In this week’s article on Mergers and Acquis-itions, Mark Beyer looks at the impact of tax on M&A transactions.
WHEN a business is bought or sold, the tax implications are often treated as an unpleasant detail that needs to be tidied up at the end of the process.
Tax consultants such as Steve Lowe, a director at McKessar Tieleman,
are trying to change that mindset.
Mr Lowe’s past experience has shown that tax planning should be a key ingredient when mergers and acquisitions (M&A) are being planned.
In some cases they can even tip the balance in deciding whether or not to proceed with an M&A trans-action.
Capital gains tax, income tax, stamp duty and even the GST can affect the bottom line impact of M&A transactions, according to Mr Lowe.
One of the biggest issues for vendors is minimising the impact of capital gains tax (CGT), espec-ially in cases where the vendor’s assets (including the value of the business) are worth $5 million or less.
Vendors typically want to sell their business in such a way that they can maximise the small business CGT concessions, which can reduce or even eliminate CGT.
In some cases this goal is best achieved by selling the company that runs the business, whereas purchasers typically want to buy the assets out of the business.
“The position of the vendors and the purchasers are rarely at one,” Mr Lowe said.
Individuals who sell shares can normally utilise several CGT con-cessions, including the 50 per cent CGT discount and a number of small business ‘active assets’ con-cessions.
By utilising these concessions a capital gain can be received in a form that is largely tax free, although Mr Lowe said the final outcome would depend on who owned the shares and how the sale was structured.
In contrast, if a company sells assets, there is less scope for the owners to receive the funds in a tax-effective manner, partly be-cause the proceeds will be quarantined within the company.
From the purchaser’s perspective, the main tax worries are GST and stamp duty.
Mr Lowe said these taxes would normally be minimised by purchasing a business as a going concern.
In such cases, the sale is GST-free and the purchaser is able to claim back GST on any professional fees paid to advisers and minimise stamp duty (which is payable on the GST-inclusive value of the purchase).
If the purchaser buys shares, they may be unable to claim back GST on the professional fees and may incur a greater stamp duty liability.
Mr Lowe said there also could be good strategic reasons for acquiring the assets, rather than the company.
For instance, the purchaser would not have to worry about inheriting any hidden tax or legal liabilities that may be embedded with the company. This could be anything from unpaid taxes to possible negligence claims.
For purchasers, the components of the overall purchase price can also have an impact on the after-tax cost.
For instance, if plant and equipment is a large portion of the total price, the purchaser benefits from depreciation allowances.
Mr Lowe said most vendors recognised the need to assess the likely after-tax returns when they were considering selling their business.
Therefore they are likely to seek tax advice early in the sale process, unlike purchasers, who tend to be driven by the strategic imperatives of takeover opportunities.
He recommended that purchasers also seek tax advice early in the acquisition process to ensure any transaction is structured in the most tax effective manner.
Mr Lowe said vendors should be very careful about the tax implications of ‘claw back’ and ‘earn up’ clauses.
The aim of these clauses is usually to give some added com-fort to the purchaser.
They typically involve making an up-front payment for the acquisition and a second deferred payment that is tied to the performance of the business over the next one or two years.
They can be structured as an incentive payment, to encourage the vendor to continue working in the business.
The problem for vendors is that, unless these earn-up payments are properly structured, they may be fully taxable, even though they effectively represent part of the proceeds from the sale of their business.
Hence, the proceeds from the up-front payment may be taxed concessionally while the proceeds from the second payment may be fully taxable.
