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Reasonable methods of allocation

There's no prescribed method that must be used to allocate a group's indirect tax law liability.

Last updated 24 May 2017

The following are examples of what the ATO would consider reasonable bases of allocation:

We acknowledge that these allocation methods may result in certain entities being liable for less than, or more than, they would be if they were not members of a group.

Other methods using financial information normally available to the group may also be acceptable, provided each contributing member's contribution amount is a reasonable allocation of the total indirect tax law liability of the group for that tax period.

For each allocation method it's assumed that allocations are based on 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's also possible for each indirect tax liability to be accounted for and apportioned separately. For example, a group may separate its GST, LCT and WET component liabilities and apply the allocation method or methods to each individual component against the contributing members. Note that:

  • The legislation requires that ultimately there must be a single amount ('a particular amount') that is determinable in respect of each contributing member.
  • This amount must represent a reasonable allocation of the group's liability among the representative member and the contributing members.

Allocation based on each member's contribution to the 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 intragroup transactions. This may result in some members having a liability and others being in a net credit position (notional refund members).

The credits that accrue to notional refund members (that is, the input tax credits that remain after offsetting amounts of GST) may be:

Credits transferred

Notional refund members may choose to transfer their credit to other group members, as follows:

  • determine the notional indirect tax liability for each contributing member on the basis that it is not part of a group, ignoring intragroup 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.

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 other members' contribution amounts, 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.

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Credits not transferred

The ITXSA may specify that the credits accrued by 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 among the other members of 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. This method of allocation may still be considered reasonable.

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 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.

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Proportional allocation based on historical information

Unquantified indirect tax law liabilities may be allocated proportionally among members based on historical information if, at the time an ITXSA is put in place, the amount of the liabilities it is intended to cover have not been determined. For instance, the amount allocated to a contributing member could be calculated using the average contribution of that entity to indirect tax law liabilities over the previous 12 months. Allocations calculated using this method may need to be adjusted if there are changes in the group's structure (such as entries or exits), or changes to the individual member's operations. Depending on the timing and significance of these changes, a new ITXSA using a different methodology may be required.

Allocation based on each member's ability to pay

Liabilities may be allocated on the basis of each contributing member's ability to pay that liability.

Such an allocation may be considered unreasonable if, at the time of the allocation, the directors were aware that events would occur that would severely affect a member's ability to pay their allocation, but ignored that information.

If the entire group lacked sufficient funds to meet its liability for a tax period at the due date for lodgment of the GST return, an allocation may be considered reasonable despite one or more contributing members being unable to pay their contribution (for example, the entire group was insolvent as opposed to only one or more contributing members being insolvent).

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