Under Australia’s tax consolidation regime, entities under 100% common ownership can be grouped for tax purposes. The ‘Head Company’ of the tax consolidated group is primarily liable for all of the income tax liabilities of the group entities and lodges a single tax return for the group.
However, under the tax legislation, each subsidiary in the group may be jointly and severally liable for the entire group tax liability, in the event that the head company defaults in paying that liability.
This can create difficulties, particularly in the event of external sales of subsidiaries, but also for example with external funding arrangements, directors’ duties, adjustments to financial statements and solvency and rating reviews.
To deal with the vexed issues of joint and several liability and with how the group’s tax liabilities are to be funded amongst its members, corporate groups tend to rely on Tax Sharing Agreements and Tax Funding Agreements. It is prudent to have these in place from the beginning, and not to wait for an external sale, funding or other needs before acting.
However, the agreements can be entered into at any time following formation of a tax consolidated group, and new members can ‘sign up’ to the agreements under a Deed of Accession.
Tax Sharing Agreements and Tax Funding Agreements are also relevant for Multiple Entry Consolidated (MEC) groups.
Joint and several liability also arises under GST groups, so an Indirect Tax Sharing Agreement is also commonly used.
Tax Sharing Agreements overcome joint and several liability for mainly income tax purposes by contractually allocating the group’s income tax liabilities among group liabilities on a ‘reasonable’ basis. Portoria’s agreements do this using the common method of notionally treating each entity in the group as a stand-alone entity and by applying clear rules, grounded in the tax laws, to reasonably allocate the group’s tax adjustments.
This allows companies leaving the tax group (for example on a sale to a third party) to rely on the ‘clear exit’ rule which limits that leaving company’s exposure to the joint and several tax liabilities of the whole group.
In practice, a buyer from a tax consolidated group would normally want the seller group to have entered into valid tax sharing and to comply with the other requirements of the clear exit rules.
Tax Funding Agreements typically work in tandem with Tax Sharing Agreements by setting out:
It is a requirement of the tax effect accounting standards (AASB 112 and UIG Interpretation 1052 Accounting for Income Taxes) that tax consolidated groups have a Tax Funding Agreement that uses an ‘acceptable allocated method’ for group tax liabilities. This enables the head company and group members to record tax accounting entries in the financial statements of each group member – otherwise groups may have to recognise deemed intra-group dividends, capital distributions or capital contributions in their accounts.
An Indirect Tax Sharing Agreement applies similar principles to allocate the GST liability on a reasonable basis among the members of a GST Group. A different methodology is used to do this because the nature of the tax liabilities is quite different. Also note that a GST Group can be constituted quite differently to a Tax Consolidated Group and a separate agreement is needed.
Similar to a Tax Sharing Agreement, a valid Indirect Tax Sharing Agreement enables a member to exit the GST group on sale to a third party with a ‘clear exit’ without exposure to the joint and several GST liabilities of the whole group.
It is highly recommended to have an Indirect Tax Sharing Agreement in place.
Acutech will arrange for you to order and receive one or more grouping agreements from our Professional Adviser as follows:
Portoria Legal Services Pty Limited
Cryptocurrencies have just reached their tenth birthday, but surprisingly their taxation treatment remains uncertain and they continued to be viewed with suspicion by revenue authorities. The Australian taxation system has been making steps to better define their tax treatment, together with a wider strategy to curtail their secret use within the black economy. This all serves to legitimise digital currencies as they navigate their preferred path in the stateless ether of the global digital economy on the outer reaches of traditional regulations. Perhaps taxation will act as the ‘leveller’, holding cryptocurrencies close enough to maintain sufficient visibility to collect tax payments, but far enough away to allow continuous innovation in competition with sovereign currencies.
What does a cryptocurrency look like through a taxation lens? For Australian goods and services tax (GST) purposes, we have a statutory definition of “digital currency”. In response to concerns from the fintech industry that transacting in cryptocurrencies was leading to double taxation of GST, digital currencies now have a GST free status akin to money or foreign currency. This leads to more efficiency and less paper work.
Not all cryptocurrencies will qualify for this treatment as the rules are very prescriptive requiring features very close to traditional money, such as:
Traders in digital currencies need to be aware that, like money or foreign currency, the supply of cryptocurrencies in coin-to-coin or coin-to-currency transactions may be an input taxed financial supply, meaning GST credits on things purchased by a business to make the trade (e.g. brokerage and other transactions costs) may not be claimable. For a GST registered business, this requires closer analysis to assess the impact and whether exemptions are available.
The Australian Taxation Office (ATO) has been busy releasing guidance and determinations on the income tax treatment of cryptocurrencies such as bitcoin, which serves to better define and recognise digital currencies within the mainstream; legitimisation through taxation.
The income tax rules are less friendly than GST, as the ATO views digital currencies as capital gains tax assets for investors and as trading stock for businesses which trade in cryptocurrencies. Annoyingly, this means that every transaction involving a cryptocurrency needs to be converted to Australian dollars (AUD) at market value precisely on the date of the deal. This requires a knowledge of the AUD market value of the relevant cryptocurrency, which may not be readily available. Wild fluctuations in the volatile markets for this medium may unfairly distort the AUD income recognised on cryptocurrency transactions, and therefore the amount of tax to pay. The ATO also requires records to be kept of cryptocurrency transactions, which can be difficult to find with the passage of time.
Much to the frustration of the cryptocurrency community, regulatory intrusions into their world are increasing, both in Australia and across the globe, as sovereign states seek to impose their own sense of order, including:
Despite the regulatory storm clouds, it is quite clear from their popularity that cryptocurrencies are used by many for legitimate purposes. Necessarily, when they touch on nation states, usually through the taxation system and transactional tracking, digital currencies will gain greater legitimacy. Just as cash is not ‘bad’, but rather it’s the ‘bad guy’ who conceals it for illegitimate ends, the bad or good use of cryptocurrencies depends on the user. In the long run, the underlying blockchain technology may provide powerful benefits leaving a digital trail helping to disrupt tax avoidance, corruption and international crime.
After many years in a large firm advising clients on business and tax laws, I have ‘jumped the fence’ to join the world of startups focusing on the digital disruption of professional services, building my own pathway to providing ethical and reliable online tax and legal advice, available to all. Having founded my own startup, Acutech, Australia’s first automated online tax and legal advisory app, I have been keen to stay on the right side of the strict regulatory rules governing the professions, particularly lawyers.
Enter the disruptors. With the advent of legal tech startups, new technologies and business models are beginning to eat into the relatively stable statutory monopoly enjoyed over many years by the legal profession. The traditional boundaries are becoming more uncertain as legal tech startups make incursions into areas where qualified lawyers generally practice, both within a law practice (internal disruption) and by competing with the services provided to clients by a law practice (external disruption). The root cause of this disruption is the client; their needs and their demand for value.
The legality of the services of legal tech startups brush up against several regulatory boundary lines, including:
In conjunction with work I have been doing with the University of Sydney Business School, I have researched the regulatory landscape both in Australia and overseas. Some key findings and recommendations from my research paper:g through a ‘NewLaw’ lens of disaggregation of the legal profession and the unbundling of legal services, the question now needs to be asked whether all the acts of “advising”, “assisting”, “drafting” and acting for a party are acts carried on in the practice of law? Many tasks can be broken down and be performed by the client, a pre-programmed computer, other experts and legal tech startups which each in themselves do not necessarily require the provision of legal services. Indeed, in Legal Services Commissioner v Walter, Daubney J found that it was the “combination” of services that contributed to his findings that the respondent unlawfully carried on the profession of law.
How has Acutech resolved these challenges? Our market research shows that users value a professional sign off that they can rely on. We build the professional adviser into our solutions. You receive a signed off solution under a professional services contract tailored to your particular circumstances to suit your needs. Now that’s legal!
At Acutech we’ve been researching how artificial intelligence (AI) is eating into the $200 billion income of the professional, scientific and technical services market, ultimately to the benefit of the users of these services; the customers and clients.
Much of this income is taken home by about 1 million employees and proprietors as salaries and profit distributions. They work across a range of occupations as architects, accountants, IT consultants, engineers, lawyers, management consultants, scientists and more. Many readers of this article will be working in one of these sectors and no doubt will have their own views on whether their unique skills can be replaced by AI or not.
The future is positive. More people having useful jobs. Greater diversity of people involved in delivering solutions. Clients playing a greater role in shaping the advice they truly need. All assisted by a vast array of technological tools, enablers and bots.
Machines that do the routine stuff so people can get on with the hard stuff that needs time, thought and a human touch.
Looking at our findings in the table above, drawn from the last census data, we can see 200 billion good reasons to sit up and take notice. Let’s put some faces on these numbers.
Customers and clients – who annually pay the ‘sales income’ totalling approximately $200 billion across all these sectors. These are the people who have a problem and decide where they should go to find an answer.
Experts who do the work – naturally they ‘take home’ a significant portion of what the client pays (across all the sectors, it’s over half).
In the table we can see that lawyers and accountants take home roughly 65% of the fee. This reflects the well proven professional services business model with roughly an even split of 1/3 for the staff, 1/3 for the practice expenses and the remaining1/3 as profits for the partners. The fee is collected through the hourly charge-out rate, traditionally used as a measure of effort, set at roughly 3 three times the expert’s salary to achieve the above split. This traditional model is all about the expert who is ‘charged out’ to the client, with little focus on ‘value to’ the client.
Enter the disruptors. New technologies and business models are beginning to eat into the seemingly endless glory years experienced by the top end professionals.
But it’s not just about reducing costs. Clients are simply demanding value. They want more convenience, online digital delivery, an ability to own and manipulate the advice and get answers to what they really need, not what their good-natured adviser perceives they need. AI can help a client ‘triage’ the problem so they can accurately scope what they need and (here’s the rub), if and how they use advisers.
Nor is it about computers replacing humans. New business models, enabling non-professional experts to solve discrete elements of the client’s problem, also deliver better outcomes and value. This is called disaggregation whereby experts do not need to deliver the whole solution at hourly charge out rates. Pieces of work can be performed by other experts or by machines, usually a combination of both.
This might seem to fly in the face of the ‘one stop shop’ or ‘trusted adviser’ benefits offered by professional firms. Quite the contrary. Under these new tech-driven business models, a well-structured problem-solver can clinically involve all the best inputs (whether from within, external, human or machine) to deliver a valuable solution, the best solution, to the answer what a fully informed client knows they need.
This is no different to the concept of delegation which has been the foundation of the leveraged model of the professions. Disaggregated leverage models bring a range of people, software and processes to bear to solve the client’s problem.
Experts can help more clients solve more problems by delegating and supervising a diverse team of people and machines.
An interesting benefit is the opportunity to help those who cannot access professional advice due to cost or a lack of access to knowledge. The ‘great unserviced’ are clearly winners, able to access high quality professional advice from AI startups under low cost ‘advice for all’ delivery models.
Getting back to the numbers, if emerging AI startups could service just 2% of the Australian market in the short term, that would deliver at least $4 billion worth of value to customers and clients.
Just think for a moment about what this means for the global services industry? Australia is the world’s 13th largest economy at 1.7% of global GDP. If we extrapolate our professional services sector income, this is equivalent to a global professional services sector income of $11,764,705,882,353 (which I think is $11.8 trillion!). 2% of this would be $235 billion. Now that’s value worth chasing!
People in business are trained to focus on ‘pre-tax’ numbers such as EBIT to measure financial success seemingly because the ingredients of ‘earnings before tax’ are what business managers feel they can influence and control. But the ever-pervading reach of tax is too important to leave as an after-thought or ‘below the line’ item. Many a good business decision can be unwound by failing to appreciate the substantial impact that a choice or direction can have on the resulting tax obligations. Ultimately, the value of a business is measured on a net present value basis inclusive of tax costs. Good business leaders learn that tax can both create and destroy value, significantly.
Like all variables, taxation needs to be managed as part of an overall business strategy. And it’s not just about saving or minimising tax. It’s also about not knowingly or unwittingly paying too little tax. It’s about ensuring that enough tax is paid under the laws; meeting the social licence to operate, stakeholder relationships and maintaining the reputation of the business within the community.
Tax acumen is the ability to formulate business decisions with an overall understanding of the financial and non-financial taxation impacts of those decisions on the business and stakeholders to achieve optimal ‘post-tax’ business and community outcomes.