- Minor refinements are proposed to deal with particular issues with the current consolidation foreign dividend account (FDA) provisions. One proposed change will ensure that the application rule for the removal of the FDA grouping provisions will prevent transfers of FDA surpluses between subsidiary members of a consolidated or a multiple entry consolidated (MEC) group and non-consolidated members which could occur during the transitional period. This change will also cover transfers from foreign loss companies that are not consolidated for a transitional period.
- A further proposed refinement will ensure that a provisional head company of a MEC group is able to credit its FDA when a subsidiary member has paid or is taken to have paid foreign tax for which it is personally liable.
- Rules in the consolidation provisions ensure that the head company of a consolidated or MEC group or a provisional head company of a MEC group operates a single FDA. When the consolidation regime was introduced, numerous grouping rules were phased out including rules allowing the transfer of FDA surpluses between members of a wholly owned group.
- The application of the repeal of the FDA grouping rules is not clear in the situation where some members of a wholly owned group consolidate but other members do not. This is particularly relevant to potential MEC groups. Rules are therefore required to prevent inappropriate transfers of FDA credits.
- In relation to credits to the FDA, the current rules determining when a head company is deemed to have paid and to have been personally liable for foreign tax do not apply appropriately for a provisional head company. A change is required for the purposes of the FDA provisions to ensure a provisional head company is held to have paid and been personally liable for foreign tax paid or deemed to have been paid by subsidiary members. This will enable the provisional head company to appropriately credit the FDA when a subsidiary member receives an assessable non-portfolio dividend from a foreign company.
- A new rule is proposed to have the effect that any dividends paid on or after the consolidation day and before 1 July 2003 from a non-consolidated member of a wholly owned group to a related company that is a member of a consolidated or MEC group will not qualify as an FDA dividend. The result will be that the non-consolidating member can continue to pay unfranked dividends to a shareholder in a consolidated group but the dividends paid will not have FDA credits attached.
- However, the proposed rule is not designed to prevent the non-consolidated members from paying FDA dividends to other members that have not consolidated. That is, a non-consolidated member should be able to pay FDA dividends to other shareholders in the wholly owned group until 30 June 2003 if those shareholders are not members of a consolidated or MEC group.
- A new rule is also proposed to ensure that foreign tax paid by a subsidiary member of a MEC group is taken to have been paid by the provisional head company where an assessable non-portfolio dividend is received by the subsidiary member. The provisional head company of the group will also be taken to have been personally liable for the foreign tax. This rule will ensure that a credit can arise appropriately in the FDA of the provisional head company at the time the dividend is received.
- The date of effect of any amendment will be 1 July 2002, consistent with the commencement date of the consolidation regime. This will provide maximum certainty and minimise the risk of arbitrary outcomes from a later commencement date.
The principles outlined in this paper are supported by Government. However, they are not yet law. As a consequence, this paper is merely a guide as to how the principles might operate.