Reading time: 4 minutes

If you operate your business through multiple companies, you may find it difficult to pay your taxes. Forming a tax consolidated group will allow you to operate as a single entity for income tax purposes. This is effective because it reduces compliance costs for your company. This article will explain when and how you can form a tax consolidated group.

When Can You Form a Tax Consolidated Group?

It is common for many startups to set up as a dual company structure. It is also common for more sophisticated businesses to have multiple companies or entities under one umbrella. This involves one company (known as the holding company) fully owning one or more other companies (known as operating companies). Typically the holding company will own all of the company’s valuable assets including intellectual property, such as trade marks and software, cash and any physical assets. The operating company will be responsible for the day to day operation of the company and will enter into contracts with employees and clients.  

Businesses often choose to have a dual company structure to protect their major assets. For example, if a customer were to sue the business, they could only sue the operating company that they had a relationship with. However, they would not have access to any of your company’s valuable assets, held in the holding company. Businesses may also create structures with multiple entities if they want to separate branches of the business. For example, you may create companies in different locations or for different products within your business. If you have more companies, this helps to reduce the risk to your business if something goes wrong.

Why Would You Form a Tax Consolidated Group?

Many businesses question whether the compliance and administrative costs of setting up multiple companies are worth it. If you set up multiple entities, you need to lodge tax returns for each company. If you consolidate the groups together, then you will only need to lodge a single income tax return for the entire group and pay a single set of PAYG instalments.

Tax Sharing Agreement

One of the main disadvantages of forming a tax consolidated group is that although the holding company has the responsibility for paying tax, every company is fully responsible for the group’s activity. For example, if the holding company fails to pay the group’s income tax, the operating companies will be responsible for paying back. You can manage this situation by each company executing a Tax Sharing Agreement which distributes the responsibility between the group members. This means that if the holding company does not pay the group’s income tax, then a group member would only be responsible for the portion that the agreement sets out. This agreement can also address what happens if that new companies join the group or companies leave it.

Steps to Form a Tax Consolidated Group

1. Get Tax Advice

Before forming a tax consolidated group, it is best practice to get formal business structuring and tax advice. The consolidation regime contains complex rules that you should understand. If you are forming the group a sometime after the entity has been created, the tax consequences may be more severe. Once you decide to form a tax consolidated group, you cannot reverse it.

2. Check Your Company Minutes and Resolutions

You should check your company constitution and shareholders agreement to determine your company’s requirements about making this decision. It is important to document your decision through company minutes and resolutions.

3. Notify the Australian Tax Office (ATO)

To implement the consolidation of the groups, the holding company or its registered tax agent must notify the Australian Tax Office by completing and lodging a Notification of Formation of an Income Tax Consolidated Group Form. The holding company must notify the ATO of the group’s formation before the date that:

  • you lodge your income tax return for the income year that the consolidation occurs; or
  • your income tax return would be due, if your head company does not need to lodge one.

Key Takeaways

Tax consolidated groups help companies with multiple entities to reduce compliance costs and make it easier to pay tax. You should carefully consider whether consolidating your companies to form a group is appropriate for your business. You cannot reverse this decision. If you would like assistance with your company’s business structure or forming a tax consolidated group, you can contact LegalVision’s taxation lawyers or fill out the form on this page.

Webinars

How to Sponsor Professionals For Your Healthcare Organisation

Thursday 24 March | 11:00 - 11:45am

Online
Plug skill shortages in your healthcare organisation by sponsoring professionals from overseas. Learn how in our free webinar.
Register Now

Everything You Need to Know about SaaS Agreements

Thursday 7 April | 11:00 - 11:45am

Online
Understand which contracts will protect your SaaS contract from risk, and how. Register for free today.
Register Now

What to Consider When Buying a Tech or Online Business

Wednesday 13 April | 11:00 - 11:45am

Online
Learn how to get the best deal when buying a tech or online business. Register for our free webinar today.
Register Now

Corporate Governance 101: Responsibilities for New Directors

Wednesday 27 April | 11:00 - 11:45am

Online
If you are a new company director, join our free webinar to understand your legal compliance obligations. Register today.
Register Now

Rogue Directors and Business Divorces: How to Remove a Director

Thursday 28 April | 11:00 - 11:45am

Online
Removing a board director is not simple. Join our free webinar to learn how to handle rogue directors. Register today.
Register Now

Employment Essentials for Tech Businesses

Thursday 5 May | 11:00 - 11:45am

Online
Protect your tech business and your employees by understanding your employment legal obligations. Register for our free webinar today.
Register Now

How to Protect and Enforce Your Trade Mark

Wednesday 11 May | 11:00 - 11:45am

Online
Protect your business’ brand from copycats and competitors. Register for this free webinar to learn how.
Register Now

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Online
Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer