Accounting standards for tax effect (AASB 112 and UIG Interpretation 1052 Accounting for Income Taxes) require that tax-consolidated groups have a tax financing agreement that uses an “acceptable allocation method” for the groups` tax liabilities. This allows the lead company and group members to record tax entries in the financial statements of each group member, otherwise groups may need to record intra-group dividends, capital distributions or capital contributions on their books. Business groups are encouraged to consider entering into tax sharing agreements and tax financing agreements as part of their entry into the tax consolidation system. Tax financing agreements complement tax-sharing agreements and specify how subsidiaries finance the payment of tax by the main company and when the main company must make payments to subsidiaries for certain tax attributes generated by subsidiaries that benefit the group as a whole (e.g.B tax losses and tax credits). In our experience, a number of older TFAs are not based on UIG 1052 or older versions of UIG 1052 and may not result in the desired accounting treatment. Acutech will ensure that you order and receive one or more consolidation agreements from our professional advisor as follows: The income tax consolidation system is now more than a decade old. For many companies, their Tax Sharing Agreement (TSA) and Tax Financing Agreement (TFA), which were introduced at the beginning of the consolidation regime, will be just as old. Many of these agreements will not have been reviewed or updated for years. Under the new International Financial Reporting Standards, tax groups must ensure that they have a tax financing agreement that applies an “acceptable allocation method” as urgently interpreted by Questions Group (UIG) 1052 Tax Consolidation Accounting. If the tax financing agreement does not apply an “acceptable allocation method”, class members may be required to record capital contributions on their books in the form of dividends and capital distributions or capital contributions.
Since the TFA is only a contractual agreement between group members, which, unlike the TSA, has no legal requirements, there is a high degree of flexibility in the design of funding obligations that are economically feasible and that rely on internal processes that the group actually wants to pursue. This can lead to difficulties, especially in the case of external sales of subsidiaries, but also, for example, in regulations on third-party financing, obligations of the board of directors, adjustments to financial statements as well as creditworthiness and rating reviews. There is no prescribed approach and there are a number of different approaches. The best approach depends on the Group`s financing and cash flow arrangements, management reporting arrangements and current tax accounting systems. The move to monthly payments has prompted a number of taxpayers to reconsider how they fund the PAYG. These taxpayers have attempted to change their pay-as-you-go funding arrangements to provide more flexibility and reduce the administrative burden of completing monthly funding calculations, returns and formal payments. When entering the tax consolidation regime, groups of companies should consider how best to minimize the application of joint and several liability in relation to the group`s tax obligations. You should also consider how subsidiaries finance the payment of these liabilities by the main business. Both issues can be managed by corporate groups through tax sharing agreements and tax financing agreements. However, agreements may be concluded at any time after the establishment of a consolidated steering group and new members may “sign” agreements under an instrument of accession. Tax sharing agreements overcome joint and several liabilities primarily for income tax purposes by contractually allocating the Group`s tax obligations among the Group`s liabilities on a “reasonable” basis.
Portoria agreements do this using the usual method of fictitiously treating each group company as a separate entity and applying clear rules based on tax laws to appropriately allocate tax adjustments to the group. An indirect tax sharing agreement applies similar principles to allocate GST liability among members of a GST group on an appropriate basis. A different methodology is used for this, as the nature of tax obligations is very different. Also note that a GST group may be composed very differently from a consolidated tax group and a separate treaty is required. Compliance with UIG 1052 is important to ensure that the accounting effects of tax consolidation in accordance with accounting standards do not have negative consequences for the Group (the overall objective being to ensure that fiscal consolidation effects do not lead to adjustments through contributions or equity distributions). Tax financing agreements also determine the tax entries in the financial statements of members of the tax groups (i.e., deferred tax assets and deferred tax liabilities). We have developed a wide range of precedents documenting tax sharing and tax financing agreements. These precedents include: It is therefore important that tax groups are up to date with the requirements of the updated version of UIG 1052 and ensure that their TFA meets the requirements set out in the interpretation. This ensures that the TFA leads to the desired accounting treatment of tax consolidation effects.
Recent changes to pay-as-you-go rules, which require large corporate taxpayers to pay monthly payments, have prompted many corporate taxpayers to rethink their tax financing models to reduce the administrative burden on the monthly flow of tax financing payments between group members. Along with these changes to the TFA, taxpayers are also taking the opportunity to update their TFA. However, each subsidiary may be held jointly and severally liable to the Australian Tax Office for the full amount of a group income tax obligation if the principal is in default of payment of that obligation. This joint and several liability may have negative consequences for the Group, in particular with regard to external financing arrangements, solvency requirements, audits of credit rating agencies, the sale of subsidiaries and the obligations of directors. It is also important that tax groups continually review their TFA to ensure that they comply with relevant accounting standards, including updated versions of Interpretation 1052 – Tax Consolidation Accounting (UIG 1052) of the AASB`s Urgent Matters Group (UIG). To date, most consolidated tax groups have decided to allocate their tax obligations on the basis of the theoretical individual taxable income of each group member or on the basis of the retained earnings of each member as a percentage of the group`s total accounting income. Whether or not the allocation is accepted as appropriate on these bases ultimately depends on the facts and circumstances that affect the tax situation of each group, as well as the laws, regulations and guidelines of the ATO that apply to tax sharing agreements in general. To address the thorny issues of joint and several liability and how the Group`s tax obligations should be financed between its members, corporate groups tend to rely on tax-sharing agreements and tax financing agreements. It is advisable to have them from the beginning and not to wait for an external sale, financing or other needs before negotiating. This allows companies leaving the tax group (e.g. B in the case of a sale to a third party) to avail itself of the “clear exit” rule, which limits the risk of the company to the joint and several tax obligations of the entire group.
Since the introduction of the consolidation regime, a number of new group liabilities have been added to the table in section 721-10(2) of the Income Tax Assessment Act 1997 (Cth) (ITAA 97). The Group`s new liabilities added to the table include deficit tax clearance, change in absenteeism and, more recently, the Group`s monthly payment liabilities. Some interesting questions arise when subsidiaries of a tax consolidated group are written off or liquidated. Tax sharing and tax financing agreements – what companies should consider in light of recent legislative and administrative developments Although amending an TSA is the preferred option for most consolidated tax groups, particular attention should be paid to the requirements of the respective TSA amending provisions to ensure that the amendment is legally effective. This article describes some of the key areas to consider when reviewing and updating your ASD and TFA. Over the years, some of these article numbers have changed – for example, income tax was once item 25, but it has now become item 3. Although many ASDs have “interpretation clauses” that allow references to outdated article numbers to be read as references to new article numbers, it is advisable to update the TSA to avoid any doubt as to whether a TSA covers a particular group liability, to update the TSA to replace the old article numbers with the new article numbers. .