The tax consolidation regime was recently introduced into Australia to allow wholly-owned groups of companies to lodge a single consolidated income tax return for the group.
The tax consolidation legislation contains over 600 pages of technically challenging rules, including special rules concerning the utilisation of losses and tax cost of assets.
As a result of the need to allocate deferred tax assets and liabilities to group entities under UIG 1052, most groups prepare consolidated tax returns on a bottom-up basis. That is, notional tax calculations are prepared for each group entity then consolidated into a group tax calculation.
From a compliance perspective, tax consolidation software needs provide a clear audit trail from ATO tax return forms and schedules down to consolidated tax calculations and underlying entity tax calculations. The software should also provide clear audit trails and reconciliations from profit and loss accounts and balance sheets to tax calculations at entity and group level, including eliminations of intra-group transactions.
Tax return software should interface with tax-effect accounting software to reconcile differences between group tax provision and lodged consolidated tax return. These differences would include overseas and non-100% owned companies that are included in the group tax provision, but excluded from the consolidated tax return.
From practical perspective, software systems should be as automated and responsive as possible. Tax systems should import financial data from general ledger and other financial systems to improve accuracy and timeliness of calculations. Changes to tax or financial data at entity level should automatically update consolidated tax calculations.
Tax consolidation software should also handle the areas of consolidated losses and asset costs for tax and tax-effect accounting purposes under IFRS.