On 30 March 2011 the Assistant Treasurer, Bill Shorten, announced he had asked the Board of Taxation to review the recently introduced consolidation rights to future income ("RFI") rules. This review follows the Board's concerns that taxpayers are claiming deductions for types of assets which were not originally contemplated when the rules were introduced.
Moore Stephens understand that there is a possibility that the scope of the RFI measures could be restricted on a retrospective basis. If this was to occur this would result in an inequitable outcome for tax consolidated groups that have (and may in the future) undertaken mergers – particularly those that have already requested an amendment of their prior year returns in good faith.
The Board's terms of reference
The terms of reference are to:
- examine the operation of the right to future income rules with a view to clarifying their scope; and
- propose changes to limit the scope of the rules, if necessary, and advise on the date of effect of those proposed changes.
The current right to future income rules
The current rules were introduced in June 2010, though their application was backdated to 1 July 2002; the start of the consolidations regime. They apply to allocate a tax cost setting amount for a tax consolidated group in relation to a joining entity's interest in assets that qualify as 'rights to future income'.
The law as it currently stands suggests that an RFI asset will include rights to payment under:
- long term construction contracts;
- broker trailing commissions;
- perpetual or annual service contracts;
- funds management fees; and
- unbilled income.
Rights to passive income are excluded from the definition of an RFI asset. Examples of these excluded rights are:
- income under a leasing agreement;
- future interest income;
- rights to an annuity under an annuity contract; and
- rights to royalties.
Where a consolidated group acquires an entity that holds an RFI asset the current rules allow a consolidated group to claim a deduction (over a maximum period of 10 years) equal to the tax cost amount of the asset. In this way the deduction that is claimed by the consolidated group should offset the income that is expected to arise under the future income right.
Whilst the timing of this deduction may be required to be spread over a period of up to 10 years, the introduction of the rules with a retrospective application have allowed many corporate groups to amend their prior year tax returns to claim a deduction and receive an immediate tax refund.
Who will be affected?
The Assistant Treasurer has flagged the possibility that any changes could apply retrospectively from the introduction of the consolidation regime (i.e. 1 July 2002). Such a retrospective change would certainly impact every consolidated group which has undertaken an acquisition from 2002 to the present. A move to retrospectively restrict deductions for rights to future income will particularly impact on taxpayers who have amended their prior year returns. These taxpayers are likely to have invested substantial resources in amending their returns in reliance on the existing legislative provisions. Any change to the provisions should recognise this.
Next steps
The Board of Taxation is inviting submissions from interested
parties, which are due by 20 April 2011. Moore Stephens will be
involved in the submission process, and encourages affected parties
to do the same.
The Board will report to the Government on 31 May 2011.
For further information on the above please contact the authors or your Moore Stephens Relationship Partner.
On 30 March 2011 the Assistant Treasurer, Bill Shorten, announced he had asked the Board of Taxation to review the recently introduced consolidation rights to future income ("RFI") rules. This review follows the Board's concerns that taxpayers are claiming deductions for types of assets which were not originally contemplated when the rules were introduced.
Moore Stephens understand that there is a possibility that the scope of the RFI measures could be restricted on a retrospective basis. If this was to occur this would result in an inequitable outcome for tax consolidated groups that have (and may in the future) undertaken mergers – particularly those that have already requested an amendment of their prior year returns in good faith.
The Board's terms of reference
The terms of reference are to:
- examine the operation of the right to future income rules with a view to clarifying their scope; and
- propose changes to limit the scope of the rules, if necessary, and advise on the date of effect of those proposed changes.
The current right to future income rules
The current rules were introduced in June 2010, though their application was backdated to 1 July 2002; the start of the consolidations regime. They apply to allocate a tax cost setting amount for a tax consolidated group in relation to a joining entity's interest in assets that qualify as 'rights to future income'.
The law as it currently stands suggests that an RFI asset will include rights to payment under:
- long term construction contracts;
- broker trailing commissions;
- perpetual or annual service contracts;
- funds management fees; and
- unbilled income.
Rights to passive income are excluded from the definition of an RFI asset. Examples of these excluded rights are:
- income under a leasing agreement;
- future interest income;
- rights to an annuity under an annuity contract; and
- rights to royalties.
Where a consolidated group acquires an entity that holds an RFI asset the current rules allow a consolidated group to claim a deduction (over a maximum period of 10 years) equal to the tax cost amount of the asset. In this way the deduction that is claimed by the consolidated group should offset the income that is expected to arise under the future income right.
Whilst the timing of this deduction may be required to be spread over a period of up to 10 years, the introduction of the rules with a retrospective application have allowed many corporate groups to amend their prior year tax returns to claim a deduction and receive an immediate tax refund.
Who will be affected?
The Assistant Treasurer has flagged the possibility that any changes could apply retrospectively from the introduction of the consolidation regime (i.e. 1 July 2002). Such a retrospective change would certainly impact every consolidated group which has undertaken an acquisition from 2002 to the present. A move to retrospectively restrict deductions for rights to future income will particularly impact on taxpayers who have amended their prior year returns. These taxpayers are likely to have invested substantial resources in amending their returns in reliance on the existing legislative provisions. Any change to the provisions should recognise this.
Next steps
The Board of Taxation is inviting submissions from interested
parties, which are due by 20 April 2011. Moore Stephens will be
involved in the submission process, and encourages affected parties
to do the same.
The Board will report to the Government on 31 May 2011.
For further information on the above please contact the authors or your Moore Stephens Relationship Partner.