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Focus: New rules make GST grouping more attractive

5 July 2010

In brief: The risks associated with membership of a GST group are reduced and joining and leaving a GST group is easier under new rules introduced by the Tax Laws Amendment (2010 GST Administration Measures No. 2) Act 2010 (Cth). Partner Ross Stitt and Lawyer Adam Ahmed report.

How does it affect you?

  • Members of a GST group are now able to limit their otherwise joint and several liability for the GST liabilities of the GST group, by entering into an indirect tax sharing agreement.
  • A member of a GST group that exits the group during a tax period is able to exit clear of any liability for the portion of that tax period that it was a member.
  • GST groups can form and dissolve, and new members can be added:
    • on a self assessment basis (pending notifying the Commissioner of Taxation (the Commissioner)); and
    • with effect on any day during a tax period.

Background

Any GST payable on a taxable supply that a member of a GST group makes is payable by the representative member of the GST group and not by the member that made the taxable supply. Conversely, the representative member is entitled to the input tax credit for any creditable acquisition that a member of the GST group makes. Certain elements of input tax credit entitlement are determined as if the GST group were a single entity. Subject to limited exceptions, a supply made within the GST group that would otherwise be treated as a taxable supply is treated as if it were not a taxable supply.

The general rule is that members of a GST group are jointly and severally liable to pay any GST that is payable by the representative member of the group. This liability would typically be triggered where the chosen representative member defaults in its obligation to pay the GST liability of the GST group.

Indirect tax sharing agreements

The new rules allow the members of a GST group to execute an indirect tax sharing agreement, which limits the joint and several liability that otherwise arises for members of a GST group.

A valid indirect tax sharing agreement:

  • places a limit on the individual liability of each GST group member for the GST liability of the GST group. This limit is the amount determined according to the terms of the indirect tax sharing agreement (the contribution amount); and
  • enables a member to leave the GST group during a tax period clear of any GST liability for the portion of the last tax period that it was a member of the GST group. This requires the leaving member to pay its contribution amount for that period, or a reasonable estimation of its contribution amount, to the representative member before the day on which the representative member is required to lodge the GST group's GST return for the period.

For an indirect tax sharing agreement to cover a GST group's GST liabilities in a tax period, it must:

  • be between the representative member, and one or more other members of the GST group (the contributing members);
  • be in place before the date the representative member of the GST group is required to give the Commissioner a GST return for the tax period;
  • determine the contribution amount for each contributing member; and
  • determine the contribution amount for each contributing member such that the contribution amounts represent a reasonable allocation among the representative member and the contributing members of the total GST payable.

However, notwithstanding the above, there are two circumstances under which an indirect tax sharing agreement will not be valid, namely, where:

  • the indirect tax sharing agreement was entered into as part of an arrangement to prejudice the recovery by the Commissioner of an indirect tax amount; and
  • the Commissioner gives the representative member a notice to provide a copy of the indirect tax sharing agreement and does not receive it within 14 days.

Self assessment for GST grouping

Entities can now self assess their eligibility to form, alter or revoke a GST group, and simply notify the Commissioner before the lodgment of the GST return for the relevant tax period.

Date of effect

The formation of a GST group, or changes to the composition of a GST group, take effect on the nominated date in a tax period, provided that the relevant notice is given to the Commissioner. This can be any day during the tax period. Previously, changes to GST group membership had to take effect from the beginning of a tax period.

General comments

While there have always been benefits to GST grouping, one of the major drawbacks has been the associated joint and several liability for group GST liabilities. This can be an issue when a member of a GST group seeks to borrow money, as lenders want to be comfortable that the entity will be able to repay the loan. Joint and several liability for GST of other group members can therefore be a complicating factor. It is also a problem when a GST group member is acquired by another entity, as it raises the possibility of unforseen liabilities. The new rules provide at least a partial solution to these problems, by limiting the liabilities of each group member and, in relation to the second problem, by providing a mechanism for the acquired entity to leave the GST group clear of any liabilities for the last tax period.

The new rules also make GST grouping administratively simpler, by allowing an entity to join or leave a GST group at any time during a tax period. This can be very useful when an entity is sold out of a GST group during a tax period.

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