One of the key consequences of forming a tax consolidated group is that all of the members of the group are jointly and severally liable for the tax liabilities of the group as a whole.
If however, each member of the group signs a valid tax sharing agreement (TSA), then it is possible for each member of the group to only be responsible for a 'reasonable' portion of the Group's tax liability.
A TSA is generally seen as a document that should be in place whenever a tax consolidated group is formed.
Generally, a TSA will also set out how any member of the group can make a 'clean exit', ensuring that it will not bear any future liability in relation to taxes that arise once the entity has left the group, even where they relate to a period where the entity was in fact a member.
Often, a TSA will be implemented in conjunction with a tax funding agreement (TFA).
Due to the way in which the tax consolidations regime is structured, the head entity of a consolidated group is the one that is ultimately liable for the tax of the group as a whole.
In order to ensure that the head company has the funds to meet the tax liability, a TFA can be utilised to regulate the manner in which that funding is to occur, particularly with reference to relevant accounting standards.
While most consolidated groups in the small to medium enterprise space will (or at least should) implement a TSA, often TFAs are only utilised by larger tax consolidated groups, given that they are more mechanical and technical in nature.
** For the trainspotters, ‘what’s your story’ is a line from the Red Hot Chili Peppers’ song from their 1986 album Stadium Arcadium, namely ‘Tell Me Baby’.