Investing in Australia – don’t lose your losses

As the Australian company expands, the strategic acquisition and merger of an Australian competitor may occur. Forming an Australian tax consolidated group with the target can provide various advantages including:

1. making the acquisition more tax effective for the vendor, reducing upward pressure on the purchase price;
2. providing an opportunity to reduce risk by subsequently transferring the target’s business to another consolidated entity without income tax implications; and
3.  providing an opportunity to “refresh” the tax losses of your existing Australian subsidiary, and those of the target, by potentially allowing these losses to be subject to a less complex set of loss use rules.

It is important to consider whether the target’s business is acquired via:

1. money and/or scrip (shares);
2. an acquisition of assets;
3. by the foreign parent directly; or
4. by one of your existing Australian subsidiaries.

The structure can have numerous implications for the type of tax consolidated group that is formed, and the ability to continue using losses.

If looking to form a tax consolidated group, you need to consider how the purchase consideration is structured. If part of the consideration involves the issuing of shares from a foreign parent, then this can cause adverse tax implications at consolidation. This is because the amount paid for the target is a key variable used in the consolidation calculations, and this will determine future deductions and the tax costs of assets. Shares issued by a foreign parent may not always constitute consideration paid. Getting this wrong can have negative implications for the tax costs you are deemed to acquire in trading stock and depreciable assets, and may overinflate future capital gains.

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Photo: Bogdan Lazar - stock.adobe.com