Trouble navigating amalgamations? Now’s your time to comment

By Emma Marr & Viola Trnski

Inland Revenue has released three draft guidance documents – totalling at just over 100 pages – for public consultation on how the tax rules apply to amalgamations:

• General income tax, GST and FBT implications of company amalgamations (General Guidance)

• Treatment of pre-amalgamation tax losses (Losses Guidance)

• Calculating available subscribed capital (ASC) (ASC QWBA)

Background

The amalgamation rules in the Income Tax Act 2007 outline the tax treatment and provide certain tax concessions for amalgamations between New Zealand resident companies that derive taxable income.

Good tax policy should not be “grit” in the wheels of productivity and investment, nor should tax implications dictate or drive otherwise sound commercial decisions. To this end, the tax treatment of amalgamations tends to reflect the treatment of amalgamating companies under the Companies Act 1993 (Companies Act). Broadly, the Companies Act provides that the company that exists after the amalgamation (Amalgamated Company) inherits the assets, rights, liabilities and obligations of the company (or companies) that ceases to exist following the amalgamation (Amalgamating Company). Likewise, the Losses Guidance statement mirrors the general tax rules that allow for a company to carry forward and share a loss with other companies in the same group. The ASC QWBA clarifies the interpretation of amounts in the ASC calculation.

Inland Revenue’s work programme for 2023-24 noted a need for guidance on the amalgamation rules for compliance and education purposes, to refresh and update existing guidance, and because “customers sometimes find the amalgamation rules difficult to follow”. The General Guidance and Losses Guidance are wholly new interpretations from Inland Revenue, while the ASC QWBA updates and replaces an earlier QWBA.

The draft guidance documents do not depart significantly from the current practice, nor do they delve into particularly complex or uncertain fact scenarios. Rather, the items provide clarity and explain how the rules should apply, interspersed with a number of examples that illustrate the rules in practice. As you can imagine, the tax issues for amalgamations can get very complex and so any guidance from the Inland Revenue on these issues is welcome.

What do the draft guidance documents cover?

General guidance

The General Guidance walks through subpart FO of the Income Tax Act 2007 which deals with the tax consequences of amalgamations. The guidance document provides a handy summary table of all the subpart FO provisions as well as twenty-one examples illustrating the rules.

It also discusses how other tax rules apply to amalgamations, including dividend implications, interest deductibility, imputation credit accounts, tax credits attributed to Controlled Foreign Companies (CFC) income, provisional tax, and non-standard balance dates.

Guidance is provided on FBT and GST implications, such as applying the de minimis threshold, close company implications for FBT, mixed-use assets, bad debts, and GST registration.

Losses guidance

The Losses Guidance outlines the treatment of tax losses that exists before the amalgamation. For post-amalgamation losses, the general tax loss rules apply (as previously outlined in IS 22/07 Company losses- ownership continuity, sharing and measurement)). Broadly, the Losses Guidance concludes that:

• For the Amalgamated Company: tax losses can be inherited by the Amalgamated Company if continuity tests are met and all the amalgamating companies, including the Amalgamated Company (unless it was only incorporated on amalgamation) were at least 66% commonly owned from the start of the income year that the tax loss component arose until the date of the amalgamation. The Amalgamated Company, for the purpose of determining ownership and continuity, is treated as existing as the Amalgamating Company, rather than existing separately.

• For the Amalgamating Company: tax losses can be used in the pre-amalgamation part year (i.e., before the date of amalgamation in the part of the income year that ends with the date of amalgamation) if continuity and commonality requirements are met. Tax losses can also be carried forward if continuity requirements are met and all amalgamating companies are at least 66% commonly owned. For attributed CFC or Foreign Investment Funds net losses, 100% ownership is required.

• For non-amalgamating group companies: tax losses can be shared if the amalgamating companies, and the company that incurred the loss, meet commonality requirements.

Losses must be used in the order they arose. Amalgamated companies can elect the order in which they use losses where the losses were incurred in the same tax year. Sixteen examples in the guidance document illustrate these rules.

ASC QWBA

The ASC QWBA combines two existing QWBA’s (QB 13/02 and 14/05) which cover the “subscriptions” amount in the ASC calculation. The ASC of a company can be returned to shareholders tax-free in certain circumstances, rather than being treated as a (taxable) dividend. For the purposes of this ASC QWBA, the term “Amalgamating Company” also includes the Amalgamated Company.

The ASC calculation has four components; however, the focus of the ASC QWBA is on “subscriptions” and “returns” because these amounts are specifically modified in an amalgamation by the legislation.

Inland Revenue summarises the legislative rules around measuring ASC on amalgamations, which effectively ensure that ASC is not counted twice when companies amalgamate, and ASC is preserved when appropriate. This means that:

• Consideration received for shares issued by an Amalgamating Company that are directly or indirectly held by another amalgamating company is excluded. This is to prevent the double-counting of capital that has been introduced by underlying shareholders.

• Shares of the Amalgamating Company must be “of an equivalent class to the class” of shares in the Amalgamated Company. To determine whether this is the case, shareholder rights, rights to be paid profits, and rights to the distribution of assets should all be considered.

• Shares in the Amalgamated Company are excluded (as because an Amalgamated Company is also an Amalgamating Company for the purposes of calculating ASC, they will be double counted).
  

The ASC QWBA also confirms that the “returns” amount will increase if an Amalgamating Company shares in an Amalgamated Company are cancelled on amalgamation. The Amalgamated Company’s ASC per share will reduce by the “returns” amount. The guidance document includes three examples to illustrate these rules.

Deloitte comment

Amalgamations are a useful way of tidying up a group structure, and the tax rules are generally well understood by those who frequently advise on amalgamations. The three draft items provide useful and comprehensive guidance on how the tax rules apply to company amalgamations. As can be expected, the tax rules for amalgamations ensure that tax obligations match the purpose of the amalgamation regime – one company ceases to exist and another company assumes all of its tax attributes and obligations. The tax rules are designed to enable this to happen smoothly, while removing possibilities for an amalgamation to be used to reduce a tax liability or obtain some other tax advantage. If you would like to discuss the tax issues surrounding amalgamations, please contact your usual Deloitte advisor.

What next?

Consultation on the draft guidance documents is open until 1 November 2024. The publications detail the process to provide feedback. Inland Revenue officials will then consider the feedback received and iron out any remaining details and interpretive issues with submitters where appropriate. Following this, finalised items will be published, reflecting Inland Revenue’s view on the amalgamation rules going forward. The finalised ASC QWBA will update and replace the existing guidance from the date the finalised guidance is published.