Consolidation - GST input tax credits

Where a subsidiary member of a consolidated group is entitled to an input tax credit, is section 27-5 of the Income Tax Assessment Act 1997 (ITAA 1997) taken into consideration by the head company in working out the amount of the income tax liability or loss of the head company?

Yes. Section 27-5 of the ITAA 1997 provides in these circumstances that the head company of a consolidated group cannot claim as an income tax deduction the subsidiary's input tax credits in working out the amount of the head company's income tax liability or loss. The operation of the 'single entity rule' in section 701-1 of the ITAA 1997 treats the subsidiary as part of the head company for the head company core purposes.

Company A, a head company and its wholly-owned subsidiary company, Company B, are members of a consolidated group.

Company B carries on an enterprise and is registered for GST.

Company B makes taxable supplies, incurs GST liability and receives a credit for the GST paid on inputs ('input tax credits') as part of its normal operations.

The 'single entity rule' in section 701-1 of the ITAA 1997 operates to treat the subsidiary members of a consolidated group to be parts of the head company, for the purposes of working out the amount of the head company's income tax liability or loss (see subsection 701-1(2) of the ITAA 1997).

Subsidiary members of the group are consequently treated as parts of the head company rather than as separate income tax entities. In this case, Company B is treated as part of Company A for the purpose of working out Company A's income tax liability or loss.

Section 27-5 of the ITAA 1997 provides that a taxpayer cannot deduct as an outgoing or loss any amount relating to an input tax credits to which that taxpayer is entitled.

Accordingly, amounts relating to input tax credit entitlements of a subsidiary company are not deductible to a head company of the group for the core purposes of working out the amount of the head company's income tax liability or loss. Thus, the outgoings giving rise to Company B's input tax credits are not an allowable income tax deduction for Company A.