As a business grows new entities are frequently created to perform functions in the business group. In most cases, these new entities will have associated compliance requirements, which will generally include GST obligations. The additional compliance requirement for new entities generates administration costs to ensure amounts are correctly reported and remitted to the Australian Taxation Office.
A common approach to mitigate some of these costs is GST grouping.
To form a GST group the following basic criteria apply to each member joining the group:
- Each member in the group has the same tax period and GST reporting cycle, either quarterly or monthly
- Each member must have the same basis for GST reporting, either cash or accruals
- A member cannot already be a member of another GST group
- A member cannot have GST branches
- Each member is party to a written agreement to form the GST group
- Each group member must be 90% owned by other members in the group, which can be achieved through direct ownership or via interposed entities.
- A representative member must be elected for the group.
Once formed a range of benefits flow from GST Grouping, including the following:
- The GST representative member lodges a single BAS with the ATO for the group each period, saving time on processing and lodgements
- GST grouping eliminates the need to apply GST to inter-entity transactions between group members
- A single GST payment / refund is required each period from the representative member, reducing the number of transactions and reconciliation work required
- Joining the group is a choice for each member, and specific entities can be excluded from the group if desired, even if they are wholly owned by other members in the group.
However, as with all consolidation and grouping, there are a number of potential issues that need to be considered and appropriately addressed to ensure GST grouping is effective:
- Each member of the group becomes jointly liable for the GST obligations of all group members.
- To mitigate the issues of joint liability an indirect tax sharing agreement, or ITXSA, can be prepared that will limit liability for individual group members. A number of methods can be applied under the ITXSA; however the most common method will act to limit the liability of a member to the same liability it would have incurred had it not joined the GST group.
- The ITXSA does not limit the liability of the representative member, which always has full GST liability for the entire group. It is therefore worth closely considering which entity is elected as the representative member to ensure valuable assets are not exposed due to potential GST liability arising from other group members.
- GST Property Credits in a GST group are allocated to the representative member, rather than the actual selling entity, requiring close checking of GST withholding notices to ensure the correct entity is allocated the credits.
- A written agreement is required to form the group, and must be updated each time a member leaves or joins the group, potentially reducing cost savings if entities are frequently added or removed.
- Effective procedures should be in place internally to ensure the GST liability is correctly recorded between group members. A failure to have appropriate procedures in place may lead to overcomplicating the reconciliation process.
While a number of factors should be considered before forming a GST Group, in appropriate cases there are clear benefits to be gained from streamlining the GST lodgement and payment processes for a trading group.