Intercompany Invoices

Intercompany invoices are invoices issued between legal entities within the same group of companies. A parent company charging a subsidiary for management services, a subsidiary recharging costs to a sister entity, or a shared services centre billing operating entities for finance, HR, or IT services -- all of these generate intercompany invoices that flow through the AP system of the receiving entity. Intercompany invoices are processed through AP in the normal way but require additional controls because of the related-party nature of the transactions and the tax implications of getting the pricing wrong.

From a group consolidation perspective, intercompany transactions must be eliminated on consolidation: the income recorded by the billing entity and the expense recorded by the receiving entity cancel each other out when group financial statements are prepared. Intercompany balances in AP and accounts receivable must also be eliminated. This elimination requires that intercompany transactions are consistently identified and tagged in both entities' accounting systems -- usually through dedicated intercompany account codes or entity-specific supplier codes.

Transfer pricing considerations

When the intercompany transaction crosses an international border -- one entity is in Australia and the other is in a different country -- transfer pricing rules apply. Australian transfer pricing legislation (Division 815 of the Income Tax Assessment Act 1997) requires that cross-border intercompany transactions be priced at arm's length: at the price that independent parties would negotiate in the same circumstances. Intercompany invoices that are not priced at arm's length can be adjusted by the ATO to reflect arm's length pricing, resulting in additional tax and interest.

For domestic intercompany transactions (both entities in Australia), transfer pricing is less of a concern but the transaction still needs to be commercially reasonable to withstand ATO scrutiny. Management fee arrangements between related entities are a known area of ATO focus, particularly where the fees are structured to shift income to entities with lower tax rates or significant tax losses.

GST on intercompany invoices

Intercompany invoices between GST-registered entities in Australia are subject to GST in the normal way -- the billing entity charges GST, and the receiving entity claims an ITC. However, if both entities are part of a GST group (a formal registration option for related companies), supplies within the group are excluded from GST entirely, which reduces administrative burden. GST grouping requires ATO notification and has specific eligibility criteria, but is commonly used by groups with high intercompany transaction volumes to simplify their compliance obligations.