Rest assured, the single entity rule means what you thought it did!

5 February 2019

On 30 January 2019, the ATO introduced a new Appendix 1 to its ruling on the meaning and application of the tax consolidation ‘single entity rule’ (TR 2004/11) to address the implications of the 2015 Full Federal Court decision in Channel Pastoral Holdings Pty Ltd v FCT (2015) FCR 162, and in particular some troubling comments in the judgment of Pagone J. The new Appendix confirms that neither the decision, nor Pagone J’s minority judgment, affects previous guidance in relation to how the single entity rule operates.

The case, which involved a question of whether, and how, Part IVA could be applied in circumstances where a subsidiary member of a tax consolidated group obtains a tax benefit as a result of joining the group, for example as a result of resetting the tax cost of an asset which is later sold, is discussed in detail in our earlier Tax Brief and Riposte.  The key finding by the Court was that in such circumstances the Commissioner can issue a Part IVA determination to the subsidiary and give effect to that determination by issuing an assessment to the subsidiary itself, not the head company of the tax consolidated group.

However, Pagone J’s minority judgment also included some concerning comments about the single entity rule operating as a ‘statutory direction concerned with the calculation of a composite liability’ rather than as a ‘statutory fiction … that a subsidiary of a consolidated group is to be treated as non-existent’. This view was contrary to the common understanding (shared by both taxpayers and the Commissioner) as to how the single entity rule operated, and was arguably contrary to the manner in which a number of legislative provisions envisage the single entity rule operating. If correct, the could have had significant consequences, for example, in relation to the treatment of intra-group assets.

The new Appendix provides useful clarity on this critical issue. Unfortunately, it does not provide any guidance on the difficult practical issues raised by the concept of assessing a subsidiary member of a tax consolidated group, some of which are explored in our earlier publications. Perhaps one day these issues, such as how the subsidiary’s taxable income is calculated, whether the subsidiary can apply tax losses, which entity obtains franking credits for the tax paid and whether the assessment affects the consolidation joining date and calculations, will be addressed in the Decision Impact Statement promised by the Commissioner in 2015 in the compendium to his determination regarding the application of Division 7A to a subsidiary member of a tax consolidated group (TD 2015/18EC)?



Cameron Blackwood



Ryan Leslie

Senior Associate


Narelle McBride