• Acquiring a new business

    When acquiring a business or entity, consider whether to conduct a commercial or tax due diligence process to identify and manage all risks associated with your new investment. Document the tax due diligence undertaken for business acquisitions that exceed a certain size or carry significant risks.

    If you don't conduct a detailed due diligence, ensure the risks associated with your investment have been adequately considered through other means, such as in discussions with your advisers and warranties in your purchase contracts.

    When purchasing the shares in an existing business, you may be accepting the risk associated with that company’s tax history. A tax due diligence process will help you factor the tax compliance ‘health’ of a prospective business purchase into your negotiations and identify existing tax risks that need to be mitigated.

    If you operate a consolidated group for income tax purposes and you acquire 100% of the interests in another business it will generally join your consolidated group. The acquisition process may give rise to tax issues that attract our attention, particularly in relation to the allocation of costs to assets and the transfer of tax losses into the group.

    Example: Acquiring a new business

    Before purchasing the shares in an existing business, your governance procedures required you to conduct a tax due diligence process in conjunction with your advisers.

    This process identified a number of ongoing tax risks that required attention. You raised these risks in negotiations with the vendor, who agreed to reduce the price due to the unresolved tax risks. Following the purchase, you engaged early with the ATO to seek our advice and a resolution of the risks identified during the purchase process.

    The ATO is aware of your business group’s effective tax governance and will take this into account in its future engagements with you.

    End of example

    Consolidation and private groups

    When your tax consolidated group acquires another business and it joins the group, ensure that the group complies with the consolidation rules.

    In particular, the process of allocating costs to assets and transferring tax losses may attract our attention.

    Asset cost setting

    Your tax consolidation procedures should ensure that when an entity joins your consolidated group, the purchase price of ownership interests in the entity is allocated to the tax costs of its assets in a way that is both defensible and sufficiently documented for use in future years.

    This will typically involve:

    • preparing calculations and work papers to determine the allocable cost amount (ACA) for the joining entity and demonstrate the correct allocation of this amount to the tax costs of the joining entity's assets
    • preparing accurate financial statements as at the joining time to support the allocation of the ACA to the joining entity's assets
    • valuing material assets that require use of market values for the ACA allocation process – for larger or higher risk items, an independent valuation may be expected
    • collecting all information relevant to the entry of the joining entity, such as asset registers, depreciation schedules, franking account information and pre-CGT asset characteristics
    • engaging professional advisers to prepare consolidation reports where necessary.

    Allocations of the ACA that result in inappropriate deductions or increases in the cost bases of the joining entity's assets may attract our attention.

    Carried-forward losses

    Your procedures should ensure that when an entity joins your tax consolidated group, any carried-forward losses of the joining entity are reviewed to determine whether the tax loss transfer provisions are satisfied and the correct loss utilisation rates (the 'available fraction’) are determined.

    This will typically require you to:

    • undertake analysis to determine whether the loss transfer rules are satisfied for carried-forward losses of the joining entity
    • document joining entity losses eligible for transfer and calculate the available fraction in relation to each bundle of losses that the joining entity transfers to the consolidated group
    • prepare or obtain and keep any market valuations required for calculating the available fraction for each bundle of joining entity losses
    • seek advice on any complexities.

    Tax governance policies which ensure that rigorous and contemporaneous tax consolidation calculations are kept can give you certainty, reduce your future compliance costs and help you demonstrate effective tax governance.

    See also:

    Last modified: 31 May 2016QC 49166