Will latest COVID-19 tax changes reignite M&A transactions?
While targeted as relief for small and medium-sized enterprises adversely affected by the COVID-19 pandemic, new tax measures announced today by the Government apply more broadly and may have significant implications for M&A transactions.
The package of business tax changes could affect the purchase price for some target companies and potentially the timing of when transactions should complete. In summary, the measures include:
More favourable loss carry-forward rules:
To carry-forward tax losses a company currently needs to maintain 49% ownership continuity from when the losses are incurred until when they are used. This will be supplemented by an alternative test modelled on Australian law which will see losses carried-forward if, following a change of ownership, the company’s business will continue in “the same or a similar” way as it did before the ownership change. This proposal will be open for public consultation in the second half of 2020 and enacted before 31 March 2021, with application to the 2020/21 and later income years.
Loss carry-backs to immediately access refunds:
Taxpayers will be able to carry-back actual or estimated tax losses from the 2019/20 year or the 2020/21 year to offset against income generated in the immediately preceding year. This will allow a refund of now overpaid tax in respect of the prior year. A temporary change to effect this will be included in legalisation to be introduced in the week beginning 27 April 2020, with a permanent loss carry-back scheme to be introduced later that will apply to the 2021/22 and subsequent income years.
Temporary flexibility for Inland Revenue to extend deadlines:
Inland Revenue will be given the discretion to temporarily change due dates, timeframes and procedural requirements. This will apply for a period of 18 months in respect of businesses and individuals affected by COVID-19 and could see such things as extended deadlines for filing tax returns and paying provisional or terminal tax.
Factor losses into your M&A negotiations
From an M&A perspective, the new loss carry-forward rules have the potential to increase the purchase price for target companies that have significant tax losses which will now be able to be used post-completion. That will be especially relevant for companies generating significant losses due to COVID-19 which may come up for sale soon.
That being said, the determination of what constitutes a “same or similar business” will be crucial. Australia initially applied a “same business” test, which is quite narrow in its application and looks at whether the exact same business was conducted when the losses were generated. That was subsequently loosened in Australia by the introduction of the “similar business” test, but that is still a very fact specific enquiry. Whether value can be attributed to tax losses will need to be weighed up against the ability to use the losses constraining the business that the target company could carry on in the future.
For transactions currently underway, or on hold during the lockdown, the timing of completion will be important if the target company has significant losses. The new rules will apply from the 2020/21 income year (i.e. currently underway for taxpayers with income years ending between 1 October and 31 March), but yet to commence for late balance date taxpayers (i.e. income years that end between 1 April and 30 September).
The consequences of the loss carry-back regime will initially focus on companies with upcoming losses seeking tax refunds from their 2019/20 year. The availability of refunds will potentially impact the pricing of M&A transactions currently underway and will become a feature in the tax provisions of sale and purchase agreements.
If we can assist you in any way to manage your M&A tax planning, please contact one of our tax experts. The Australian tax experts at MinterEllison have extensive experience applying the “same or similar” tests and would also be happy to assist.