allows Australian-resident wholly-owned subsidiaries of a non-resident company to elect to consolidate for income tax purposes, in various combinations, with an eligible subsidiary being appointed as the head entity of the multiple entry consolidated (MEC) group.


The principal tax consolidation legislation was enacted through a series of Acts over a long period.  The first Act, the New Business Tax System (Consolidation) Act (No. 1) 2002, was passed by Parliament in June 2002.  However, its commencement was linked to the second principal tax consolidation Act, which was enacted in October 2002.  The third and fourth principal tax consolidation Acts were enacted in November 2002 and March 2003 respectively.  Amendments and additional requirements have been included in other taxation Acts as well.  However, the tax consolidation regime or system commenced with effect from 1 July 2002.


Under the legislation, if a group chooses to be taxed as a consolidated entity, each of the entities in the tax-consolidated group will be taken to be “part” of the head entity for the purposes of the tax consolidation legislation. A single consolidated annual tax return will be required to be prepared for the tax-consolidated group. Transactions between entities in the tax-consolidated group will be ignored for tax purposes. The head entity will be liable for the current income tax liabilities of that group. Each entity in the group will be jointly and severally liable for the current income tax liability of the group where the head entity defaults, subject to the terms of a valid tax sharing agreement between the entities in the group.


Accounting Standard AASB 112 Income Taxes contains the general requirements for accounting for income taxes.  However, there are different views on many issues concerning the recognition of income tax amounts (expense/income, assets and liabilities) under the tax consolidation system which are only relevant to an entity once it is applying the tax consolidation system.  For example, the issues raised include whether each entity in a tax-consolidated group should still recognise income tax amounts, whether deferred tax balances previously recognised by subsidiaries in the group should be recognised by the head entity, the accounting for intragroup tax funding (or contribution) arrangements, and potential contingent liability disclosures by subsidiaries in respect of tax liabilities borne by the head entity.


Concern has been expressed that, in the absence of authoritative guidance, diverse or unacceptable practices may occur or develop in accounting for the effects of the tax consolidation system. This will undermine the relevance and reliability of general purpose financial statements.


The principal issues are:

(a) Once tax consolidation is adopted:

(i) should current taxes in relation to wholly-owned subsidiaries’ transactions be recognised by the subsidiaries and/or the head entity, or only by the group on consolidation?

(ii) should the deferred tax effects of the assets and liabilities of wholly-owned subsidiaries be recognised by the subsidiaries or the head entity, or only by the group on consolidation?

(b) How should tax funding (or contribution) arrangements be accounted for?

(c) What disclosures are appropriate?