Tax Sharing Agreement and Group Funding

A tax sharing agreement allocates a consolidated group’s tax liability between the head company and contributing members. A valid agreement limits members’ exposure if the head company defaults. Prepare the allocation calculations alongside separate instructions for funding tax payments and handling a member’s exit.

What a Tax Sharing Agreement Allocates

A tax sharing agreement determines members’ contribution amounts for a covered group liability under Division 721 of the Income Tax Assessment Act 1997. The head company remains responsible for the full group debt.

If the head company leaves a covered tax liability unpaid at its due time, members can become jointly and severally liable. Contributing members include entities that belonged to the group during all or part of the liability period. That can include a subsidiary sold before recovery starts.

A valid agreement replaces that general exposure with the contribution amounts determined under the agreement. Statutory exceptions and clear-exit conditions still apply. Allocating a liability does not pay or extinguish it. Money transferred internally to the head company also leaves the ATO debt unpaid until the ATO receives payment or another discharge occurs.

Start with the group’s actual membership history. A tax consolidation election, its commencement and subsequent entries or exits establish the facts needed for the allocation period. Common ownership alone does not establish a consolidated group.

Separate Tax Sharing From Tax Funding

A tax funding agreement sets the contractual payments between members and the head company so the group can meet its tax bills. A tax sharing agreement determines statutory exposure when a covered group liability remains unpaid.

The cash contributions can differ from the statutory allocation. For example, a group might fund instalments through monthly advances, then settle differences after preparing the annual return. Its tax sharing method can allocate the liability using each member’s accounting profit. Keep the two calculations identifiable even when one document contains both sets of terms.

Give the legal drafter coordinated instructions covering:

• The head company and participating entities, with their identifiers and membership periods.
• Each covered tax liability and period, including the treatment of instalments, interest, penalties and amended assessments.
• The statutory allocation method, inputs and treatment of losses or nil contributions.
• The funding method, payment deadlines and who receives refunds or loss-related compensation.
• The settlement method, evidence of payment and reconciliation of each intercompany balance.
• Joining and leaving arrangements, access to records and the versions that continue to govern earlier liabilities.

Under AASB Interpretation 1052, tax funding arrangements can create intercompany assets and liabilities. Differences from the tax amounts assumed by the head company can produce equity contributions or distributions. Reconcile those accounting effects separately from the tax sharing allocation. A funding entry does not establish that the statutory agreement is valid.

Build a Reasonable Allocation Method

A reasonable allocation accounts for the whole covered liability using a method that works for the group’s circumstances. A percentage written into a spreadsheet is insufficient without a binding agreement and supporting facts.

Use the following sequence when preparing instructions for legal review.

1. Identify each group liability and its due time. Keep income tax and PAYG instalments distinct, and identify any interest or penalty liabilities the document must cover.
2. Assemble the agreement’s parties and membership history. Obtain each entity’s accounts and reconcile relevant profit, loss and tax adjustments to the group calculation.
3. Calculate every contribution under the proposed method. Explain nil allocations, excluded members and the head company’s share. Confirm the total reconciles to the covered amount.
4. Test the method against known changes. Include acquisitions, disposals, unusual transactions and foreseeable inability to pay. Document why the resulting allocation remains reasonable.
5. Arrange legal drafting and execution before the head company’s due time. Preserve the signed document and the information needed to reproduce its allocation.

Section 721-25 requires an agreement to exist just before the relevant due time. Each participating member’s amount must be determinable, the allocation must be reasonable and any applicable regulatory requirements must be met. Overlapping agreements covering the same liability, or an arrangement intended to prejudice recovery, defeat coverage.

The ATO’s approved-form requirements also call for a written, properly executed agreement identifying its parties, covered liabilities and allocation method. Retain execution dates and authority. Where exact amounts are not specified, prepare the signed allocation schedule required on production, together with any relevant deeds of assumption. The schedule itself need not exist before the due time if the agreement already determines the amounts.

Fictional Allocation With a Loss Member

Assume a fictional group has an assessed liability of $240,000 before any instalment credits. Its proposed method gives loss members nil and allocates the debt across positive accounting profits. These are assumed figures, not a finding that this method suits every group.

Entity role	Accounting profit or loss	Allocation weight	Contribution
Head company	$100,000 profit	10%	$24,000
Trading subsidiary	$600,000 profit	60%	$144,000
Services subsidiary	$300,000 profit	30%	$72,000
Development subsidiary	$100,000 loss	Nil	$0
Total	$900,000 net profit	100%	$240,000

The weights use $1 million of positive profits. The loss member receives nil, so its loss is excluded from that denominator.

Incorrect calculation: divide positive profits by the $900,000 net profit while still giving the loss member nil. The positive weights exceed 100%, so allocated amounts exceed the debt.

Correct calculation for the stated method: divide each positive profit by $1 million. The contributions total $240,000, with the reason for the nil amount recorded.

Reconciliation alone does not prove reasonableness. Excluding the main profit earner while allocating its share to other members would undermine a profit-based method. Known changes in members’ operations or financial circumstances also need assessment.

Now assume an amended assessment raises the liability to $300,000 without changing these accounting profits. Under the same percentage method, the amounts become $30,000, $180,000, $90,000 and nil. The additional $60,000 requires a revised schedule.

A method based on notional taxable income can give a different result. If an amendment disallows a loss used by other members, trace the effect through those members’ taxable amounts. Do not allocate the increase automatically to the entity that originally recorded the loss.

The ATO’s consolidated-group collection guidance addresses these methods and amended liabilities. Original and amended assessments concern the same underlying liability, so preserve the applicable agreement and its amendment mechanism. Extra income tax from an amended assessment is normally payable 21 days after notification. Do not assume that its due time is the original assessment’s due time.

Prepare for a Member’s Exit

An income-tax clear exit depends on the statutory conditions for each liability. A sale agreement’s indemnity or promise to obtain a clear exit does not establish the tax-law result.

Under section 721-35, the member must leave before the head company’s relevant due time. Before leaving, it must pay the head company its contribution amount, or a reasonable estimate when that amount cannot yet be determined. The exit must also be outside an arrangement intended to prejudice ATO recovery, and the liability must be covered by a valid agreement.

Prepare an exit file before completion containing:

• The executed agreement and access to its operative schedules and supporting documents.
• The membership leaving time, matched to the transaction documents and the group structure record.
• A liability-by-liability calculation, identifying due times and any amounts already due.
• The estimate’s assumptions, known adjustments and anticipated amended assessments.
• Evidence that the exiting member pays the head company before leaving, with each component attributable to its liability.

A purchaser’s payment to another vendor entity does not satisfy the requirement for payment by the leaving member to the head company. A bare journal entry is also insufficient. An agreed set-off needs actual cross-liabilities and legal documentation supporting the payment.

For a supported nil contribution, retain the calculation. The ATO’s policy does not require a token payment solely because the amount is nil.

After completion, compare the estimate with the final calculation and record contractual refunds or additional funding. A later top-up cannot retrospectively make an unreasonable pre-exit estimate reasonable. A valid estimate can differ from the final amount, so preserve what was known when the member left.

An amended assessment needs its own timing analysis. In limited circumstances, a member leaving after the original debt’s due time can leave clear of an anticipated amended debt. Obtain legal review of the relevant due time and pre-exit payment. Keep the original debt exposure separate from that analysis.

Recognise an Indirect Tax Sharing Agreement

An indirect tax sharing agreement addresses GST-group liabilities under separate rules. The GST group’s representative member carries the payment responsibility, and group members generally have joint and several exposure. The representative member’s full liability continues despite the agreement.

Under Schedule 1 section 444-90, the agreement must be entered into before the representative member must lodge the GST return. It must determine a contribution amount for each participating member and reasonably allocate the relevant indirect tax total for the tax period. A member outside the agreement generally retains joint and several exposure.

That differs from an income-tax agreement’s liability coverage and payment-based timing. GST-group membership can also differ from income-tax consolidation membership. Use the GST grouping records to identify the representative member, participating entities and membership changes for each tax period.

Collect each member’s external supplies, input tax credits and adjustments, together with any other relevant indirect tax amounts. Identify how the method handles credit members and amended amounts. The total allocated must match the group liability under that method.

The ATO’s indirect tax collection policy sets out separate execution and production requirements. Avoid overlapping agreements for the same tax period. Preserve the signed version and any required allocation schedule.

GST clear-exit timing also differs. The member must leave before the GST return is due, with payment to the representative member before the day the return is due. The anti-recovery condition still applies. An income-tax exit checklist requiring payment before departure cannot simply be copied as the statement of GST law.

Review the Agreement Against Actual Payments

Review the signed agreement against actual tax liabilities and settlements, with one record connecting each amount to its source. The file must let another practitioner reproduce the allocation without guessing which document applied.

Review record	Evidence to retain	Result to reconcile
Membership	Entry and exit records for each entity	Parties and periods match the calculation
Covered liability	Assessment, instalment or indirect tax records	Correct tax, period and due time
Allocation	Operative method, source accounts and working papers	Contributions match the covered total
Execution	Signed version, authority and accession documents	Binding agreement existed by the required time
Funding	Intercompany balances, transfers and refunds	Settlements match both entities’ records
Exit	Estimate, payment evidence and leaving time	Each claimed clear exit has its own evidence
ATO request	Notice, approved-form package and delivery receipt	Correct agreement supplied within the required time

For an income-tax agreement, an ATO notice can require production in the approved form within 14 days. Failure can cause the liability to be treated as never covered. An exited member has a separate statutory protection involving timely production of its copy, so retain accessible records after sale.

Revisit the method when membership changes, a new head company takes over or business operations change. Also review amended assessments, losses, funding shortfalls and changes affecting members’ ability to pay. Keep prior versions effective for their existing liabilities while the legal drafter settles changes for future liabilities.

If the schedule and group ledger differ, identify whether the cause is a liability change, a calculation error or an unsettled funding payment. Recalculate under the operative agreement, reconcile the revised schedule to the group ledger and send any required document amendment for legal execution.