Indirect Tax Sharing Agreements

by Andrew Spalding and Con Boulougouris

From 1 July 2010, members of GST groups and participants in GST joint ventures may now limit their exposure to joint and several liability for the entire GST liabilities of the group or joint venture. This can be done by entering into what is known as an “indirect tax sharing agreement” (ITSA). An ITSA is designed to serve a similar purpose in the indirect tax context to a tax sharing agreement (TSA) in the income tax context. Based on the TSA experience, we expect that all GST groups will need to enter into an ITSA. To ensure maximum coverage, an ITSA should be entered into before the group’s first BAS is required to be lodged after 1 July 2010 – this will be 20 August 2010 for monthly remitters.

The GST grouping provisions allow entities with common ownership or membership that operate as a single business to form a group for GST purposes.

Under the GST grouping provisions, the “representative member” of the GST group will be primarily liable for the group’s GST liabilities. However, each member may be jointly and severally liable to the Australian Taxation Office (ATO) for the GST payable by the representative member if the representative member defaults in paying that liability.

The GST joint venture provisions allow participants in certain joint ventures to form a “GST joint venture”.

Under the GST joint venture provisions, the “joint venture operator” will be primarily liable for the GST liabilities relating to the joint venture. However, each participant in the GST joint venture may be jointly and severally liable to the ATO for the GST payable by the joint venture operator if the joint venture operator defaults in paying that liability.

Joint and several liability under the GST grouping or joint venture provisions may have adverse consequences for the group members/ joint venture participants, particularly in relation to external funding arrangements, solvency requirements, rating agency reviews, the sale of subsidiaries (in the case of corporate groups) and directors’ duties.

From 1 July 2010, these issues may now be managed by corporate groups and joint venturers through entry into an ITSA.

Broadly, an ITSA performs a similar function in respect of GST, wine equalisation tax, luxury car tax and fuel tax (together indirect taxes) to a TSA in the tax consolidation (income tax) environment. In particular, an ITSA:

• prevents joint and several liability arising by “reasonably” allocating the group / joint venture indirect tax liability to the group members / joint venture participants (this benefit is particularly important in the case of GST joint ventures where the participants may be otherwise unrelated and not part of the same economic group), and
• in the case of GST groups - allows entities leaving the GST group (eg. on a sale to a third party) to take advantage of the “clear exit rules” which limit the leaving entity’s exposure to its former group’s indirect tax liabilities in certain circumstances. As with income tax liabilities under tax consolidation, buyers of a subsidiary in a GST group can be expected to request that the seller GST group enter into a valid indirect tax sharing agreement and comply with the “clear exit rules”.

Members of a GST group and participants in a GST joint venture are not required to enter into arrangements or agreements by which the group members / joint venture participants fund the payment by the representative member / joint venture operator to the ATO of the group’s indirect tax liabilities.

However, it may be prudent to enter into an indirect tax funding agreement (ITFA) at the same time as an ITSA. Having regard to existing accounting policies relating to the funding of income tax liabilities for tax consolidated groups, auditors of GST groups may expect an ITFA to be entered into to regulate how the group members / joint venture participant will fund the payment by the representative member / joint venture operator to the ATO of the indirect tax liabilities of the GST group / GST joint venture.

GST groups and GST joint ventures are encouraged to consider entering into ITSAs and ITFAs.

We have developed a range of precedents documenting indirect tax sharing and tax funding arrangements.

Should you require any further information, please contact a member of the Norton Rose Tax Group.