What does it mean to be Tax Consolidated?
When a wholly owned group of entities consolidates for income tax purposes, it is considered to be a single entity represented by the Head Company in the eyes of the Commissioner for Taxation.
It is the Head Company that is responsible for the payment of the income tax related liabilities for the group.
However, in the event the Head Company does not pay the income tax liabilities of the group by the due date, the group members become jointly and severally liable for the group’s outstanding tax liabilities. This means that each individual group member company is liable for the whole amount of the group’s liability. For example, if the group’s outstanding tax liability is $1 million then each member has a liability to pay the Commissioner $1 million in tax.
This outcome could jeopardise the asset protection strategy of the group companies.
Why is being jointly and severally liable a problem?
A consolidated group member being jointly and severally liable may be a problem for a number of reasons including:
- External funding — where the consolidated group member needs to obtain approval for funding from third party financiers
- Solvency requirements — where the consolidated group member needs to meet solvency requirements as required by third parties
- Sale of the group member — purchasers of the group member would require certainty that the group member can exit from the tax consolidated group without being liable for tax liabilities of the group falling due after the sale date arising from the period that the group member was a member of the group.
Does the client need a Tax Sharing Agreement?
If a client has a tax consolidated group, you need to consider the following issues:
- How to minimise joint and several liability?
- How to fund the payment of the Head Company’s payment of the tax liability?
These issues can be managed by the tax consolidated group having a Tax Sharing Agreement and a Tax Funding Agreement.
A Tax Sharing Agreement ‘shares’ the tax liability for the group (in the event the Head Company defaults) and limits the liability of the group members as determined by the methodology set out in the agreement. Only a valid Tax Sharing Agreement will be effective to limit the joint and several liability of the group members.
Tax Funding Agreements describe how the group members will ‘fund’ the Head Company to pay the tax liability for the group.
What should you do?
We recommend that you review your client’s circumstances. Where the client is consolidated for tax purposes and does not have a tax sharing agreement or tax funding agreement in place, please call a member of our team to discuss your client’s needs.
Alternatively, if your client does have these agreements in place, has the client had any members enter or exit from the group? It is important that all member entities are a party to the agreements. Please call a member of our team if you need any assistance with this.
If you have any questions generally regarding asset protection strategies for corporate groups, please call a member of our team.
For more information contact Meyer Vandenberg: