Tax in M&A: A move from shares sales to asset sales

When COVID-19 hit Australian shores, and businesses across all industries started to feel its impact, state and federal governments began to release a wide range policy updates and initiatives. A key focus for the Federal Government was to encourage capital expenditure by introducing a number of tax incentives – some of which still affect, and will for the long-term, the way businesses undertake acquisitions.

Most notably, was the introduction of ‘Temporary Full Expensing’ (TFE) and ‘Backing Business Investment’ (BBI) concessions. Additionally, the Government has enhanced its existing ‘Instant Asset Write Off’ (IAWO) incentive by allowing business’s to write off assets with a value less than $150,000.
While these incentives were appealing and served a purpose during the pandemic, there has been a significant, possibly unforeseen, knock-on effect. For instance, if you act on behalf of a consolidated group planning to acquire a target, you may need to consider how these incentives could impact the transaction.

How it works

Where a deduction is taken for the cost of an asset under the IOWA, BBI or TFE, there are future implications where an entity later joins a tax consolidated group (TCG). Previously, where an entity is purchased and becomes a member of a TCG, the purchase price of the company is allocated to the assets of the business.

This means that the written down value (WDV) of an asset can be increased (or decreased) and a deduction for decline of value can be claimed against the asset from then on. Modifications to the tax cost setting rules have adjusted how the WDV of assets are calculated, where the enhanced IAWO, BBI or TFE have been previously claimed.

These affected assets can no longer have their WDV reset on acquisition and the tax cost – that would have otherwise been allocated to the asset in excess of its existing tax base – cannot be re-allocated to other assets of the joining entity. This effectively reduces the deduction for decline in value an entity receives after its consolidation where the accelerated depreciation incentives have been previously used.

What does this mean for transactions?

As these changes only affect tax consolidation acquisitions, purchasers will likely move away from share sales and begin purchasing the assets of targets that have utilised the accelerated depreciation incentives. In an asset sale, the WDV of depreciating assets for tax purposes can be reset to market value and depreciated, regardless of whether accelerated depreciation incentives have been implemented.

Share sales have historically been the most popular method of acquiring a target, as the purchaser can avoid paying stamp duty. However, due to the modification of the tax cost setting rules on consolidation, and the abolition of stamp duty on the purchase of business assets in most states (excluding QLD, NT and WA), asset sales are likely to see a resurgence in the near future.

Are you looking to acquire a new entity? Deciding whether an asset or share sale is right for you can be difficult and should be considered at the outset of a deal so it’s structured for an optimal tax position. Get in touch.