Group contribution refers to the strategic reallocation of funds and assets among companies within a unified corporate structure, such as between a parent company and its subsidiary.
Should you possess ownership of one or more limited companies (subsidiaries) under the auspices of a parent company, there exists the option to transfer resources between these entities, facilitating the movement of profits and allowing for the optimisation of tax liabilities. These transfers may comprise monetary assets, operational resources, or additional assets held by the company.
This fiscal manoeuvre is known as a ‘group contribution’.
Benefits of a group contribution
The predominant advantage of employing group contributions lies in the potential to balance the tax obligations across the corporate group, ensuring that the collective tax burden is minimised. Consider the following scenario:
- The parent company registers a profit of 10,000 AUD and faces a tax liability of 22%.
- The subsidiary records a loss of 10,000 AUD and incurs no tax.
By extending a group contribution of 10,000 AUD to the subsidiary, the parent company’s profit is effectively neutralised. As a result, the whole group evades taxation in light of the fact that neither enterprise reports a profit.
Furthermore, group contributions can serve as a mechanism for funding other companies within the group. The transfer can generate tax consequences or be structured to have no tax impact.
The difference between group contribution and dividends
Though group contributions and dividends share similarities, pivotal distinctions exist between the two.
With dividends, a resolution by the general meeting decrees a distribution to all shareholders in proportion to their shareholding. Dividends do not alter the company’s tax position and are received tax-free by the parent company. However, individual shareholders must declare dividends as taxable income.
Alternatively, a group contribution allows a company to allocate funds to a specific shareholder, typically the entity with a 90% or greater shareholding. This does not necessitate simultaneous distribution among all shareholders. Notably, neither party in a group contribution incurs a tax burden, thus fostering more flexible capital movement between group companies.
See also: What is a dividend?
Group contributions can traverse up from subsidiaries to the parent company or laterally between sister companies, while dividends traditionally ascend from the subsidiary to the parent company only.
The receipt of dividends influences the financial results of the recipient company. For example, if a subsidiary disburses dividends to its parent company, this will reflect as increased profits (or reduced losses), which may bolster the parent company’s financial standing in dealings with suppliers or financial institutions.
Group contributions can be structured to bear tax implications or to be executed neutrally, without impacting the financial outcomes of the involved companies.