Foundations of Taxation Law

Ordinarily, the income tax law treats distinct legal entities as separate taxpayers. As a result, each entity must determine its own tax liability, irrespective of the liability of any other entity that may be related to it. This principle, however, operates subject to the consolidation regime, which was introduced on 1 July 2002 and is contained in pt 3-90 ITAA97 (divs 700 to 721). This chapter outlines the basic features of the consolidation regime. Because of the complexity of the regime, it is only possible to discuss the main general rules and not the many intricate exceptions to them. The chapter commences by examining the nature of a consolidated group and how such a group is formed. It also discusses a related kind of group, known as an ‘MEC group’. The chapter then proceeds to examine some of the core rules that exist under the consolidation regime, being the single entity rule, the entry history rule and the exit history rule. Other important rules, such as the cost setting rules and loss transfer rules, are also considered. The chapter also discusses the consequences that arise where an entity leaves a consolidated group. It concludes with a discussion of the special liability rules that apply to the tax debts of a consolidated group.