Dennis Tomaras, a partner in law firm Cornwalls, believes that Covid-19 is inspiring a wave of merger and acquisition (M&A) activity in Australia. He believes that current M&A activity is most common with privately owned SME’s – across all sectors – and especially in technology, agricultural, services and manufacturing.
“It’s probably 50 / 50 between those businesses looking to merge for survival reasons and those seizing the initiative in difficult times to acquire a competitor, supplier or even a key client in some cases,” says Tomaras.
“Now that Australian business has recovered over the initial shock of Covid-19, SMEs are learning to live with the virus and trying to make the most of it, by considering M&A opportunities.”
As a Tax adviser, Tomaras believes that there are four main structuring considerations in any M&A deal.
Buying shares or assets in the target company
Tomaras says that there are numerous pros and cons of each and no two M&A deals are ever quite the same. However, vendors typically prefer selling their shares and buyers typically prefer acquiring assets. As a general rule, Australia’s Capital Gains Tax laws tend to favour a sale of shares for the sellers creating a degree of tension between the interests of the buyer and the seller. However, the GST and state tax implications of the deal should also be considered by the parties.
Are the entities ready for an M&A deal?
Tomaras believes the biggest mistake business makes is that they are underprepared for an M&A deal.
“You wouldn’t sell your house without making sure it’s ready for inspection and it’s the same in a business deal.”
Acquirers and target entities need to make sure their legal and financial affairs are up to date and that all federal and state tax returns are in order.
Buyers often conduct due diligence on the seller too as they want to know their business and staff are going to be in good hands. A good idea he says is to get the company advisers to undertake a high-level health check of the business before any M&A activities commence. Directors of companies also need to be aware that they may be personally liable for certain past tax liabilities of a target company.
Effect on tax losses of the deal
Australia’s income tax laws contain detailed rules as to the usage of company tax losses. Tax losses – whether of a revenue or a capital nature – can be valuable assets to a buyer of a company. Typically, the so called ‘continuity of ownership’ test will be failed on an acquisition of the target company.
Even though the ‘continuity of business’ test is available regarding the future use of the losses, this is a more difficult test to satisfy and care is required in what business improvements and changes in personnel are made in the target company, says Tomaras.
The allocation of consideration over the assets acquired
One of the most contentious issues, particularly on a future ATO audit, is the allocation of consideration against the assets acquired. This is an area of interest both to business and taxation authorities alike as for example, tax depreciation is based on the acquisition cost of an asset.
Likewise, there may be different tax outcomes for both GST and state taxes based on the allocation of consideration to the assets acquired. Tomaras recommends involving a qualified valuer to contemporaneously opine on how consideration has been allocated across assets, so as to avoid future disputes with taxation authorities.
The bottom line is that as M&A activities increase, both buyers and sellers need to be ready for a deal and need to do their homework across a range of revenue law and other relevant issues.