Guide to Tax Consolidation

Guide To Tax Consolidation

Operating your business through multiple companies often complicate your tax compliance. Creating a tax-consolidated group can streamline the structure into a single entity for tax purpose, cutting compliance costs. This article outlines some of the process and considerations around forming a tax-consolidated group.

What is Tax Consolidation?

Tax consolidation is a tax arrangement that allows a group of related entities to be treated as a single entity for tax purposes. This means that the group consolidates its financial results and tax liabilities, simplifying the overall tax reporting process. In essence, it replaces the tax reporting of the individual entities into a single entity (the head entity).

What are the Reasons Behind Creating a Tax Consolidated Group?

Improved cash flow
By consolidating tax liabilities, businesses can offset losses against profits within the group, potentially leading to a reduction in tax payments and improved cash flow.

Reduced compliance requirements & costs
Numerous businesses can sometimes overlook the additional compliance and administrative expenses associated with establishing multiple companies. When multiple entities are formed, separate tax returns are required for each. By consolidating these entities, a singular income tax return covers the entire group, streamlining the admin work such as only one set of PAYG instalments for the group. 

GST Grouping could also enacted to organise a singular Business Activity Statement for the group as well.

Simpler R&D Tax Incentive & ESIC eligibility
Business groups might find the R&D Tax Incentive application simpler where the IP and R&D expenditure are less organised across a group (easy for founders to overlook in startup mode). 

Achieving the ESIC eligibility criteria for the 100 point test is also easier – just be wary about the combined income and expenses for the thresholds as well.

Interentity transactions have reduced tax considerations
If you have transactions in your group like management fees or asset transfers between group entities the resulting tax impacts are largely ignored for tax purposes.

When to Establish a Tax Consolidated Group?

A date must be nominated for when the Tax Consolidation arrangement starts. Nominating your tax consolidation date from the beginning of the financial year, (i.e. 1 July – in most cases) can mean you don’t have to engage in an additional part-year tax return (otherwise known as ‘stub’ return). It’s always best to get the ‘okay’ from your tax adviser on this date however.

Tax Sharing Agreements

A key drawback of establishing a tax consolidated group lies in the fact that while the holding company assumes tax payment obligations, every individual company bears full responsibility for the group’s collective activity. For instance, if the head company fails to cover the group’s income tax, the other companies become liable for reimbursement.

To address this, each company can adopt a Tax Sharing Agreement that allocates responsibility among group members. In the event that the holding company fails to settle the group’s income tax, each group member would only be held accountable for their specified portion as outlined in the Tax Sharing Agreement. Moreover, the agreement can also specify the procedures to be followed when a company decides to exit the group or when a new company wishes to join it.

What are the Steps for Establishing a Tax Consolidated Group

1. Seek Professional Tax & Accounting Guidance

Prior to initiating the formation of a tax-consolidated group, it is prudent to seek comprehensive advice on business structure and taxation. The consolidation regime can require a detailed calculation and assessment on whether consolidation is possible, evaluating the impact and advising tax & accounting actions required for doing so. A chartered accounting firm like Fullstack is best placed to advise on this project.

Delaying group formation after entity establishment might lead to more pronounced tax consequences later on – particularly where market value of assets need to be determined for the consolidation. Once the decision to consolidate is made, reversal becomes unfeasible.

2. Review Company Minutes and Resolutions

Review your company’s constitution and shareholders agreement to gauge the ability of the group to pursue a consolidation resolution. It is crucial to meticulously document this determination to consolidate through appropriate company minutes and resolutions.

3. Inform the Australian Tax Office (ATO)

To execute group consolidation, the holding company or its registered tax agent must inform the Australian Tax Office by completing and submitting a Notification of Formation of an Income Tax Consolidated Group Form, prior to either:

  • The lodgment of your income tax return for the fiscal year in which consolidation transpires, or
  • The due date of your income tax return if your head company is exempt from lodgment, the ATO must be notified of the group’s formation.

Key Takeaways

Tax consolidated groups offer a means for businesses operating with multiple entities to streamline tax payments and cut compliance expenses. Assessing the suitability of forming a group by consolidating companies is a crucial step and irreversible once taken.

If you require guidance on your business structure or the process of creating a tax-consolidated group, you can reach out to the chartered accountants at Fullstack who establish and look after plenty of tax consolidated groups.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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