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.
Corporate groups and GST
The GST grouping provisions allow entities with common ownership
or membership that operate as a single business to form a group for
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.
Joint ventures and GST
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
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.
Indirect tax sharing agreements
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
Indirect tax funding agreements
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.
What should you do?
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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