In a corporate acquisition, different tax issues flow from the choice of acquiring shares or buying assets and assuming the debt of a target business. The decision can significantly alter the after-tax return for both the buyer and the seller. This article looks into several key issues that affect the value of the transaction.
Satisfying the Continuity and Same Business Tests
To pass the continuity of ownership test (COT), the company must directly or indirectly hold more than 50 percent of the rights to exercise voting power, and to receive dividends and capital distributions during the loss recoupment year. That period runs from the start of the year in which the loss was incurred until the end of the year in which the loss is utilized. The same business test (SBT) is satisfied if during the loss recoupment year the company essentially carries on the same overall business as before and does not earn assessable income from a type of business or a type of transaction it was not involved in before the acquisition.
The tax implications of acquiring a company vary depending on whether the transaction is a stock acquisition or the purchase of assets and assuming debts. Eligible target companies typically want to sell their shares to access the CGT discount, which is generally not available in asset acquisitions unless there are certain small business concessions. They may accept a lower purchase price in order to access those tax concessions, which generally apply to disposals of active capital assets, including interests in companies and trusts, where the target’s net assets do not exceed $6 million. Here are highlights of other key tax implications related to mergers and acquisitions:
Stock acquisitions and consolidation. Buyers who take an interest-bearing loan for a stock acquisition can typically deduct the interest, but this generally is not tax efficient. The deductions shelter only dividend income and if the acquired company pays tax and franked dividends, that deduction has little value. Consolidation is more tax efficient because the interest deductions generally offset the acquired company’s taxable income. If your business is part of a consolidated group that acquires all of a company’s shares, consolidation is automatic and several tax-related events occur:
1. the acquired company is absorbed into the group for tax purposes and only the head company is the recognised taxpayer;
2. the tax value of the acquired company’s assets are broadly reset to market value;
3. the purchase price of liabilities, adjusted for certain tax attributes, will be allocated to the acquired organisation’s cash-like assets dollar for dollar;
4. non-cash assets will be allocated in proportion to their relative market values and capped at market value for depreciating assets, trading stock and revenue assets);
5. the head company may deduct interest on debt to finance the acquisition from the acquired organisation’s income, and
6. the group acquires any tax losses the acquired business has and can use them provided the head company satisfies the continuity of ownership test or the same business test. (See right-hand box)
Depreciation In a stock acquisition, to reset the adjustable value of depreciating assets the acquiring company, corporate unit or trading trust, or limited partnership must purchase all the stock and elect to consolidate. If depreciating assets are acquired, the adjustable values are based on allocating the purchase price to specific assets. It may be wise to include an allocation schedule in the acquisition agreement. The Tax Office is unlikely to challenge such contracts between arm’s length parties. Keep in mind, the seller’s tax position may warrant a different allocation.
Bad debts and trading stock In a stock acquisition, unpaid debts of the acquired company can be deducted only if the buyer satisfies the SBT. However, if the acquired company joins the consolidated purchasing group, bad debts can be deducted to the extent that the group and the acquired business satisfy either the COT or SBT. Bad debts cannot be deducted in an asset acquisition. As a result, the purchase price typically is trimmed by 30 percent of the value of doubtful debts or the debts are not acquired. To reset the tax value of trading shares in a stock acquisition, there must be a consolidation. In an asset purchase, however, the seller is deemed to have disposed of the stock — and the buyer to have acquired it — at market value, regardless of what the purchase price allocation states.
Tax loss carry forwards and stamp duty The acquired business may continue deducting tax loss carry forwards if the SBT is satisfied. The acquiring company cannot access the losses without consolidation. In that case, the losses transfer if the purchased company has satisfied the SBT for the 12 months ending just after the transaction. In asset acquisitions, losses are left behind. The stamp duty implications in a stock acquisition generally are not significant unless the acquired company is land rich. Land holder or land rich duty is generally higher than for other assets in all states and territories. An asset acquisition is likely to trigger stamp duty. Calculation and compliance can be complex as the duty differs in each jurisdiction and is particularly complicated if the acquired business operates in several states and territories.
GST does not generally apply to stock purchases because the transaction is a financial supply. The tax does apply to such costs as advisers’ fees but generally is not recoverable because financial supplies are input taxed. GST also generally does not apply to asset purchases, as long as the transaction represents a “supply of a going concern”. Where the going concern exemption applies, GST on costs incurred should be recoverable. It is important to ensure that asset acquisitions qualify for this exemption, as it is a distinct difference between share and asset acquisitions. Consult with your adviser to discuss other tax implications as well as legal and commercial considerations if your business is planning an acquisition.