When included in the tax consolidation regime, enterprise groups should consider how best to minimize the application of joint and several liability in respect of the group`s income tax liabilities. They must also consider how the subsidiaries finance the payment of these debts by the main company. Both of these issues can be managed by groups of companies through tax-sharing agreements and tax financing agreements. Tax financing agreements complement tax-sharing agreements and determine how subsidiaries finance the payment of taxes by the main company and when the main company is required to make payments to subsidiaries for certain tax attributes generated by those subsidiaries and which benefit the group as a whole (e.g. B tax losses and tax credits). However, any subsidiary may be held jointly and severally liable to the Australian Tax Office for the total amount of a group income tax debt if the principal company is in arrears in the payment of that obligation. This joint and several liability may have negative consequences for the group, in particular as regards external financing arrangements, solvency requirements, audits of credit rating agencies, the sale of subsidiaries and the obligations of directors. Under the new International Financial Reporting Standards, tax groups must ensure that they have a tax financing agreement that applies an “acceptable allocation method” according to the Urgent Issues Group`s (UIG) 1052 Tax Consolidation Accounting interpretation. If the tax financing agreement does not provide for an “acceptable allocation method”, group members may be required to account for dividends and capital distributions or capital injections considered capital deposits in their accounts.
Tax financing agreements also determine the tax accounts in the financial statements of members of tax groups (i.e., deferred tax assets and deferred tax liabilities). One of the usual, but not mandatory, practices is for members of consolidated groups to enter into two types of tax agreements with each other, a tax-sharing agreement and a tax financing agreement. So far, most consolidated tax groups have decided to allocate their income tax liabilities on the basis of each group member`s notional independent taxable income or on the basis of each member`s accounting profit as a percentage of the group`s total balance sheet profit. Whether or not attribution on these bases is accepted ultimately depends on the facts and circumstances surrounding the tax position of each group as well as the laws, regulations and ATO guidelines relating to tax separation agreements in general. Business groups are encouraged to consider tax-sharing agreements and tax financing agreements as part of their accession to the tax consolidation system. We have developed a wide range of precedents that document tax sharing and financing agreements. Among these precedents are: the purpose of a tax financing agreement is to finance the main company to make current tax payments to the Australian tax office, as well as to compensate loss-making subsidiaries for a reduction in the group`s total tax debt as a result of these losses. It follows that the calculation of tax effects can be carried out at company level for subsidiaries on a basis similar to that of autonomous undertakings. . .