• Indirect tax sharing agreement – reasonable allocation of indirect tax law liability

    In order for an indirect tax sharing agreement (ITXSA) to apply to a GST group's indirect tax law liabilities for a particular tax period, the contribution amounts for each contributing member must represent a 'reasonable allocation', among the representative member and the contributing members, of the group's total indirect tax law liability for that period: paragraph 444-90(1A)(c) of Schedule 1 to the Taxation Administration Act 1953 (TAA).

    An ITXSA may specify fixed contribution amounts for each contributing member. These contribution amounts must represent a 'reasonable allocation' among the representative member and the contributing members. Alternatively an ITXSA may prescribe a method of allocation under which contribution amounts may be determined. In such cases, it will be necessary to ensure that any method of allocation prescribed under the ITXSA will ultimately produce contribution amounts that represent a 'reasonable allocation' among the representative member and contributing members.

    Without prescribing the method that a group may adopt for allocation of the indirect tax law liability, examples of what the Commissioner would consider as being possible bases of allocation are:

    • Allocations on the basis of each contributing member's contribution to that liability. Under this method of allocation, each member's contribution amount is calculated as if that member were not part of a GST group, ignoring intra-group transactions. This may result in some members having a liability, while others may be in a net credit position (notional refund members). The credits which accrue to notional refund members (that is, the input tax credits that remain after offsetting amounts of GST) may be taken into account in two ways
      • credits transferred to, and apportioned amongst, members with notional debt (see Table1 for more details)
      • credits not transferred to members with notional debt (see Table 2 for more details).
       
    • Allocations of a proportion of unquantified indirect tax law liabilities by using historical information if, at the time an ITXSA is put in place, the quantum of the liabilities which it is intended to cover have not been determined. For instance, the amount allocated to an ITXSA contributing member could be calculated using the average contribution of that entity to the indirect tax law liabilities over the last 12 months. However, changes in the group's structure, for example, because of entries and/or exits, or changes to individual member's operations, may mean that the contribution amounts calculated under this method would need to be adjusted to account for these movements. Depending on the timing and significance of these changes, a new ITXSA using a different methodology may need to be entered into.
    • Allocations on the basis of each contributing member's ability to pay that liability. However, if, at the time of allocation, the directors were aware that events would occur that would severely affect one or more member's ability to pay their allocation, but the directors ignored that information, then the allocation may be viewed as unreasonable. If it was the case that, at the due date for lodgment of the GST return, the entire group lacked sufficient funds to meet the liability for that tax period, an allocation may be considered reasonable despite one or more contributing members being incapable of paying their contribution amount (for example, the entire group was insolvent as opposed to only one or more contributing members being insolvent.

    Table 1: Credits transferred to, and apportioned amongst, members with notional debt

    Notional refund members may choose to have the amount of their credit transferred between group members so that the notional refund members receive a 'nil' allocation and the members in a net liability position receive an allocation of a share of the credit.

    This approach may be summarised as follows:

    • determine the notional indirect tax liability for each contributing member on the basis that it is not part of a group, ignoring intra-group transactions
    • allocate the notional refund members a 'Nil' liability under the ITXSA, and
    • apportion the amount of any credits to members with a tax liability; or allocate to each ITXSA contributing member (that still has a notional tax liability) a portion of the indirect taw law liability on a pro rata basis.

    Note that any increase in the group's liability following an amended assessment resulting from incorrectly over claimed credits by a notional refund member should, in principle, increase the contribution amounts of the other members which had previously been reduced by the allocation of the (incorrectly claimed) credits. Although it was the notional refund member who incorrectly over claimed the credits, the ITXSA allocation methodology spreads the adjustment across other members of the group. This does not jeopardise the reasonableness of the allocation.

    Refer to example 1 in the appendix below for an illustration of how these types of allocations may work in practice.

    Table 2: Credits not transferred to members with notional debt

    Alternatively, the methodology may dictate that the credits accrued by the notional refund members should not be used by the other group members. That is, the notional refund members will have a 'nil' contribution amount, but the amount of their credits will not be redistributed amongst the other members in the group.

    As the contribution amounts of the other members are not reduced by the notional refund members' credits, the total amount of the ITXSA contribution amounts payable by all contributing members will exceed the net amount payable by the group. However this method of allocation may nonetheless be considered reasonable.

    Under this method of allocation, any increase in the group's liability following an amended assessment resulting from incorrectly over claimed credits by a notional refund member will, in principle, be attributed to that member such that it will now have a contribution amount equal to the amount of the increased liability. The contribution amounts of the other members will not need to be amended.

    Refer to example 2 in the appendix below for an illustration of how these types of allocations may work in practice.

    It is assumed in all the above examples that allocations are made on the basis of the sum of all indirect tax liabilities for that tax period, such that each contributing member receives an allocation based on a portion of the total amount of the liabilities. However it is also possible for each indirect tax liability to be accounted for and apportioned separately. For example, a group may consider it appropriate to separate the GST, LCT and WET component liabilities and apply the allocation method or methods to each individual component against the contributing members. It should be noted however that the legislation requires that ultimately there must be a single amount ('a particular amount') that is determinable in respect of each contributing member. Further, it is this amount that must represent a reasonable allocation of the group's liability among the representative member and the contributing members.

    The methods of allocation outlined above are not intended to be prescriptive and other methods using financial information normally available to the group may be acceptable, provided that each contributing member's contribution amount can ultimately be considered to represent a reasonable allocation of the total indirect tax law liability of the group for that tax period.

    It is also accepted that above mentioned methods of allocation may result in certain entities being liable for less than, or more than, they would be if they were not members of a group.

    As will be seen in the examples below, there may be cases where the representative member is a contributor to the group's indirect tax law liability for a tax period, and the amount allocated to the ITXSA contributing members (other than the representative member) is less than 100% of the total amount of the liability because a portion of the liability is a notional allocation to the representative member. This is acceptable as long as the requirements of the legislation (for example, the allocations represent a reasonable allocation of the total amount of indirect tax payable in relation to that tax period) are satisfied.

    It is recognised that the financial position of individual members may change between the date on which the ITXSA is entered into and the date (if any) on which the contribution amount is pursued by the Commissioner, particularly where the contribution amount is pursued some years after the due date. Accordingly, it is possible that a contributing member may not be able to pay its full contribution amount by the time the Commissioner seeks to recover that amount. However, provided that the original allocation was in accordance with the methodology of the ITXSA and was reasonable at the due date for lodgment of the GST return and provided, also, that there are no adverse circumstances relating to the validity of the ITXSA (for example, the ITXSA was part of an arrangement to prejudice recovery), the Commissioner will recognise the ITXSA as being valid.

      Last modified: 22 May 2014QC 26371