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  • Examples

    Example 1: Contribution to liability method, where credits are allocated

    X Co is the representative member of the GST group (the group).

    A Co, B Co and C Co are also members of the group and have entered into an ITXSA with X Co covering indirect tax amounts payable in respect of period Y. The ITXSA was entered into before X Co was required to give the Commissioner a GST return for period Y.

    The members ordinarily make supplies to, and acquisitions from, entities outside the group except for A Co, which primarily makes supplies to the other members of the group.

    The method of allocating the contribution amounts for each member of the group under the ITXSA is based on each member's individual contribution to the group's liability (the contribution to liability method) taking GST, input tax credits and adjustments into account. The contribution amounts are subsequently allocated on a pro rata basis.

    For the purposes of applying the contribution to liability method, A Co's net indirect tax law liability is determined to be a credit as a result of primarily making supplies to other members of the group (which are treated as not being taxable supplies). This credit is applied to, and reduces, the indirect tax law liabilities payable by the group.

    The group's indirect tax law liability for period Y remains unpaid and the Commissioner commences recovery action against the members of the group.

    The table below summarises the information from the ITXSA that X Co, as the representative member, provides the Commissioner with respect to period Y.

    Example of information from X Co to the Commissioner for period Y

     

    GST group

    (X Co is the representative member)

    Contributing members' liabilities

    X Co

    A Co

    B Co

    C Co

    Indirect tax law liabilities:

    GST - ITC

    $60,000

    $50,000

    ($40,000)

    $25,000

    $25,000

    Balance payable

    $60,000

    % of liability

    100%

    50%

    0%

    25%

    25%

    ITXSA contribution amounts

    $60,000

    $30,000

    (Note - for the representative member, this is a notional allocation)

    $0

    $15,000

    $15,000

    B Co and C Co's exposure to joint and several liability is limited each to $15,000.

    Despite A Co having a 'nil' contribution amount it is still necessary for it to be a participant in the ITXSA to avoid joint and several liability.

    While X Co as the representative member remains 100% liable for the group debt, it can be allocated an amount under the ITXSA in accordance with a methodology aimed at a reasonable allocation among the representative member and the contributing members. As a result, while X Co has a notional allocation of $30,000 under the ITXSA, it continues to be fully liable for the debt, and the contributing members' liabilities are limited to the extent of their allocations pursuant to the ITXSA.

    If an amended assessment issues, reversing A Co's credit and thereby increasing the group's indirect tax law liability by $40,000, the members' contribution amounts under the ITXSA would need to be amended. The contribution amounts would be increased, in accordance with the allocation method, by the following amounts:

    Example of increase to contribution amounts

     

    GST group

    (X Co. is the representative member)

    Contributing members' liabilities

    X Co

    A Co

    B Co

    C Co

    Additional liability (over claimed credits)

    $40,000

    % of liability

    100%

    50%

    0%

    25%

    25%

    Increase to contribution amounts

    $40,000

    $20,000

    (Note - for the representative member, this is a notional allocation)

    $0

    $10,000

    $10,000

     

     

     

    End of example

     

    Example 2: Contribution to liability method, where credits are not allocated

    X Co is the representative member of the GST group (the group).

    A Co, B Co and C Co are also members of the group and have entered into an ITXSA with X Co covering indirect tax amounts payable in respect of period Y. The ITXSA was entered into before X Co was required to give the Commissioner a GST return for period Y.

    The members ordinarily make supplies to, and acquisitions from, entities outside the group except for A Co, which primarily makes supplies to the other members of the group.

    The method of allocating the contribution amounts for each member of the group under the ITXSA is based on each member's individual contribution to the group's liability (the contribution to liability method). However, each member's allocation is not made on a pro rata basis.

    For the purposes of applying the contribution to liability method, A Co's net indirect tax law liability is determined to be a credit as a result of primarily making supplies to other members of the group (which are treated as not being taxable supplies). This credit reduces the indirect tax law liabilities payable by the group.

    The group's indirect tax law liability for period Y remains unpaid and the Commissioner commences recovery action against the members of the group.

    The table below summarises the information from the ITXSA that X Co, as the representative member, provides the Commissioner with respect to period Y.

    Example of information from X Co to the Commissioner for period Y

     

    GST group

    (X Co is the representative member)

    Contributing members' liabilities

    X Co

    A Co

    B Co

    C Co

    Indirect tax law liabilities:

    GST - ITC

    $80,000

    $20,000

    ($40,000)

    $50,000

    $50,000

    Balance payable

    $80,000

    ITXSA contribution amounts

    $120,000

    (but the Commissioner cannot recover more than the total of $80,000)

    $20,000

    (Note - for the representative member, this is a notional allocation)

    $0

    $50,000

    $50,000

    While X Co as the representative member remains 100% liable for the group debt, it can be allocated an amount under the ITXSA in accordance with a methodology aimed at a reasonable allocation among the representative member and the contributing members. As a result, while X Co has a notional allocation of $20,000 under the ITXSA, it continues to be fully liable for the debt, and the contributing members' liabilities are limited to the extent of their allocations pursuant to the ITXSA.

    As the contribution amount for each member is not calculated on a pro rata basis, B Co and C Co's liability remains at $50,000. This is the indirect tax law liability that B Co and C Co would have on their own if the representative member was not responsible for the obligations and entitlements of the group.

    As a result, the sum of all the members' contribution amounts (including X Co's notional contribution amount) is more than the GST group's total indirect tax law liability. In this case, the sum of the members' contribution amounts is $120,000, while the GST group's total indirect tax laws liability is only $80,000.

    However, the Commissioner cannot recover more than the sum of the group's total indirect tax law liability of $80,000 from the group. That is, while the Commissioner may recover the full amount of the contributing liability allocated to a member, he cannot recover more than $80,000 from the group in total. Therefore if $50,000 is recovered from B Co, the Commissioner can only recover the balance of $30,000 from the remaining members. Alternatively, the Commissioner has the right to recover up to $50,000 from C Co, but if this debt is fully satisfied by C Co, the Commissioner can only pursue the balance of $30,000 from X Co and B Co.

    If an amended assessment issues, reversing A Co's credit and thereby increasing the group liability by $40,000, only A Co's contribution amount would need to be amended. In this case, A Co's contribution amount would be increased by $40,000, representing the amount it had over-claimed. The other members' contribution amounts under the ITXSA would not need to be amended.

    End of example

     

    Example 3: Chain supply scenario

    X Co is the representative member of the group.

    A Co, B Co and C Co are members of the group and have entered into an ITXSA with X Co covering indirect tax amounts payable in respect of period Z. The ITXSA was entered into before X Co was required to give the Commissioner a GST return for period Z.

    The group manufactures and sells goods through a supply chain comprising the members. The goods are manufactured by X Co and supplied to A Co, which in turn supplies to B Co, and then to C Co, which as the retailing entity supplies the goods to customers outside of the group.

    As with example 1, the group uses the contribution to liability method under the ITXSA in which the member's contribution amount is based on its individual contribution to the group's liability.

    The group's indirect tax law liability for period Z remains unpaid and the Commissioner commences recovery action against the members of the group.

    The table below summarises the information from the ITXSA that X Co, as the representative member, provides the Commissioner with respect to period Z.

    Example of information from X Co to the Commissioner for period Z

     

    GST group

    (X Co is the representative member)

    Contributing members' liabilities

    X Co

    A Co

    B Co

    C Co

    Indirect tax law liabilities:

    GST - ITC

     

    $0

    $0

    $0

    $60,000

    Balance payable

    $60,000

    % of liability

    100%

    0%

    0%

    0%

    100%

    ITXSA contribution amounts

    $60,000

    $0

    $0

    $0

    $60,000

    As intragroup supplies and acquisition are not treated as taxable supplies or creditable acquisitions for GST purposes, the only entity that makes taxable supplies in period Z is C Co, as the supplier of the goods to customers outside of the group. Consequently, 100% of the group's indirect tax law liability is attributed to C Co under the terms of the ITXSA.

    Despite X Co having a 'nil' notional allocation under the ITXSA it continues to be responsible for 100% of the liability.

    Despite A Co and B Co having 'nil' contribution amounts it is still necessary for each entity to be a participant in the ITXSA to avoid joint and several liability.

    This method of allocation may be considered reasonable provided there is no arrangement that has a purpose of prejudicing recovery of the liability. A greater degree of scrutiny will be given to the matter if, for example, C Co possesses insufficient assets to satisfy the liability.

    End of example

    See also:

      Last modified: 25 May 2017QC 26371