Walking the tax tightrope

Some businesses have multiple corporate entities. There are lots of reasons for this and it often makes a lot of sense to separate different parts of your business.

One of the challenges that can come with this is at year-end where you have one company in a profit position and the other in a loss.

Naturally, you don’t want to pay any more tax than is necessary and you may even look at the two companies as one in working out your overall position.

From a tax perspective you may be looking to offset the losses of one company against the other to arrive at a net position.

And you may be tempted to apply some management or service charges to try to balance up the profit and tax position.

But be careful if you are heading down this path. It is easy to get caught out.

The simplest way for the Tax Office to test your position is to compare your annual accounts with the total of the Business Activity Statements lodged for the four quarters.

If they don’t correlate, then you are inviting a potentially tricky query from the taxman. Beyond this, any more detailed examination will test the commerciality of any end of year transactions.

There is no automatic way of offsetting losses and profits between your companies. Avoid trying to do this by after year end charges between the companies. It is not effective and creates a risk position for you.

Each company is an independent entity for tax purposes and needs to account for its tax position separately.

This could result in one of your companies having a tax liability, and the other having a tax loss which will be carried forward.

In this case the carry forward loss will continue to be available for a future year in which your company derives a taxable income.

Providing there is a continuing majority of ownership of the loss-making company in both the loss year and the year in which you make a profit and seek to claim the loss, then there is no time limitation on carrying forward the losses.

In the event that your loss-making company never made a profit in future years then it is possible that the losses would be foregone.

One option available for you is to tax consolidate the two companies. Under a tax consolidation the two companies are dealt with as one for tax purposes.

This allows you to offset profits and losses between the companies. To tax consolidate the two companies there must be a head company and a subsidiary.

The fact that they are commonly owned by the same shareholders is not enough – you need to have a head company in place.

If this is your situation then you can elect to tax consolidate the two companies for the 2011 financial year.

If the shareholders are private individuals or held through family trusts then you may need to complete a restructure of ownership first. In this case, tax consolidation will only be available in a future year.

The decision to tax consolidate brings with it a range of requirements. It is not simply a matter of saying that you are tax consolidated.

The fact that your accounts may be consolidated for accounting purposes does not mean that you are tax consolidated.

Tax consolidation is a specific process that you need to go through. This includes a resetting of your cost base for tax purposes.

Tax consolidation makes sense in some situations but it is not appropriate for everyone. It comes with some initial set-up costs and will have ongoing requirements on you.

It does also provide a number of benefits.

Get advice on the implications of tax consolidation and determine whether it is advantageous for you.

Greg Hayes is director of Hayes Knight, an accountancy and business advisor firm.