Tax Sharing and Funding Agreement (TSFA) is an arrangement that governs the sharing of tax liabilities and benefits between related entities. It is a legally binding agreement that specifies the amount of tax each entity is responsible for paying and the terms and conditions of payment. The Australian Taxation Office (ATO) plays a critical role in enforcing tax laws and ensuring that TSFAs are correctly structured and adhered to.
The purpose of a TSFA is to ensure that related entities are paying their fair share of tax and that there is no double taxation or non-payment of tax. It is a common practice for companies to use a TSFA to distribute tax liabilities between related entities, such as parent and subsidiary companies. The TSFA also establishes the mechanism for funding the tax liabilities of related entities, ensuring that each entity has the necessary funds to pay its share of tax.
When determining the terms and conditions of a TSFA, careful consideration must be given to the ATO guidelines and the principles of a fair and equitable distribution of tax liabilities. The ATO has strict rules on the structuring of TSFAs to prevent the misuse of the arrangement. The ATO may also review the TSFA to ensure that it reflects the economic substance of the transaction and is not designed to artificially reduce tax liabilities.
The ATO encourages companies to self-assess their TSFAs to ensure they comply with the tax laws. This means that companies need to review their TSFAs regularly to ensure they are still relevant and effective in the current business environment. The ATO may also conduct compliance reviews and audits of TSFAs to ensure that they are structured correctly and that entities are fulfilling their tax obligations.
In conclusion, a properly structured TSFA can be an effective way for related entities to share tax liabilities and funding obligations. However, it is important to ensure that the TSFA is correctly constructed and adheres to ATO guidelines. Companies should regularly review their TSFAs to ensure their relevance and effectiveness and be prepared for ATO scrutiny and compliance reviews.