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Australia – Stop. Review. Update. What’s The State Of Your TSA And TFA?

4 June, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Tax

 

Tax Sharing and Tax Funding Agreements – what companies should be considering in light of recent legislative and administrative developments

 

What You Need To Know

 

  • The recent introduction of PAYG monthly instalments is causing many corporate taxpayers to review their existing tax sharing and funding arrangements. 
  • The ATO has also recently updated its policy on TSAs in Practice Statement PS LA 2013/5. While confirming many points in the original policy introduced in 2003, there are a number of important changes to be aware of that may affect your group’s tax sharing arrangements. 
  • Given the recent legislative and administrative changes, now is a good time to review and update your TSA and TFA.

 
What You Need To Do

 

  • Review your TSA and TFA if you have not done so in the past few years.
  • Consider whether amendments are needed to reflect the latest legislative and administrative developments. 

 
Background

 
The income tax consolidation regime is now over a decade old. For many corporate groups, their Tax Sharing Agreement (TSA) and Tax Funding Agreement (TFA), which will have been put in place at the start of the consolidation regime, will be just as old. Many of these agreements will not have been reviewed or updated for years.

 
The recent changes to the PAYG instalment rules, which require large corporate taxpayers to pay PAYG instalments on a monthly basis, have caused many corporate taxpayers to rethink their tax funding arrangements to reduce the administrative burden of having tax funding payments flowing between group members on a monthly basis. In conjunction with these TFA changes, corporate taxpayers are also taking the opportunity to update their TSAs.

 
The Commissioner of Taxation (Commissioner) has also recently updated his policy in relation to the collection of consolidated group liabilities and TSAs in Practice Statement PS LA 2013/5 (Practice Statement). While the Practice Statement confirms much of the original policy statement in the ATO Receivables Policy (released in 2003), various changes have taken place since 2003 that may impact existing TSAs.

 
The recent PAYG monthly instalment changes and the release of the new Practice Statement makes it a good time for corporate groups to review their TSA and TFA and check whether any amendments are needed to reflect the latest legislative and administrative developments.

 
This article sets out some of the key areas for consideration when reviewing and updating your TSA and TFA.

 

What You Should Consider

 
Changes In Relation To Monthly PAYG Instalments

 
From 1 January 2014, certain corporate tax entities are required to pay their PAYG instalments on a monthly basis.

 
The move to monthly instalments has caused a number of taxpayers to reconsider their funding arrangements for PAYG. These taxpayers have sought to amend their PAYG funding arrangements to provide for more flexibility and to reduce the administrative burden of undertaking formal funding calculations, notifications and payments on a monthly basis.

 
There is no prescribed approach and a range of different approaches are available. What is the best approach will depend on the group’s funding and cash arrangements, management reporting arrangements and current tax accounting systems.

 
As the TFA is merely a contractual arrangement between the group members which, unlike the TSA, does not have any legislative requirement, there is a great deal of flexibility to craft funding obligations which are commercially practicable and align with internal processes that the group actually wishes to follow.

 
New Group Liabilities

 
A number of new group liabilities have been added to the table in section 721-10(2) of the Income Tax Assessment Act 1997 (Cth) (ITAA 97) since the consolidation regime was first introduced. New group liabilities that have been added to the table include franking deficit tax, shortfall interest change and most recently, PAYG monthly instalment group liabilities.

 
These changes require amendments to be made to existing TSAs. TSAs need to be amended to add new allocation clauses to cover the new group liabilities that have been added to the table since the consolidation regime was first introduced.

 
Failure to update the TSA in this way will result in those group liabilities not being covered by the TSA. As a result, subsidiaries will be jointly and severally liable for these group liabilities in the event of a head company default.

 
Accessions Of Subsidiary Members

 
Tax groups should ensure that all records are updated to reflect the current members of the tax consolidated group.

 
New members who have joined a tax consolidated group should be made party to the group’s TSA as soon as possible. This will typically require new members to execute a deed of accession to the group’s existing TSA.

 
Failure to accede a new subsidiary member to the TSA can result in the allocation of a group liability being unreasonable. The consequence of this is that the TSA will become invalid for this group liability.

 
Releases Of Subsidiary Members

 
It is also important for subsidiaries that exit the consolidated group to be properly released from the TSA.

 
In our experience, problems have arisen where a subsidiary has exited from a group and been incorrectly released from the TSA for past tax periods. These issues may arise, for example, because pro forma deeds of release have not been updated to reflect changes to the due date for amended assessments introduced in 2005.

 
If an exited subsidiary is incorrectly released for past periods, this can result in the TSA being invalid for those past periods. It could also result in the subsidiary failing to achieve clear exit from the consolidated group and all subsidiaries being jointly and severally liable for the group’s taxes for these past periods.

 
In light of this, review and amendment to the pro forma deeds of release typically annexed to the TSA should be considered to ensure that the release of a subsidiary operates for the correct periods.

 
Liquidated And Deregistered Subsidiaries

 
Some interesting issues arise where subsidiary members of a tax consolidated group are deregistered or liquidated.

 
For example, where a liquidated or deregistered member ceases to be a party to the group’s TSA, this could cause the TSA to be invalid for periods during which it was a member of the group in certain circumstances.

 
Another issue is that TSAs and TFAs typically require exit procedures to be followed (including making “clear exit” payments), and releases to be given, by all subsidiaries that exit the tax consolidated group. This can include subsidiaries that exit the group as a consequence of liquidation or deregistration, but exit procedures are often not followed for deregistered or liquidated subsidiaries.

 

Where clear exit for a liquidated or deregistered member does not occur, it leaves open the possibility for additional group tax liabilities for periods during which the entity was a member of the group (eg, as a result of an amended return) and liability issues for the entity’s directors.

 
Therefore, clear exit procedures are still important for liquidated and deregistered subsidiaries.

 
Changes In Group Liability Item Numbers

 
The types of group liabilities that can be covered by a TSA are listed in Item numbers in the table in section 721-10(2) of the ITAA 97.

 
Over the years, a number of these Item numbers have changed – for example, income tax was previously Item 25 but has now changed to Item 3.

 
Although many TSAs will have “interpretation” clauses which allow references to outdated Item numbers to be read as references to the new Item numbers, to avoid any doubt whether a TSA covers a particular group liability, it is be prudent to update the TSA to replace the old Item numbers with the new Item numbers.

 
Amendment Or restatement Of The TSA?

 
In our experience, it is generally preferable to amend a TSA rather than restate the entire TSA in connection with an amendment.

 
The preference for amendment rather than restatement is for two reasons:

 

  • to avoid inadvertently having two TSAs which cover the same group liability (if this is the result of a restatement, both TSAs will be invalid by operation of section 721-25(1B) ITAA 1997); and 
  • to avoid having multiple TSAs in existence each covering different periods of time.

 
While amendment to a TSA is the preferable option for most tax consolidated groups, careful attention should be given to the requirements of the amendment provisions in the relevant TSA to ensure that the amendment is legally effective.

 
For example, is it a legal requirement for former TSA parties (which have not been correctly released) to sign amendments to the TSA? This may be practically difficult to achieve in relation to subsidiaries that have exited the group (either by sale to a third party or by liquidation) but were not released from the TSA prior to exit.

 
To alleviate the practical difficulties with amending the TSA, amendments to the amending provisions should also be considered to simplify the amendment procedures going forward.

 
Tax Funding

 
Many of the issues discussed above will be equally applicable to TFAs. For example, updates to deal with changes to Item numbers and new group liabilities, accessions and releases and issues with amendments to documentation, are equally applicable to TFAs as they are to TSAs.

 
It is also important for tax groups to continually review their TFA to ensure that it complies with the relevant accounting standards, including updated versions of the AASB compiled Urgent Issues Group (UIG) Interpretation 1052 – Tax Consolidation Accounting (UIG 1052).

 
Compliance with UIG 1052 is important to ensure that the accounting effects of tax consolidation do not result in adverse consequences for the group under the accounting standards (with the broad aim being to ensure that tax consolidation effects do not result in adjustments being made through contributions to, or distributions from, equity).

 
In our experience, a number of older TFAs are not based on UIG 1052, or are based on older versions of UIG 1052, and may not result in the desired accounting treatment.

 
It is therefore important that tax groups are up to date with the requirements set out in the updated version of UIG 1052 and make sure their TFA complies with the requirements set out in the Interpretation. This will ensure that the TFA results in the desired accounting treatment for tax consolidation effects.

 

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For more information, please contact:

 

Vivian Chang, Partner, Ashurst 
[email protected]


Sanjay Wavde, Ashurst
[email protected]

 

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