If you are someone who runs businesses through multiple company platforms – when it comes time to pay taxes it can be difficult and time-consuming. A tax consolidated group enables people running multiple businesses to form a single tax entity for income taxes. By forming a tax consolidated group the companies’ compliance costs can be reduced. This Legal Kitz blog post will give you a rundown on tax consolidation, and what the benefits and limitations are of single tax entities.
What is a consolidated group?
A tax consolidated group for tax purposes is a group of entities that are owned by a single company, which is then treated as a single taxpayer for the purposes of income tax. Consolidated group taxes are subject to detailed company tax return instructions and other products that are used to calculate assessable income and tax returns. It is recommended that you seek legal advice if you are considering consolidating your businesses.
What is the eligibility for consolidation?
For startup businesses, it is common that they initially are set up as dual companies. Dual company structures are made up of a holding company that owns all of the shares in a subsidiary operating company.
This is also common for more developed companies to have multiple companies under one umbrella. This is where one company will own all of the valuable assets of the others, such as intellectual property, cash, and physical assets (if any).
There are some businesses, however, that cannot become a tax consolidated group, even if they have a head company. A non-exhaustive list of entities, such as those that receive special tax status is not eligible to become a consolidated group. Credit unions and pooled development funds are not eligible. Finally, not-for-profits can be heads of a tax consolidated group but they cannot be a subsidiary member of a group.
Why form a tax consolidated group?
When setting up multiple companies, it’s hard not to question if the administration costs make it worth it. Also, if you are in the position of setting up multiple entities, the Australian Tax Office will require you to lodge tax returns for all the entities. It can be beneficial for some to consolidate the groups together, and by doing this you will only need to lodge a single income tax return for all the entities and only pay a single set of PAYG instalments.
If you decide to consolidate your entities part way through the year, the head company will lodge a single tax return that covers its own activities up to the consolidation date and the group entities’ activities from the date of consolidation.
What are the disadvantages?
One of the main disadvantages is that although the holding company has the responsibility for paying taxes, every company has the responsibility for the group’s activity. To ensure that each group executes its responsibility, a Tax Sharing Agreement can be created. By doing this, if the holding company fails to pay the group’s income tax, then a group member would only be responsible for their portion of the Tax Sharing Agreement. If a company decides to leave the group or if a new company decides to join the group, the agreement can provide details about what happens.
Legal advice
There are many benefits to creating a tax consolidated group. However, if you are considering forming a tax consolidated group tax return, it is important to seek legal advice about the implications of the tax on your company and who you will need to contact. Here at Legal Kitz, we offer a FREE 30-minute initial consultation with one of our experienced business specialists. You can also get in contact with us at [email protected] or at 1300 988 954.
If you would like to read more business-related blogs, click here to our Knowledge Centre where we upload new blogs every week!