Entities and Tax Consolidation
Entity taxation
Different entities are taxed differently. Companies pay tax on taxable income and frank distributions; partnerships are flow-through (partners are taxed on their share); trusts are generally flow-through, with beneficiaries taxed on present entitlement or the trustee taxed at the top rate. Candidates must understand the corporate tax rate, the base rate entity test, and the imputation system.
Consolidation
Tax consolidation allows a wholly owned group to be treated as a single entity for income tax. Key concepts: the head company, the single entity rule, the entry history rule, and the exit history rule. Consolidation affects the cost base of assets and the treatment of intra-group transactions, which are generally ignored. Understand the joining and leaving rules and the tax cost setting process.
Traps
A common trap is assuming a trust is always taxed like a company, or forgetting that a beneficiary's entitlement must be present. Another is ignoring the single entity rule, which means intra-group transactions are not recognised. Watch for the distinction between a fixed trust and a discretionary trust.
Rule of thumb
For consolidation, think of the group as one taxpayer: assets are pooled, intra-group dealings are disregarded, and the head company lodges a single return. For trusts, identify whether a beneficiary is presently entitled - if not, the trustee is assessed.