Tax Funding Agreements

Tax financing agreements complement tax-sharing agreements and determine how subsidiaries finance the payment of taxes by the main company and when the main company is required to make payments to subsidiaries for certain tax attributes generated by those subsidiaries and which benefit the group as a whole (e.g. B tax losses and tax credits). Business groups are encouraged to consider tax-sharing agreements and tax financing agreements as part of their accession to the tax consolidation system. We recommend that you check your client`s circumstances. If the client is consolidated for tax purposes and does not have a tax sharing agreement or tax financing agreement, please call a member of our team to discuss your client`s needs. Under the new International Financial Reporting Standards, tax groups must ensure that they have a tax financing agreement that applies an “acceptable allocation method” according to the Urgent Issues Group`s (UIG) 1052 Tax Consolidation Accounting interpretation. If the tax financing agreement does not provide for an “acceptable allocation method”, group members may be required to account for dividends and capital distributions or capital injections considered capital deposits in their accounts. However, any subsidiary may be held jointly and severally liable to the Australian Tax Office for the total amount of a group income tax debt if the principal company is in arrears in the payment of that obligation. This joint and several liability may have negative consequences for the group, in particular as regards external financing arrangements, solvency requirements, audits of credit rating agencies, the sale of subsidiaries and the obligations of directors. When included in the tax consolidation regime, enterprise groups should consider how best to minimize the application of joint and several liability in respect of the group`s income tax liabilities. They must also consider how the subsidiaries finance the payment of these debts by the main company. Both of these issues can be managed by groups of companies through tax-sharing agreements and tax financing agreements.

Tax financing treaties also determine the tax accounting entries in the financial statements of members of tax groups (i.e. .